Luxury branding Strategies in China
By Justin Toy
Stroll through one of Tianjin's many malls and you are more than likely to see a number imported luxury goods for sale. From Rolex to Fendi, China is a dream market for global luxury brands from all over the world. Last year Chinese shoppers spent around 380 billion CNY ( 61.13 billion USD) on luxury products worldwide, making it the largest market by far of luxury goods ahead of Japan and the US. While Chinese spending on luxury goods outside China was up 21 percent, domestic sales of high-end brands dipped for the first time ever by about 2 percent. Analysts have been quick to point the finger at government policies aimed at curbing corruption and excessive gift-giving.
However, despite the slight downturn in domestic spending on luxury goods, Chinese buyers, who already account for a whopping 35 percent of global retail sales of luxury consumer goods, are projected to account for more than half of all luxury sales by the year 2025. As more and more Chinese consumers enter the middle and upper classes, luxury goods are an essential way for many to show off their increasing wealth and status.
Long-Distance Shopping Trips
The main reason that so many wealthy Chinese consumers are flocking overseas to make their luxury purchases is because of major price discrepancies. China levies a combination of taxes on luxury goods that can drive prices 70 percent more than in other countries. These taxes are a combination of luxury tax (between 10-65 percent depending on the category), VAT (value-added tax) of about 17 percent, and a consumption tax (up to 30 percent).
According to the Chinese Ministry of Commerce, historically the average price of luxury goods in China were 45 percent higher than in Hong Kong, 51percent higher than in the US, and 72 percent higher than in France. At these rates, it would be easy to pay for a flight abroad with the discount on one or two luxury items purchased abroad. With so many Chinese consumers purchasing their luxury goods abroad, the Chinese government is missing out on a lot of tax revenue. The Ministry of Commerce is expected to start gradually lowering these taxes in an effort to stimulate domestic consumption. Officials fear that an abrupt decrease would appear like an effort to favour the wealthy. Another option officials have been considering has been to create a special luxury zone with lower tax levels.
Lowering taxes however, is not expected to have a profound impact on lowering the amount of CNY being spent on luxury goods outside the country. Many Chinese luxury consumers not only shop abroad for the lower price, but also to travel, for a better selection, and because they can rest assure that the goods are genuine. Last year 67 percent of luxury products purchased by mainland Chinese were acquired outside the country. A recent study by Global Blue, a retail-tourism company, found that for 82 percent of Chinese travellers stated that shopping was a crucial part of their travel plans. In the UK they spend on average nearly 1,700 GBP (16,100 CNY) per person per trip, three times that of the market average. Much of that money is spent on shopping for themselves and as gifts.
Luxury finds a home on the Internet
The downturn in the domestic market has led to heaps of unpurchased inventory across luxury stores in China, causing a number of luxury retailers to experiment with new strategies in order to get the needle moving. Many brands have been forced to do something they haven't had to do in the past, slash prices, in some cases up to 50 percent.
Other firms have gone to Alibaba's Tmall platform to setup online retail stores. In the past, luxury goods had not fared well on the internet in China. People in China have generally associate the internet with deals and discounts and have been reluctant and suspicious of purchasing luxury goods online. However, preferences are shifting. Burberry for example has doubled down on its online strategy and has setup a warehouse to service its online orders in China.
Who's buying Luxury Goods in China
A very distinguishing characteristic of China's luxury consumer market is that they are much younger than luxury consumers in Europe and North America. 80 percent of China's luxury consumers are under the age of 45 compared to just 30 percent in the US and 19 percent in Japan. Another distinguishing characteristic is that China is the only male driven luxury market. Luxury sales in China have been driven largely by male consumers, though woman are accounting for a much higher percentage than in previous years.
According to a report from McKinsey & Company titled "Understanding China's Growing Love for Luxury," there are four general consumer groups in China's luxury market. The first group of consumers is referred to as "core luxury buyers." Around 35 percent of China's luxury consumers fit in this relatively affluent group that spends a good portion of their total annual income, between 12-20 percent (roughly 20,000 to 60,000 CNY), on luxury brands. This group is the largest group but has fewer key distinguishing features compared to the other three.
The second group is known as "luxury role models." These extremely wealthy consumers make up only 1 percent of the entire luxury consumer market in China. However, they account for approximately a quarter of all luxury spending. They spend over 150,000 CNY annually on luxury goods or roughly 10 percent of their disposable income. This group sees luxury items and services as an important part of their daily life. This group has been consuming luxury goods longer than any of the other groups. When purchasing these goods they tend to be quite spontaneous, purchasing luxury goods they find interesting with little to no research. These luxury role models place a stronger emphasis on service and will return for more purchases if the service is outstanding. They generally purchase luxury goods for personal satisfaction or to be unique as oppose to "showing off" their wealth.
The third group is referred to as "fashion fanatics." This fashion conscientious group earns between about 100,000-200,000 CNY and makes up for just 3 percent of luxury consumers. They spend a larger portion of their income than any other group, up to 40 annually. They spend much of their free time keeping up with the latest fashions and searching for seasonal promotions and bargains. Fashion fanatics love the process of researching, visiting stores, and making a luxury purchase. Before making a handbag purchase, 59 percent of consumers in this group compared three different sources of product information compared to 41 percent of the other groups. They care little about the service they receive and have a strong influence on others in their social network.
Finally, the last group is known as the "middle class aspirants." This group makes up roughly 60 percent of luxury consumers. Most in this group earn between 60,000 CNY and 200,000 annually. The majority of these individuals live in tier 2 and 3 cities where living expense are lower than in tier one cities. They spend roughly 5000 to 15,000 CNY a year on luxury goods. Because each luxury purchase makes up a significant portion of their income, they do a considerable amount of research (but less than the fashion fanatics) before making a purchase. This group has little experience with luxury goods but desires them in order to aspire to a higher social status and to stand out from those around them.
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