Luxury Spreading Far and Wide

Chinese already spend one of every eight dollars spent on luxury goods worldwide–as the proliferation of international luxury brand retailers from Armani to Louis Vuitton operating in the country and their growing dependence on its business already bear tony testimony. By 2015, Chinese consumers will be spending at least one dollar in every five, according to newly published research by McKinsey, the international management consultancy. That adds up to sales of luxury watches, jewelry, handbags, shoes, and clothing of the order of 180 billion yuan ($27.5 billion), up from 80 billion last year.

Good news for the international luxury brands that Chinese consumers prefer? Up to a point. This broadening of their customers will move them out of their traditional niche of selling to the very rich. McKinsey reckons that there are 13 million Chinese households with incomes of 100,000-200,000 yuan ($15,000-30,000)–upper middle class in China and on the first rung of the ladder of luxury consumption–and that this number will increase nearly sixfold to 76 million by 2015. Their share of the Chinese luxury goods market is forecast to grow from 12% last year to 22% by 2015, making it the fast growing sector of the market.

Addressing their needs requires a different marketing approach to the high-touch, for which read expensive, way luxury-goods makers are used to dealing with their best-heeled customers. That implies better in-store services and digital experiences for their customers, and the development of products and services designed for the local market (as Hermes is doing with its Shang Xia brand), three factors that have not always been the strong suit of luxury companies, especially their online strategies; the broad spread of social media is a particular challenge to the exclusiveness of a luxury brand. The luxury companies’ market will also spread from the the first tier cities to the second and third, compounding the reach and brand dilution issues, though it will also remain concentrated in the main cities.

Luxury-goods manufactures will also find that growing familiarity with luxury goods will make Chinese consumers more value conscious. Brand retailers won’t be able to get away so easily with just slapping a high price on their goods. Luxury goods prices in China are about 20% higher than even in Hong Kong. On the flip side, the research shows that as consumers get more brand conscious, they value craftsmanship and quality more, and are becoming more aware, and rejecting of, counterfeits.

McKinsey also predicts that spending on luxury services, such as spas and other wellness activities, will grow faster than that on luxury goods, another shifting sand for luxury retailers. The elephant in the room, though, is whether China will generate its own luxury brands as the once similarly foreign-brand besotted Japan has done.

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