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Swaying and Swayed: China’s Luxury Consumers

The world’s biggest population – China – is also the largest global consumer of luxury. In 2015, China’s rich signed off half of the high-end purchases worldwide. The same year marked a considerable shift in how, where and why they buy.

Following a dip in China’s economy last year, are the country’s consumers splurging less on luxury?

Yes. The Asian economic powerhouse slowed down to 6.9% growth in 2015. While this figure still surpasses the tepid expansion in the West, which hardly breaks the 2% mark, it is a considerable slam compared to the country’s double-digit records of previous years. China’s luxury market also took a blow, shrinking by 2% to around RMB 113 billion (around $17.5 billion), according to a January 2016 report by global management consulting firm Bain & Company.

China Luxury Market

Chinese overseas luxury spending, however, ballooned by 10% last year, to RMB 116.8 billion as the Shanghai-based luxury research consultancy Fortune Character reported. Chinese shoppers – among them 120 million tourists – lodged half of the global luxury sales in 2015. 

Driving all those numbers are the shifting realities of China’s relationship to opulence, which reflects the peculiar makeup and evolving preferences of the world’s most populous nationality in a time when its government scrambles to rekindle the economy. 

Young and rich
It is also a populace that is fast acquiring riches. Although only 41,000 ultra-high net-worth individuals (those with $30 million or above in net assets) resided in China last year – less than a half of those in the US – residential and commercial property consultancy Knight Frank estimates their ranks have stretched by a staggering 134% in a decade. By 2025, they are to expand by further 66% – a growth rate beaten only by the affluent of Russia, who, nevertheless, totaled mere 6,000 in 2015. 

Mirroring the boom of the super wealthy, China’s upper-middle class is also advancing, binging on high-end soft leather accessories, cosmetics, watches, jewelry and garments, with Givenchy and Valentino being the most sought after labels last year, according to Bain.     

China's Luxury Consumption 2014 to 2015

What truly sets well-off Chinese consumers apart from the rest, however, is their youth. According to consultancy firm McKinsey & Company, more than 70% of them are under the age of 45, compared to just over a half in the US. The majority of China’s adults have never lived through an economic recession and bustle with optimism about the near future.

Who are they?
In its 2011 Understanding China’s Growing Love for Luxury report, McKinsey splits the Chinese rich into four categories:

“Core luxury buyers” account for half of China’s well-to-do consumers, who regularly spoil themselves, setting aside a total of RMB 20,000 – 60,000 for luxury a year.    

“Luxury role models” mostly live in Beijing or Shanghai, occupy high-level executive positions and dish out 10% or more than RMB 150, 000 of their annual income on luxury, often spontaneously.  

“Fashion fanatics” frequently spend more than they make, which is not much (RMB 100, 000 – 200,000 per year), purchase on credit and dedicate every spare moment on parsing the latest trends. Safe-styled mavens, fashion fanatics extensively engage on social media, banging out advice to others.

“Middle-class aspirants” hold mid-level office jobs and dwell in tier two and three cities, the lower living standards of which allow them the occasional lavish bash.  

Chen Kun in Giorgio Armani Made to Measure 2015 ad“Unlike any other luxury market, the Chinese luxury market, by the sheer size of its demographics across the country cannot be treated as a whole,” says Sudeep Chhabra, general manager at Armani Junior India, who also teaches luxury innovation and customer value management at Skema Business School in China. “So there will always be certain groups which are aspirational customers, followed by the new money and then of course the connoisseurs. Because of this there will always be a demand across the range of luxury goods and services.”

Neither of China’s well-heeled clusters functions in a void, of course. To grasp their behavior, one needs to be conscious of how leading brands as well as the country’s government are wrestling with the economic deceleration, impacting as much as responding to consumer demand. 

Mainland fret     
When the world grappled with the adverse economic consequences of the 2008-2009 financial crisis, China boomed. Buoyed by the country’s head-spinning performance, in 2010, McKinsey projected an annual increase of 18% in Chinese luxury consumption by 2015, when it would have savored 20% of the global high-end market. A slew of other watchers echoed the predictions. 

Nevertheless, the harsh currents of the beleaguered world economy caught up with the soaring dragon. 
"The pace of change in today's marketplace in China is taking retailers and brands by surprise," Egidio Zarrella, clients and innovation partner for China at global professional service KPMG, said for South China Morning Post late last year.

Shopping malls, the domiciles of high-end labels and the symbols of the country’s urbanity and prosperity, quieted down. Last August, Dalian Wanda, China’s leading mall developer, shut down 40 of its 600 venues. Almost simultaneously, British haute couture giant Burberry as well as French conglomerate LVMH, whose portfolio flaunts Louis Vuitton, Fendi, Bulgari and more, announced such slashes in their luxury sales in China that revenue from their boutiques in US and Europe would not be able to stitch. 

Gifting & prices to go down to fight the same malice 
A widely cited reason for the Chinese exodus from high-end stores is the government’s stringent anti-graft policy, which has greatly undermined the culture of gifting. According to Hurun Research Institute, the social custom, popular among China’s richest echelon and its political elite, slumped by 5% in 2014. And Swiss luxury timepieces, once deluxe tokens of largesse, suffered most severely. The Federation of the Swiss Watch Industry reported a 3.1% downslide in total exports to the Asian country in 2014. 

More potent than the slap on gifting the exorbitant costs of luxury items in China are pushing shoppers out of foreign brands’ boutiques. Due to substantial import taxes, labels retail at prices that are around 50% higher than in Europe and North America. In 2015, unable to entice mainland customers and balance their books at the same time, fashion houses pulled back – Gucci closed five stores, Armani, Ermenegildo Zegna and Louis Vuitton sealed the doors of four stores, each.  

Others adjusted. In late spring last year, Chanel introduced a single, worldwide price tag for three of its signature purses, 2.55, 11.12 and the Boy bag. Cartier also announced price cuts in China in an attempt to attract patrons back. Burberry and Gucci, on the other hand, launched luxury outlets to cater to the increasingly discount oriented Chinese customers, compensating for their sluggish full-price record. Although the majority of high-end houses remain leery of such steps, Bain envisions more price adjustments in 2016. 

Online connection to remedy offline disconnection
Those, however, may hardly be enough. As Chinese millennials and urban middle class discover their purchasing power, the Internet becomes their prime guide. Even if cross-border e-commerce is still a speckle on the luxury market due to lofty international tariffs and a justified fear of counterfeits, online social platforms are blooming to fill a felt disconnect. 

Vacheron Constantin for Chinese New Year 2016 - Monkey watch

“The Chinese customer is increasingly aware and information hungry, however language is still an impediment,” says Mr Chhabra. “So digital is critical in increasing awareness especially in the aspirational customer base.”

In pursuit of luxury insight, 78% of the close to 1,500 Chinese shoppers Bain surveyed last year, turned to web sources. The majority flocks to labels’ official webpages as well as microblogging platform Weibo and chat app WeChat. 

However, “[d]igital is experimental for luxury brands,” Benoit Garbe, senior partner at Millward Brown Vermeer, said in an interview for China-focused leadership and business analysis portal, CKGSB Knowledge. “But the reality is you have to be where the consumers are, and the reality is Chinese consumers are online.”

And business-savvy brands follow suit. American luxury accessory label, Coach, for instance, lures more than 2.1 million followers on Weibo with interactive, hot-topic campaigns around its seasonal launches. While Burberry streams exclusive content on its official site and leverages WeChat to host virtual events for its shows, Chanel partners with acclaimed Chinese actress and singer Zhou Xun to share candid beauty counsel with its 1.6 million Weibo aficionados. 

Yunnan blossoms from China used in Bvlgari perfume

The pull of the Foreign  
Would all those strategies – from price reductions to social media engagement – encourage Chinese to shop at home? Maybe. But as an ever increasing segment of the populace acquires a taste for travel and foreign luxury spoils, including private charters and spa splashes, the mainland fret may spiral into a cul-de-sac.

“It’s not just about consumption but it’s about contextual consumption where they want to be part of the authentic experience by buying in Milano, Paris and London,” says Mr Chhabra.

Europe – mainly France, the UK, Germany and Spain – is pushing aside one-time preferred lavish hubs such as Hong Kong, Macau and Taiwan. It is Japan, however, that crowns Bain’s list of Chinese travelers’ top luxury destinations for 2015. The island country is close, has a relaxed visa policy and a stable currency, delicious cuisine and picturesque sceneries. More than that, it straddles the-West-meets-the-East junction – a true high-end haven for both China’s aspirant luxury consumers and its connoisseurs.

“The Chinese customer is becoming a lot more global,” said Andrew Keith, president of Lane Crawford, for the New York Times. “There’s a real thirst for newness.” 

And that lust for novelty smothers the old praxis of daigou, or personal shoppers who purchase overseas on behalf of their mainland clients, is frizzling out. Government efforts to regulate the rather gray custom and e-retail have also contributed to its downscale from around RMB 60-70 billion in 2014 to approximately RMB 40-50 billion in 2015, according to Bain. 

“The practice of Daigou is on the decrease because customers want trust and authenticity which is not easy to maintain, says Mr Chhabra. “I don’t think it will fade away but there is a clear shift in experiencing luxury as being a BIG part of buying luxury, rather than by getting it by Proxy. In many cases because of stringent new rules of customs tax, there is no option left for the real luxury customer to rely on Daigou.”    

With a shrinking domestic luxury market, Chinese wealthy customers turn the world into a store that best matches their fancy. For a second year in a row, an ever-surging number of them plans to travel and experience luxury in Japan, Europe and North America. It is sensible to say, overseas jaunts are shaping the latest craze in the Asian country. But if there is anything certain about China and its consumers that has stuck in the past two years, it is that what seems rational today may reverse tomorrow.