China's meteoric development over the last two decades has becomes a growth engine for luxury brands. Given the country's rapidly expanding middle class, rising incomes, and insatiable appetite for opulence, Chinese consumers have become synonymous with luxury's promising future.
Many luxury brands have opened stores across the country, including stand-alone stores exclusively dedicated to very important consumers (VICs). China has became the number one focus for many companies, both for its fast-growing number of high-net-worth individuals and aspirational luxury clients.
But now, the country's post-pandemic recovery is faltering.
To understand the nuances of China's shifting luxury landscape, it's crucial to recognize the root causes of the current economic situation. One of the most prominent factors has been the significant cooling down of the Chinese real estate market, both in commercial and residential real estate. For years, real estate was the favored avenue for investments, often reflecting not just economic wealth but also social prestige. However, recent regulatory changes, over-leveraged property giants, and concerns about a housing bubble have subdued this once red-hot sector.
This downturn in real estate has ripple effects beyond just property owners and investors. The Chinese middle class, many of whom saw real estate as a tangible manifestation of their aspirations, are now treading with caution. The home, often adorned with luxury items, was a testament to their upward mobility. With the real estate market currently in flux, there's a palpable hesitancy in their consumption patterns.
On top of this, the nation is struggling with a significant decline in exports and a growing youth unemployment rate, which is now at a new record high The jobless rate of 16 to 24 year olds in urban areas rose to 21.3 percent in June, official figures show. It comes after the world's second largest economy grew just 0.8 percent in the second quarter of 2023.
The recent economic slowdown and geopolitical uncertainties are clouding the forecast for many luxury brands, especially those that targeted aspirational luxury buyers. Additionally, client preferences are shifting so fast that some of the leading brands of the past are struggling to keep up with emerging local brands, trends, and technologies.
A cautionary tale is Audi. According to recent press announcements, the brand now will use the EV platform of Chinese automaker SAIC instead of its own. For a brand that once positioned itself as “Vorsprung durch Technik,” or basically as the most technologically-advanced car maker, this step is a clear manifestation of a new reality. Automotive News called it in a recent article: “Audi's decision shows that China's automakers are starting to be the licensor, not the licensee, of EV technologies.”
Hence, brands face a two-pronged challenge: keeping up with the storm clouds gathering over China's economic horizon and navigating rapidly changing client preferences and technology shifts, especially Chinese Gen Z's gravitation towards local brands. Luxury brands must navigate this terrain with agility and sound strategies. Here are some strategies for luxury brands in these changing times.
1. Deepening brand storytelling#
In challenging economic climates, brand loyalty becomes even more critical. Brands that are able to create cultural capital through their brand stories have a strategic advantage. In luxury, most of the perceived value is created through brand storytelling based on deep client insights and desires. Only when a brand resonates with cultural nuances and expectations can they remain in their clients' favor.
What brands fail to understand is that it's not just about excellent products, but mainly about the brand's core values and its connection to clients. The question “what do we really sell?” becomes the most critical.
2. Prioritizing value over volume#
As discretionary incomes might tighten, brands should prioritize delivering exceptional value and lessen their dependency on aspirational clients. This means enhancing the desirability of the brand and each product. Limited editions, collaborations with Chinese artists, or products that reflect Chinese traditions could add unique value.
That said, promotions are the fastest way to destroy a brand. Additionally, luxury brands must remind themselves that experiences matter more than just transactionally selling products. Luxury today is not just about selling high-end items; it's about creating luxury experiences, which is a significant opportunity for luxury brands.
3. Embracing e-commerce with authenticity#
The digital realm is an avenue luxury brands can't afford to neglect, especially in China. But merely having an online presence isn't enough. It's about creating a seamless, authentic digital experience that is centered around the client and being present on the relevant Chinese digital platforms. Surprisingly, Équité Research identified that the majority of Western brands still — even in 2023 — have significant shortcomings along the digital customer journey, often disappointing the high expectations of Chinese clients.
Economic downturns and rapid change, while challenging, offer an opportunity for reflection and reinvention. Some brands will emerge significantly stronger, while those who take a wait-and-see approach will pay a high price. It’s time for action.
This is an opinion piece where all views expressed belong to the author.
Named one of the “Global Top Five Luxury Key Opinion Leaders to Watch,” Daniel Langer is the CEO of the luxury, lifestyle and consumer brand strategy firm Équité, and the executive professor of luxury strategy and pricing at Pepperdine University in Malibu, California. He consults many of the leading luxury brands in the world, is the author of several best-selling luxury management books, a global keynote speaker, and holds luxury masterclasses on the future of luxury, disruption, and the luxury metaverse in Europe, the USA, and Asia.
Follow him: LinkedIn: https://www.linkedin.com/in/drlanger, Instagram: @equitebrands /@thedaniellanger