Why China Is The Only Luxury Superpower

Key Takeaways: Hainan has bloomed into an entertainment/travel/shopping destination that could, in a few years, rival Dubai, now that its generous duty-free allowances are redirecting customers from other destinations to stores inside China. China's domestic luxury consumption will continue to grow after approximately 400 million people transition from low-income to middle and upper-middle-class households over the next few years. This growth is sure to fuel further demand for luxury goods in China. Looking at some of the top-selling luxury brands today, many are only working at 20-30 percent when it comes to their digital capabilities in China. Just 20 years ago, the luxury world looked completely different. Japanese customers were the most sophisticated globally and were dominating luxury purchases outside of their home countries. For some of the top luxury brands in the world, their stores in Hawaii were top revenue drivers after their flagships in Paris, Milan, or Rome. No, there is not a mistake — Hawaii was a top revenue driver because of its popularity with Japanese tourists. And when Japan was the driver of growth in the luxury world, life for luxury brands seemed predictable. Japanese customers loved Western heritage brands and did not expect much localization. Retail and marketing approaches within Western and Japanese markets were pretty similar, sales were easily generated in flagship stores, and advertising followed the same principles in both markets (mainly print and outdoor). The service expectations of Japanese customers were significantly higher than Western buyers, but that was easy to manage. Fast-forward to our current reality, and things could not have changed more drastically. While Japan is still an extremely important market for many luxury brands — one with solid demands and an ongoing desire for craftsmanship and quality — luxury's center has shifted to China. Over the last five years, most of the world's luxury consumption growth was either directly generated by Mainland China or driven by Chinese tourists purchasing luxury goods outside China. These cross-border luxury purchases swelled to epic proportions: Within a few years, Korea became the world’s number one duty-free shopping destination, fueled by Chinese travelers who would conveniently hop over on a short 2-3 hour flight to purchase luxury. Recently, the largest island in Mainland China, Hainan, bloomed into an entertainment/travel/shopping destination that could, in a few years, rival Dubai, now that its generous duty-free allowances are redirecting customers from other destinations to stores inside China. Today, repatriation towards domestic consumption is one of the most profound seismic shifts happening in luxury. Fueled by Covid-related travel restrictions, some luxury brands saw a 60 to 80-percent increase in revenue in China in 2020, while the industry collapsed in other areas of the world. Équité recently revised the forecast of when China will account for more than fifty percent of the global luxury market from 2030 to 2025. Brands are now witnessing the fastest regional shift in the history of luxury spending. And the growth of Chinese domestic luxury consumption will continue to grow after approximately 400 million people transition from low-income to middle and upper-middle-class households over the next few years. This growth is sure to fuel further demand for luxury goods in China. Furthermore, Chinese Gen Z, the most affluent and digital generation, is also shaking up the market. These Gen Zers are not only optimistic with a high propensity for spending on luxury brands, but they are also much more patriotic than previous generations. As a result, domestic luxury brands like Nio or the luxury beauty brand Florasis (Hua Xizi) are attracting young, affluent consumers and may soon take a significant share of the luxury market, putting additional pressure on Western brands. The emergence of Gen Z means that brands need to dramatically up their game in the Chinese market. When I analyze WeChat, for example, I can see that very few Western brands grade well on all critical success factors. Looking at some of the top-selling luxury brands today, many are only working at 20-30 percent when it comes to their digital capabilities in China. In part, this is because many decisions about the Chinese market are still being made from far away — in New York, Milan, or Paris by people who hardly understand China's market, consumer trends, or digital landscape. Few Western managers have personally experienced the lifestyles of affluent Chinese customers, speak their language, or are savvy on their local social media. The culture of key opinion customers and key opinion leaders is hardly understood, and US managers are often puzzled that customer service calls in China take as little as 6-8 seconds to get a human on the line (compared to 10-30 minutes for Western luxury brands). Recently, a French luxury couture shoe brand needed weeks to rectify an e-commerce delivery issue in the US — a time frame that is unacceptable in China. China is not just the luxury superpower in value. It has also become a trendsetter and the birthplace of an unprecedented number of new local luxury brands over the last 24 months — brands that will likely challenge today's leaders in a few years. Many luxury brands still profit from just being in China and riding the growth wave. But by 2025, a significant consolidation will happen. Many brands will have to exit if they don’t get critical mass because their digital costs will spiral out of control for being too inefficient. For luxury brands, now is the time to critically review your China strategies and play to win. The market is too important, too sophisticated, too competitive, and too expensive to do any less. Daniel Langer is CEO of the luxury, lifestyle and consumer brand strategy firm Équité, and the professor of luxury strategy and extreme value creation at Pepperdine University in Malibu, California. He consults some of the leading luxury brands in the world, is the author of several luxury management books, a global keynote speaker, and holds luxury masterclasses in Europe, the USA, and Asia. Follow @drlanger

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Why China Is The Only Luxury Superpower