The luxury market in China has faced a complex landscape in recent years, requiring brands to recalibrate their strategies in response to evolving consumer trends.
Following an underwhelming first quarter in 2024, during which many luxury houses recorded disappointing performances in China, there has been much discussion about the supposed “decline” of the Chinese luxury market. However, a more nuanced understanding is needed to make sense of the dynamics at play.
To fully grasp the state of the Chinese luxury market, it is crucial to differentiate how various segments are faring against factors like the economic climate, the resumption of international travel, and brand efforts towards elevation. These factors impact luxury houses in China in vastly different ways, depending on their positioning, scale of operations, and target clientele.
China’s luxury market in five segments#
In my opinion, the luxury market in China can be divided into five distinct segments: Ultimate Luxury Powerhouses, Commercially Savvy Luxury Powerhouses, Scarcity-focused Houses, Houses Focused on Brand Elevation, and Customer Acquisition-fueled Houses. Each of these segments is navigating the current landscape in unique ways.
The Ultimate Luxury Powerhouses, such as Hermès and Chanel, have traditionally focused almost exclusively on Very Important Clients (VICs) and high-end luxury products. These houses maintain consistent positioning and strategy, resulting in strong performance in China due to their advanced VIC focus and limited entry-level offerings.
Largely unaffected by the economic environment that impacts the middle class, these houses continue to benefit from very high desirability and are viewed as the pinnacle of luxury by most Chinese consumers. However, the increased international travel of high-net-worth individuals (HNWIs) is likely to affect their revenue in China, though this should be compensated by luxury expenditures of these consumers outside mainland China.
Commercially Savvy Luxury Powerhouses, including Louis Vuitton and Christian Dior, have established themselves as quintessential luxury brands while also attracting middle-class consumers through entry-level products and targeted marketing tactics.
These brands are likely to outperform the broader luxury market in mainland China by leveraging their exceptional expertise in customer and merchandise segmentation to cater to the evolving needs of both the Chinese middle class and HNWIs.
Then there’s Scarcity-focused Maisons, exemplified by brands like Patek Philippe, Harry Winston, and Loro Piana, which focus exclusively on VICs and ultra-luxury products.
Constrained by their production capacity, their intrinsic scarcity positions them well to benefit from the growth and resilience of HNWIs in China, despite their high exposure to duty-free shopping and international travel patterns. Their success in mainland China will largely depend on their ability to implement price harmonization and provide their clients with added benefits, such as gated experiences, to reward their purchases in mainland China.
Maisons Focused on Brand Elevation, such as Gucci, Prada, Cartier, and Tiffany & Co., are among the few that are making significant and visible efforts to elevate consumer perceptions of their brand universes. They achieve this by hosting exceptional exhibitions, intensifying their focus on VICs, and showcasing new or exclusive products.
While these houses have a high level of exposure to the economic environment, they also have clear potential to grow their share of HNWIs and reduce their dependence on the middle class. Their ability to rigorously sustain these long-term efforts should allow them to outperform expectations in China by next year.
Finally, Customer Acquisition-Fueled Maisons, which are heavily reliant on the middle class, face significant challenges. Having historically focused on new customer acquisition, these brands lack scarcity and face high exposure to the current economic environment. Although they are beginning to implement brand elevation strategies, these efforts are not yet consistently visible across consumer touchpoints.
Tailoring strategies accordingly#
In China’s complex luxury market, influenced by the return of international travel, a nuanced understanding of each segment’s unique challenges and opportunities is crucial. Factors affect brands differently based on how they are positioned in China in terms of desirability, business scale, and scarcity.
Covid-19 had a profound impact on the dynamics of luxury consumption within mainland China, artificially inflating the market’s growth from 2020 to 2023. However, the economic climate in China has since changed, bringing about significant changes: the middle class is experiencing a dampened appetite for luxury goods, while HNWIs are showing remarkable resilience in their luxury expenditures.
Understanding how the economic confidence and travel behavior of the middle class impact these segments differently is crucial. Chinese consumers are gradually reverting to their pre-pandemic habits, when they used to spend more than half of their luxury expenditure abroad, complicating the narrative around domestic luxury consumption.
Brands that have relied heavily on the growth of the Chinese middle class by offering entry-priced items are facing a very different environment compared to luxury maisons that have never strayed from their core target market of HNWIs due to their limited production capacity.
Luxury brands must adapt their strategies to meet evolving consumer needs. Some brands are showing promise by effectively navigating current challenges and capitalizing on long-term potential through strategic consistency and execution. This dynamic market requires a deep understanding of specific drivers to succeed.
Jacques Roizen is a Managing Director at DLG (Digital Luxury Group) in Shanghai. With extensive experience in leadership roles, strategic consulting, and advisory work, Roizen is renowned for driving transformative growth for his luxury industry clients. He is a globally recognized thought leader on the evolving Chinese luxury and beauty market, as well as its unique digital ecosystem. All opinions expressed are his own and do not reflect the official position of Jing Daily.