In The Global Luxury Industry, China "Is The Hero At The Moment"

    With sales of luxury goods in China expected to reach upwards of $15 billion within the next five years, the country looks like a paradise for luxury brands. But the reality on the ground is far more complex than these rosy figures may suggest.
    Jing DailyAuthor
      Published   in Fashion

    Observers Keeping Close Eye On Mainland Luxury Figures As Brand Managers Hope For More In-Country Buying#

    The Chinese luxury consumer is not exactly a new phenomenon, but with the dramatic drop in demand in developed markets, a stronger focus on growing economies like China and India has given this group a boost in visibility. With sales of luxury goods in China expected to reach upwards of $15 billion within the next five years and make China the world's largest luxury market, according to a recent Bain & Co. report, the country looks like a paradise for luxury brands. But the reality on the ground is far more complex than these rosy figures may suggest.

    One of the major obstacles to even greater growth in the mainland is the propensity of many target buyers to hold off on their purchases, choosing instead to buy these goods in Hong Kong -- which does not have the same high luxury tax as the mainland -- or overseas. As a Globe and Mail article noted this weekend, for China's most sophisticated luxury buyers, the elaborate boutiques in Beijing and Shanghai are merely living catalogues, rather than places to actually spend money:

    Given the modest leasing costs and low wages for sales staff, Mr. French argues that setting up shop in Chinese cities amounts to high-profile and effective advertising for international companies to create brand awareness.

    "If you don't have the stores here, and you don't open everywhere and do the advertising, when the Chinese tourist goes abroad he doesn't know what he's looking at," Mr. French explained. "It's very, very cheap advertising."

    The result is many beautiful stores with slow turnover, with the ritzy Shin Kong Place a prime example. Amid the slow trickle of customers on a weekday morning, few were carrying shopping bags. Even the Prada-loving Mr. Chem left empty-handed, reserving his purchases for his next trip to Hong Kong.

    Another shopper, 31-year-old advertising executive Sun Aili, was visiting Shin Kong between business meetings after travelling to Beijing from the nearby city of Tianjin. Like Mr. Chem, she plans to hold off buying until she can go somewhere where prices are better.

    While this doesn't seem like a serious problem at the moment, since retail space in China is cheap compared to that in Paris or Tokyo, luxury brands would naturally prefer to have some measure of profit at these locations. Really, at the core of this problem has two catching points: one, the high luxury tax (which may come down in the next year, but will still discourage many potential buyers) and the highly informed nature of the younger Chinese luxury consumer.

    Although figures are hard to come by about online purchases, a growing online industry is thriving on places like Taobao -- China's version of eBay -- where young Chinese, usually those studying overseas, sell luxury goods for below their mainland cost. For younger buyers who don't have the time or the means to go on Hong Kong shopping trips, online shopping has become a popular way to bypass the luxury tax. Though these twenty-somethings aren't the target market for luxury retailers, who still go after the 30- and 40-something identified as the key demographic by the Hurun Report's Rupert Hoogewerf, they are an undeniably important segment that may dictate the success of brands in the mainland among the growing middle class in the next five years.

    In the next five years, China will, in all likelihood, surpass Japan to become the world's largest luxury market, just as it has surpassed the US to become the largest automobile market this year. However, as we've written before, this won't come easy and brands can't simply expect to sit back and watch the money keep pouring in. Just as Japan once was considered a money press for global luxury brands, China's top-tier cities, which have had imported luxury brand presence for around 20 years, are at risk of slowing due to luxury fatigue. From a Business of Fashion article earlier this year:

    The Japanese were once the industry’s most-favoured fashion consumers because of the speed with which they would adopt new trends. The evolution of a luxury market is a tricky thing you see. First new consumers will gravitate to the brands they’ve heard of, like Armani. Then they’ll begin to explore ones that are more niche, say Balenciaga. Then, if the Western world is anything to judge by, they’ll get disillusioned with the whole thing and just start buying their clothes at Zara, H&M and Topshop.

    If this analogy holds true, and Chinese luxury consumers follow the Japanese model of devouring the biggest luxury brands first, then moving into more niche markets as time goes on, we might see the whole cycle happening even faster and in an uneven manner, where Beijing and Shanghai tire of huge luxury brands when second-tier cities just start buying them, and so on. No matter how the development goes, what is clear is that buyers in top cities are keen to show off not only their wealth, but their sophistication and knowledge of brands. As more buyers in top cities enter the market, particularly as the middle class in those cities keeps expanding, the wealthy buyers beloved by top brands may look elsewhere as they try to set themselves apart from the new, "unsophisticated" buyers.

    This differentiation could come in different forms. Either these buyers would move towards buying less-known, more exclusive luxury brands (as Japanese and Korean luxury buyers have in recent years), as the article about Japan said, or home-grown luxury could see an increase in fortunes. While nobody harbors false assumptions that Chinese luxury brands could compete with top European luxury brands anytime soon, people used to say the same thing about Japanese brands like Comme des Garcons and Lexus.

    Like everything in China, it's really anybody's guess as to what will be popular in five years. If luxury sales remain hampered by the luxury tax, and if key top-tier demographics do tire of the biggest brands and shift to smaller, more exclusive luxury brands, we could see a real reshaping of brand strategy in the mainland market. Much of the success of brands in coming years will rest on the younger potential consumers who are just now becoming interested in luxury, but don't yet have the money.

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