Opinion: China’s luxury shift is a wake-up call for brands

In recent months, the luxury industry has been buzzing with concerns about cooling demand from Chinese consumers. And practically all brands that have recently, or are reporting declines point their fingers to Chinese consumers. Are Chinese clients abandoning their appetite for luxury? As someone who has closely studied and advised many top luxury brands for years, I believe this narrative oversimplifies a much more complex and nuanced situation. The reality is that we’re witnessing a significant shift in Chinese luxury consumption patterns, one that presents both challenges and opportunities for brands willing to adapt. Mirage of declining demand At first glance, the numbers might seem alarming. Many luxury brands have reported decreased sales in mainland China. However, it’s crucial to understand the context behind these figures. Between 2021 and early 2023, we saw several one-time effects that artificially inflated luxury sales within mainland China. For example, the luxury market in China experienced a boom in 2021 and early 2022, with domestic luxury sales growing by 36% YoY in 2021 alone. When the market was growing at this rate, many brands were celebrating and turned a blind eye to the root cause of the growth. This surge was largely due to three main drivers: Revenge spending following lockdowns; redirected purchases due to travel restrictions; and increased disposable income from reduced travel expenses. Take, for example, the case of Hermès. In 2022, the brand saw a staggering 45% YoY increase in sales in Asia (excluding Japan), largely driven by Chinese consumers. This surge was clearly unsustainable and a direct result of pent-up demand and limited travel options. With international travel restrictions gone, Chinese luxury consumers are once again making purchases abroad. In 2023, there was a notable increase in Chinese tourists visiting popular luxury shopping destinations like Paris and Milan. This shift in purchasing location contributes significantly to the perception of declining domestic sales, yet, it is nothing more than a recalibration towards a pre-pandemic reality. Price hikes without added value Many luxury brands have significantly increased their prices without proportionally enhancing their value proposition, a development that is key to understanding Chinese consumer behavior. Shoppers are increasingly sophisticated and value conscious. Chinese consumers, known for their savvy and price sensitivity, have taken notice. For instance, Louis Vuitton raised the prices of some of its most popular handbags by up to 20% in 2023. While the brand cited increased production costs, many Chinese consumers felt the increase wasn’t justified by any tangible improvements in quality or design. Additionally, some luxury brands have been working towards global price harmonization to reduce arbitrage opportunities. However, this has led to significant price increases in the Chinese market. For example, Chanel implemented multiple price increases on its classic handbags between 2020 and 2023, with some models seeing cumulative increases of over 60%, in some cases almost 100%. The Japan factor Price disparities have become a hot topic on Chinese social media platforms. Consumers are openly discussing how luxury items can be significantly cheaper in Japan, making it a top destination for luxury shopping. Consider the case of a Chanel Classic Flap bag. In early 2024, this iconic piece was priced at around 81,700 Japanese yen (approximately $11,300) in mainland China, while the same bag could be purchased for about 899,800 yen (approximately $8,200) in Japan, a difference of over $3,000. Gen Z and millennial consumers are driving significant changes in the luxury market. They account for approximately 60% of luxury spending in China in 2024. China is the youngest of the large luxury markets, with an average age of 29 when it comes to luxury clients. Many luxury brands’ understanding of the rapidly shifting expectations of young clients is inadequate, leading to mistakes and insufficient relevance. These younger clients prioritize emotional client-centric brand storytelling, unique experiences, sustainability, and brands that align with their personal values. There’s a growing trend towards experiential luxury among Chinese consumers. This includes luxury travel, fine dining, and exclusive events. Luxury brands that can offer unique experiences alongside their products are likely to see increased engagement and loyalty. Hyper-localization, digital personalization Younger Chinese consumers are increasingly seeking hyper-localized and personalized luxury experiences. Brands that fail to provide this level of customization and cultural relevance are losing ground. Chinese consumers, particularly the younger generation, have high expectations for digital engagement. Many Western brands are struggling to meet these expectations on China’s digital platforms. The importance of digital engagement cannot be overstated. Chinese consumers expect seamless omnichannel experiences and innovative digital touchpoints. Brands that can’t match this level of digital sophistication are finding it increasingly difficult to capture the attention of Chinese consumers. The economic factor While China’s economic slowdown is certainly a consideration, it’s far from the whole story. Despite short-term challenges, the long-term outlook for luxury demand in China remains strong. By 2030, China is expected to be home to over 10 million millionaires, according to Credit Suisse’s Global Wealth Report. Additionally, the expansion of the upper-middle class in tier 2 and 3 cities presents new opportunities for luxury brands. The number of ultra-high net-worth individuals with assets of $50 million or more is growing faster than in any other country in the world. This growing pool of affluent individuals will continue to fuel demand for luxury goods and experiences. Call to action The shifting landscape of Chinese luxury consumption is not a sign of declining interest, but rather a call for brands to evolve rapidly as the speed of change in China is unprecedented. Importantly, blaming the market while pretending internally towards their teams and externally towards the capital markets that “everything is fine, we just need the market to come back,” will put brands at significant risk by delaying necessary actions, or relying on the hope that things will be as they were before. Brands need to go beyond surface-level actions and demonstrate a deep understanding of Chinese culture and values and rapidly shifting expectations. Importantly, now is the time to invest in genuine value creation to support past price increases. This includes a dramatic improvement of brand storytelling. My 4E luxury framework (emotion, experience, engagement, and exclusivity) provides brands guidance. Brands need to focus on creating emotional connections through compelling brand storytelling. The brands that can adapt to the new reality have the chance to grow significantly in the world’s most important luxury market. The question is not whether Chinese consumers still want luxury, it’s whether luxury brands are prepared to give them what they truly desire. This is an opinion piece by Daniel Langer, CEO of Équité, recognized as one of the “Global Top Five Luxury Key Opinion Leaders to Watch.” He serves as an executive professor of luxury strategy and pricing at Pepperdine University in Malibu and as a professor of luxury at NYU, New York. Daniel has authored best-selling books on luxury management in English and Chinese, and is a respected global keynote speaker. Daniel conducts masterclasses on various luxury topics across the world. As a luxury expert featured on Bloomberg TV, Forbes, The Economist, and others; Daniel holds an MBA and a Ph.D. in luxury management, and has received education from Harvard Business School. Sign up for his masterclasses at the Jing Academy. Follow him: LinkedIn and Instagram. All opinions expressed in the column are his own and do not reflect the official position of Jing Daily.

Opinion: China’s luxury shift is a wake-up call for brands

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Published October 14, 2024

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Opinion: China’s luxury shift is a wake-up call for brands