The Rise Of The Chinese Luxury Market: Reality or Illusion?

    McKinsey's latest report recently forecast that China will comprise 20 percent of global luxury sales by 2015, surpassing Japan as the world's single largest luxury market. But this week, an article in the Chinese portal Dayoo questions whether McKinsey's forecasts are too optimistic.
    Jing DailyAuthor
      Published   in Fashion

    Is The Rise of China's Luxury Market An Overshot?#

    Is China's middle class really the luxury force they're made out to be? (Image: MO Down)

    McKinsey's latest report, "Understanding China's Love for Luxury" has forecast that China will comprise 20 percent of global luxury sales by 2015, surpassing Japan as the world's single largest luxury market. While this extensive report surveyed over 1,500 luxury consumers in 17 Chinese cities in spring 2010, and cites McKinsey's 2009 wealthy consumer and urbanization models spanning 800 cities, an article in the Chinese-language portal Dayoo is skeptical, questioning whether McKinsey's forecasts are too optimistic.

    The McKinsey reports notes that in 1998, China's luxury market accounted for less than 1 percent of the global total, while last year it reached 10 percent. The report also finds that the proportion of consumers buying luxury goods for personal satisfaction has grown rapidly, rising to 36 percent in 2010 from 25 percent in 2008. The report further indicates that the middle and affluent classes will become the main proponents of China's luxury market, with the country's 13 million middle class households becoming the fastest-growing source of luxury consumption. McKinsey predicts that while China's middle class currently accounts for 12 percent of luxury good purchases, the middle class will account for 22 percent by 2015.
    From Dayoo (translation by Jing Daily team):

    In the face of a series of hard data and examples, one cannot help but ask: Is China really reaching a "luxury age"?

    In [this journalist's] observations, some facts contradict the findings of the [latest McKinsey] survey. The number of people willing to spend two to three months of their salary on a luxury handbag is, in fact, still very small, while those recklessly purchasing luxury goods are the report's comparatively small group of "trust fund babies."

    It's worth mentioning that wanting to spend and being able to spend are two different things. At the moment, most of the 18-34 year old consumer group in China is dealing with the pressures of high housing prices, rent, tuition and medical expenses, and as such it will be difficult for them to become the main driving force of the luxury market.

    Today, the "mislabeling" of China's luxury market is not limited only to Shanghai, Beijing and other big cities, as luxury labels have cast their eyes toward second- and third-tier cities. McKinsey predicts that in the next five years, the number of large cities in China will double, from the current 30 to 60 -- For example, cities like Qingdao, Wuxi and others expect to see luxury sales triple in the next five years. By 2015, these cities will be nearing the current luxury consumption levels of Hangzhou and Nanjing.

    The report predicts that in the next five years, China's 36 largest cities, which include two mega-cities, nine large cities, and 25 developing cities, will represent 74 percent of the luxury consumption market [in China]. Yuval Atsom [McKinsey Shanghai's Global Director] recently said that most of the world's luxury-goods companies are already in China or are considering increasing their investment there.

    McKinsey's report revealed a noteworthy phenomenon. China's luxury consumers place a great amount of importance on value and investment. More and more consumers are willing to buy luxury goods that have long-term value. Yuval Atsom cited an example of a respondent who was happy that a bag she spent 250,000 yuan on in 2008 can now be sold for 300,000 yuan. For this respondent, the purchase of her bag was a great investment.

    Another interesting phenomenon is that if a luxury consumer feels that a product is a "classic" and has long-term value, he or she will be more willing to pay the full price on it. McKinsey noted that this piece of information is very important for luxury labels. McKinsey concluded that, "when setting a price, be wary when setting discounts because it may affect brand recognition."

    Loving full-priced goods proves to be a dilemma. If China's luxury consumers really are willing to pay full luxury prices, how do you explain the large number of Chinese consumers who take advantage of sale seasons abroad to mass-purchase luxury goods?

    In recent years, China's rise to become the world's top luxury market has been all over the media. Most of the reports published, however, were done by research institutions abroad. For example, Bain, Goldman Sachs and other companies have issued similar reports, except for slightly different data, all concluding that China will surpass Japan to become the world's dominant luxury market. Bain expects the annual growth of China's luxury market to reach 23 percent, with second- and third-tier cities becoming the new "battlefield" for luxury labels; Goldman Sachs' 2010 consumption data for the Asia-Pacific region reveals that in 2010, almost all luxury labels in China saw double-digit growth, and in three years, China will surpass Japan.

    So who's closer to reality: the numbers, or this journalist's observations? It seems to be the former. However, seeing the rush of foreign luxury goods into the Chinese market in recent years, in addition to the range of agencies "flattering" the Chinese luxury goods market, it's hard not to wonder whether the boastful claims about the Chinese luxury goods market are just consumer bait for foreign businessmen.
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