Who are China’s most underserved luxury consumers?

What happened As we enter the second half of the year, luxury brands are striving to better tap underserved demographics while grappling with flagging consumer confidence and single-digit consumption growth in China. To boost revenue, brands are looking to identify new pockets of growth and demand, with some expanding into lower-tier cities and others doubling down on culture and collaborations to attract affluent urbanites. It’s this environment of murky consumer confidence and opportunity that lays the groundwork for a recent McKinsey & Company survey of nearly 12,000 Chinese consumers, which the firm conducted at the end of 2023 and segmented consumers into 108 distinct demographic groups based on factors such as city tier, age, household income, and more. One of the notable findings from the McKinsey survey is a high level of economic confidence among millennials in lower-tier cities, bucking a wider nationwide trend of pessimism about China’s current economic picture. According to the survey, approximately 75% of millennials in tier-3 and tier-4 cities express confidence in China’s economy, compared to only 65% of their counterparts in higher-tier cities. This confidence is even higher among mid- and high-income millennials in these lower-tier regions, exceeding 80%. It's important to contextualize China's consistently low consumer confidence. Despite this, China still boasts one of the highest consumer confidence rates globally, surpassing those of many advanced economies such as the UK, Germany, and Japan. Several factors contribute to consumer optimism in lower-tier cities, making these consumers an attractive target for luxury brands. First, millennials in lower-tier cities benefit from significantly lower living costs compared to those in tier-1 cities, allowing them to allocate more of their disposable income towards discretionary spending. The Jing Take Accordingly, the pressure that their tier-1 and tier-2 counterparts face with high housing prices and mortgage payments is considerably less intense in lower-tier cities, freeing up financial resources for other expenditures. Additionally, job security is generally more stable in lower-tier cities, as many millennials in these regions are employed by large companies or hold government positions, compared to more volatile job markets in tier-1 cities. We would add that luxury fatigue is less pronounced in lower-tier cities, particularly those to which luxury brands have only expanded in recent years. This means enthusiasm for imported high-end brands tends to be higher in a city like Baoji than in luxury-saturated Beijing. For luxury brands, this lower-tier consumer segment represents a significant and largely underserved opportunity. By tailoring marketing strategies to emphasize the aspirational and cultural side of luxury goods, brands can resonate deeply with a less seasoned consumer cohort. Highlighting quality, exclusivity, and the prestige associated with luxury items can tap into the optimistic mindset and spending power of millennials in lower-tier cities Urban Generation Z consumers, despite facing high youth unemployment rates, maintain a strong sense of financial optimism. This confidence is often supported by substantial family backing and a lack of significant financial obligations, largely due to China’s one-child policy. This generation exhibits distinctive spending behaviors that luxury brands must understand to engage effectively. According to McKinsey’s survey, urban Gen Z consumers prioritize health-conscious lifestyles and are willing to invest in products that support their active and healthy living. They spend more on dining out, cultural entertainment, and sportswear, reflecting their desire for social companionship and spiritual fulfillment. This demographic also consumes less tobacco and alcohol compared to other age groups, aligning with their health-conscious mindset. The report highlights that urban Gen Z consumers are culturally engaged and place a high value on social and cultural experiences. This preference is evident in their spending patterns, which prioritize activities and products that offer social interaction and personal enrichment. Additionally, strong family support provides them with a financial cushion, enabling discretionary spending even in uncertain economic times. As this potentially lucrative but challenging demographic progresses in their lives and careers, luxury brands can effectively engage with urban Gen Z by emphasizing products that align with their health-conscious and culturally active lifestyles. Collaborations with influencers and brands in the health and wellness sectors, as well as the creation of exclusive cultural experiences, can capture this demographic’s attention. Furthermore, leveraging digital platforms to create immersive and interactive brand experiences can resonate with tech-savvy Gen Z consumers. Tying this all together, if luxury and lifestyle brands are to effectively tap these two high-potenial groups, they must be highly strategic. To reach and appeal to millennials in lower-tier cities, luxury brands must get back to their roots and focus on localized aspirational marketing that emphasizes quality and exclusivity. Meanwhile, to appeal to a less logo-mad urban Gen Z cohort, brands need to focus less on the aspirational qualities of their products and more n health and wellness-oriented products and experiences, tapping growing demand for “something more” than material goods alone.

Sectors

Insights

Company

Who are China’s most underserved luxury consumers?