Luxury Brands Refocus On China

Studies Indicate Sluggish Demand In Established Markets Will Continue As Buyers Remain Motivated In China

According to new studies, Chinese luxury enthusiasts may help buoy the global luxury market for the next few years, if not drive long-term growth

According to new studies, Chinese luxury enthusiasts may help buoy the global luxury market for the next few years, if not drive long-term growth

Luxury brands have had what can conservatively be called a tough year, with the global economic crisis putting a gaping wound in their profits in traditionally high-demand countries like the US and Japan, and recovery lagging behind expectations. These figures have been tempered somewhat by the potential of the Chinese market to soften the blow of falling demand elsewhere, if not counteract it completely. While it is still a bit quixotic to expect China to be the savior of luxury brands everywhere — since it is still very much a developing market — it does benefit luxury brands to plan ahead for the time when China is the world’s biggest luxury market, and start brainstorming on their long-term strategy for sustained growth as well as strong brand loyalty.

This week, Harvard Business looked into the Chinese luxury market, digging through statistics to discern whether this market truly is all it’s cracked up to be. While their findings suggest that hyperbolic enthusiasm about the Chinese consumer is unwarranted — as we’ve written before — they do remain bullish about the potential of this populous and fast-moving market:

New research from McKinsey & Co. indicates that, by 2015, China will be home to the world’s fourth-largest population of wealthy households, an estimated 4.4 million. McKinsey also reports that presently, about 80% of China’s wealthy are between the ages of 18 and 45 (versus 30% in the US). Jing Ulrich, the chairman of China equities at Morgan Stanley, was recently quoted in Forbes as saying of China, “With the global recovery unlikely to be smooth, domestic demand is likely to remain the primary engine of growth in the remainder of 2009.” In a Wall Street Journal op-ed last year, Zachary Karabell argued that “the rise of the Chinese consumer is the only thing standing between them [global companies] and a decline in their business.”

And Chinese consumers are ready to spend. Ruder Finn Asia recently partnered with Albatross Global Solutions in developing the 2009 China Luxury Forecast, which found that, in Greater China as a whole, more than half (50.3%) of respondents claim they will not let the global economic downturn affect their purchase of luxury goods. Additionally, the Forecast found the Chinese buyer to be remarkably loyal, with nearly nine out of ten (89.3%) respondents saying they would stick to their preferred luxury brand despite the crisis.

The results about Chinese consumer loyalty, I think, are a bit misleading, as many other studies have indicated that brand loyalty is a bit of a problem in the Chinese market. While I can’t discount these results completely, I can say that I’m a bit wary about the loyalty issue — in my experience, Chinese luxury consumers tend to jump around a lot based on buying trends, and the more wealthy the buyer, the more susceptible he or she is to dropping a brand once it becomes either 1.) Too popular or 2.) Too accessible.

The article goes on to cit Economist results that the consumer market has increased a still-significant 8% in the last 10 years — I’d have to assume this will increase even more in the next 10 years as the country’s second- and third-tier cities continue to grow and benefit from the government’s western development program (as well as this year’s stimulus spending on infrastructure projects):

This performance in the luxury segment outpaces a still-impressive retail sales growth. As reported last month in The Economist, China’s consumer market has increased by 8% a year in the past decade while, in the past 12 months, retail sales have grown 17%, although this figure could be inflated by government purchases.

And Chinese consumers engage with brands online. Almost 90% of the respondents in the China Luxury Forecast say they use the Internet to gain a better understanding of luxury brands and products. (Over 310 million people in China have the Internet, and the world’s top blogger in terms of visits is Chinese — Xu Jinglei.) In this way, China is very similar to the US in that companies can support their marketing efforts with effective online communication.

By embracing the loyal Chinese buyer, who is increasingly becoming wealthy, consumer brands hope to drive growth and maybe — if we’re lucky — pave the road to economic recovery.

One response to “Luxury Brands Refocus On China

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