Tag Archives: spending

Conspicuous Consumption “Here To Stay” In China: How Will Retailers Take Advantage?

Luxury Market In China A Mixed Bag For Foreign Brands, Who Fight To Get Customers To Buy Inside China Rather Than Traveling Overseas

Although Beijing and Shanghai are China's "crown jewels," second-tier cities like Chongqing may ultimately prove the engines for the creation of a more comprehensive Chinese consumer culture

Although Beijing and Shanghai are China's "crown jewels," second-tier cities like Chongqing may ultimately prove the engines for the creation of a more comprehensive Chinese consumer culture

We’ve discussed recent reports on the rebound of the Chinese luxury market (which didn’t drop that much to begin with, despite global economic woes), and this year’s findings in McKinsey & Company’s Insights China report that China is rocketing towards the top of the list of the world’s biggest luxury markets. Although China remains one of the only bright spots in the world of luxury retailing at the moment, foreign luxury brands — despite rapid growth in the mainland market — often have difficulties convincing many of the country’s highest-potential customers (the wealthy and super-rich urbanites in top-tier cities) to buy their products within the mainland, strangely enough, because of the large luxury tax China levies on high-priced imported goods.

Possibly to combat this problem, as we’ve seen this year, many companies are looking towards second- and third-tier cities as a source of future growth, and perhaps leaving the top-tier cities alone and letting their Beijing or Shanghai boutiques function only as “showrooms” for ultra-rich customers who’ll simply buy the products on their next overseas or Hong Kong/Macau trip. In these smaller urban areas, middle- and upper-middle class customers, who still want to differentiate themselves through conspicuous consumption but are most certainly not part of the economic elite, could be the key for luxury brands who want their China locations to actually sell things rather than simply show them off like a real-life catalog. Middle- and upper-middle class urban professionals in cities like Xi’an, Qingdao, Nanjing and Chongqing — who make a decent living but can’t afford to fly to Hong Kong or Macau (let alone Paris or Tokyo) for luxury shopping sprees — are likely going to buoy luxury brands’ losses in top coastal cities.

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WSJ: Only China Can Save Luxury Sales

Spending On Everything From Luxury Cars To Private Jets Shows Ultrarich Chinese Are Unleashing Their Inner Conspicuous Consumer

The exclusive club of "ultra-rich" in China are splurging amid the ongoing global economic doldrums

The exclusive club of "ultra-rich" in China are splurging amid the ongoing global economic doldrums

An interesting blog post today at the Wall Street Journal, where Robert Frank points out that the global economic downturn has turned a new spotlight onto a once-unlikely savior — the Chinese [ultrarich] consumer. While this group is exclusive to say the least, particularly in terms of the miniscule percentage of the Chinese population that can live up to this title, the staggering dropoff of the once mighty American, Japanese and even Russian luxury showoff has pushed the Chinese super-spender into the leading role.

Though Frank’s potential nicknames for this ultrarich group of big spenders — “Deng Xiaoblings,” for one — are a humorous take on the subject, the repercussions of an Eastward shift of conspicuous consumption and luxury shopping sprees could mean a great deal for established western luxury brands. Just as the increased buying power — and desire for diversification — seen among Chinese buyers of everything from gold to real estate to luxury cars to Chinese antiquities and contemporary arts has affected those markets and caused everyone from Bugatti to Sotheby’s to focus far more strongly on the China market than ever before, this China-bound luxury shift could very well change the nature and corporate strategies of the global luxury industry.

From the WSJ:

Purveyors of posh have a new mandate: Go East!

An updated forecast from Bain & Co. out this morning shows a stronger-than-expected rise in luxury sales for Asia–especially China. It said it expects luxury-goods sales in mainland China to jump 12% this year.

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Future For Luxury Goods Looks A Little Brighter

Growing Demand In China’s Interior, Other Asian Countries Should Counterbalance Tepid Consumption Elsewhere

Although Chinese consumers have shown a taste for foreign luxury brands, domestic labels will present stiff competition in coming years

Although Chinese consumers have shown a taste for foreign luxury brands, domestic labels will present stiff competition in coming years

As a result of the fast-paced development of China’s eastern coastline and special administrative regions, only recently have major luxury brands made it to the country’s vast interior region, where a number of second- and third-tier cities remain relative blank slates. Since so many companies are only reaching these areas now, the spread of luxury brands in China has become a regular news story. This has only intensified over the last year, as formerly free-spending Japanese and American customers have thought twice about luxury goods while emerging customers in places like the BRIC countries and relatively fast-growing economies like Vietnam become more regular (and brand-loyal) buyers. Nonetheless, the luxury sector is still experiencing only modest growth one year on from the onset of the global economic slowdown despite their best efforts at wooing new customers.

If many recent articles are correct, though, what we’ve seen over the last year — severe as it has been — should only prove to be a blip in the grand scheme of luxury revenues. From Financier Worldwide:

Sales of designer shoes, handbags, and beauty products have weathered the financial storm particularly well. At the end of August, French cosmetics company L’Oréal reported higher than expected profits of €1.37bn for H1 2009. In June, Hermès revealed it was farming crocodiles in Australia to feed demand for its coveted £4000 Birkin bag. Around the same time, Mulberry announced that its handbag sales had recovered, climbing 21 percent in the first 10 weeks of the new financial year. Shoe supplier Kurt Geiger, which operates in upmarket department stores across the UK, also reported double-digit growth in profits for the first five months of the year.

Bain & Company predicts that trading in the developed markets will remain tough for the rest of the year, with growth of around 1 percent in 2010 before a slow recovery. However, despite the recession slowing the pace of development in emerging markets, Bain believes that, as a consequence of increasing personal wealth, growth in global GDP, and rising tourism in Russia, China, India and Brazil, spending will surge between 20 percent and 35 percent over the next five years. This is expected to aid the recovery of the luxury goods sector.

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China’s Secret Purchasing Powerhouse: Women

Female Luxury Shoppers Powering Growth Of Luxury Brands Throughout Country, From First To Third-Tier Cities

Shaun Rein sees the female demographic as one of the major drivers of luxury spending in China over the long term

Shaun Rein sees the female demographic as one of the major drivers of luxury spending in China over the long term

Shaun Rein, founder and managing director of the China Market Research Group, writes an interesting feature today for Forbes, focusing on female Chinese shoppers, and the continued growth that this demographic has shown in the face of the global recession. Although female luxury customers have largely cut back in traditional luxury markets like Japan and North America, spending remains strong in emerging markets like China, where luxury brands are still new to some second- or third-tier cities — where much of China’s sustained growth will center in coming years, as we have written before.

As Rein sees it, the urban female demographic shows great sustained potential because of the speed at which they have become choosy — rather than simply profligate — spenders. Chinese shoppers are increasingly purchasing luxury goods because they like them, and have developed stronger brand loyalty based on style or quality, rather than simply spending for spending’s sake. This is a good thing for major brands, many of which take unique advertising or marketing strategies for the Chinese market to carve out loyal niches. Obviously, this strategy is working, as Rein notes, “Women [in China] are becoming less price sensitive and more sophisticated about the brands and products that they finally buy.” Unlike many male shoppers in the Chinese market, who are less apt to shop around or develop strong brand loyalty — mainly choosing based on status (for automobiles, mainly) or price (see success of Ferragamo and other high-end men’s luxury apparel brands) — women are more likely to become brand “connoisseurs.”

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China Becomes World’s Second-Largest Luxury Market

Country Overtakes US In Luxury Spending, Purchasing Nearly A Quarter Of The World’s Luxury Goods Sold In 2008

China is now second only to Japan in annual luxury spending, and is expected to overtake Japan within the next five years

China is now second only to Japan in annual luxury spending, and is expected to overtake Japan within the next five years

The World Luxury Association reports that spending on luxury products of all types in China has surpassed that of the United States, with wealthy Chinese spending $8.6 billion on luxury goods inside the country. Figures do not account for Chinese tourists buying luxury products overseas. These figures will no doubt please luxury retailers in China — both domestic and foreign — but there are signs that these companies need to work even harder to broaden their market and consolidate their brand position. This may sound strange, seeing as how China is second only to Japan, and rising fast, in luxury spending, but in order to maintain and grow these figures, companies are going to have to ensure “luxury fatigue” does not set in among some of their most active customers.

News by the state-run broadcaster CCTV put the figures published by the World Luxury Association into the context of luxury retailers trying to speed up their China efforts, as the country is seen in many ways to be on a similar consumer trajectory to that of Japan in the 1950s and 1960s:

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Reaching China’s Emerging Luxury Class: 2 Brands’ Strategies

Middle Class Estimated At Upwards of 150 Million And Growing; Consumers Hungry For Entry-Level Luxury Products That Offer Status As Well As Quality

China's middle class is expected grow exponentially in the next 20 years. Graphic © Foreign Policy magazine

Spending by China's middle class is expected to grow exponentially in the next 20 years. Graphic © Foreign Policy magazine

It has become a well-established fact that companies of all stripes are looking at the Chinese market as a source of sustainable revenue over the long term, as the country’s growing middle class increasingly becomes a consumer class on par with many more established markets. However, as many brand marketers — particularly from western countries — have found, reaching the Chinese consumer can be a complicated task, as the Chinese market differs greatly from other developing and developed markets…another well-established fact.

Today, Investopedia examines two strategies that have been adopted by western brands like Luxottica and Coach in their quest for market share in China’s huge, competitive entry-level luxury market. While it will be incredibly difficult for ambitious brands to unseat luxury powerhouses like Gucci, Louis Vuitton and Porsche in China, as this article notes, brands that adopt a specifically China-centric strategy when dealing with the middle class may create a strong foundation for future growth:

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Chinese Tap An Inner Dynamic To Drive Growth – FT

The Chinese Consumer Looks To Be One Of The Biggest Engines Of Global Growth In The Long Term

China's inland consumer is rapidly becoming the country's engine of change and growth

China's inland consumer is rapidly becoming the country's engine of change and growth. Image © New York Times

The Financial Times has an excellent article today about the rise of the Chinese consumer, once a virtually non-existent market but now the darling of the world’s multinationals.The article details how the Chinese government is trying to get consumers to make the shift “from export-oriented growth to a greater reliance on inner dynamism,” much like the United States did in the 19th century. Going along with observations I have made before, much of China’s current growth and transition is comparable to the same events in the US roughly 100 years ago — from the problems with quality control and political issues, consumer reluctance to spend, and business “grey areas.” The article is well-researched and focused, and includes many valuable insights into the monumental task ahead for the Chinese government — transforming the spending habits of over a billion individuals, who have been accustomed to high savings rates (for cultural reasons as well as China’s lack of a social safety net) and a lingering distrust of less established domestic brands (particularly since the reforms of 1978-79).

But the key to this article is its surprising (and incredibly significant) observation is its figures about the exponential growth of the inland, third-tier city consumer. This consumer segment has only now come to light, and as we have discussed before, inland Chinese cities look to be the future; not only for individuals, but for businesses and marketers as well.

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