Luxury brands’ war for Chinese consumers

Wealthy Chinese woman- Shanghai Travelers' ClubIn the the heart of old Shanghai is a magnificent villa that serves as the workplace of Guo Jingming, a provocative young film-maker. “Tiny Times”, his recent blockbuster, follows the travails of some fashionable college girls (pictured, in the walk-in closet of one of them). Its depictions of the high life, rarely shown in Chinese films, have set social networks ablaze; they have also been attacked by the People’s Daily for “unconditional hedonism”. Mr Guo says: “So what? Materialism is neutral, neither positive nor negative.” After all, he goes on, China’s cosmopolitans know at any given moment what movies are playing in New York and what fashions are on the Paris runways.
China’s once-drab and Mao-suited interior is not so far behind. In Mianyang, a middling city in the province of Sichuan, an enormous billboard featuring Miranda Kerr, an Australian supermodel, draped in Swarovski crystals welcomes shoppers to the Parkson shopping mall. It is one of half a dozen high-end malls in town. Luxury sales are exploding there. Local Audi and BMW dealers sell more than 100 cars each a month; Land Rover, Jaguar and Cadillac have just muscled in on the market.
Thirty kilometres (20 miles) away in Luxi, a town of 57,000 people, online shopping is hot. The first express-delivery office opened only three years ago, and handled perhaps ten packages a day; today, there are five, each handling 100 packages a day. Even 60km away, in rural Santai county where farm-workers are the customers, one modern shopping mall has sprung up and another is being built. “Customers are evolving very quickly from the low-end market to the middle and high-end,” says Yang Shuiying, proud general manager of the Zizhou shopping centre.
In the 1950s and 1960s the world economy was transformed by the emergence of the American consumer. Now China seems poised to become the next consumption superpower. In all likelihood, it has just overtaken Japan to become the world’s second-biggest consumer economy. Its roughly $3.3 trillion in private consumption is about 8% of the world total, and it has only just begun.

“The future of the world will be profoundly shaped by China’s rush toward consumerism,” says Karl Gerth, an expert on Chinese consumption at the University of California, San Diego. Although investment made the biggest contribution to China’s growth last year, and although private consumption’s share of output, now at 36%, fell between 2000 and 2010, that trend is unlikely to last, for several reasons.
First, boosting the people’s desire to consume is a stated goal of China’s leaders. Higher government spending on health care and pensions may encourage households to save less for such things. Higher interest rates may, paradoxically, discourage thrift if people reach their savings goals faster. Rising wages and an ageing population will also shift the balance towards consumption rather than saving. And although household debt is growing fast, China still has relatively little.
Besides, consumption has not fallen in absolute terms. It has, in fact, grown briskly—just not quite as quickly as the economy overall. In dollar terms, China contributed more than any other country to the growth in global consumption in 2011-13, according to Andy Rothman of CLSA, a broker. Moreover, China’s official statistics understate some consumption—spending on housing, for example.
A massive push to urbanise is also under way, which should produce tens of millions of richer citizens seeking retail therapy. McKinsey, a consultancy, forecasts that consumption by urban Chinese households will increase from 10 trillion yuan in 2012 to nearly 27 trillion yuan in 2022.Shanghai Travelers' Club private event - Hermes
How much China spends is striking. Even more so is the way it spends. This is now one of the world’s most sophisticated consumer markets, heavily skewed towards expensive goods. Local property barons are now building half the world’s new shopping malls in China, many of them in smaller cities, because even punters without big incomes are becoming big shoppers. Research by IDEO, a consultancy, has found that many young migrant workers earning less than 5,000 yuan ($830) a month will spend a month’s wages on an Apple iPhone.
That points to another difference from previous consumption booms elsewhere: with the world’s largest e-commerce market at their fingertips, Chinese shoppers are online from the start. As a result, what was once a foreign marketers’ fantasyland is now the world’s fiercest battleground for brands.
Sanford C. Bernstein, a research firm, calls the Chinese “increasingly aspirational and conspicuous consumers” who routinely trade up to fancier labels even on staples. Newly middle-class types in cities in the interior are keen to try out new products, especially the ones they have seen on foreign television shows. Jeff Walters of the Boston Consulting Group (BCG) points out that even country bumpkins are consuming global media, thanks to the wild popularity of local online-video services. Chinese consumers, he says, were watching the latest season of “Downton Abbey” on Youku, a video-sharing website, well before it was released in America.
This passion for fashion is, in theory, good news for multinational marketers. Unlike, say, Japan, where consumers heavily favour local brands, Chinese consumers hold foreign brands in high esteem. Torsten Stocker of AT Kearney, a consultancy, observes that foreign brands are doing well in sectors they introduced to China (chewing gum, chocolate); those that have “heritage” appeal (premium cars, luxury goods) and those where local brands are not trusted, such as powdered baby milk. The world’s fast-food and consumer-goods giants—Procter & Gamble, Pepsi, General Mills and so on—are also big in China, but they are increasingly dogged by local rivals. A recent study by Bain, another consultancy, found that although foreign brands still lead in some areas (biscuits, fabric-softener, bottled water), local brands are surging in others (toothpaste, cosmetics, juice).
Brand-hopping, though, is rife. Having grown up with radical economic change, Chinese shoppers are “very fickle, and hard to pin down to a strong brand loyalty”, says Mintel, a market-research firm. Yuval Atsmon of McKinsey reckons that brand-switching—between Pepsi and Coke, Colgate and Crest, KFC and McDonald’s—is common, “much more so than in most markets”. Swarovski, the crystal-maker, has discovered that over three-quarters of Chinese customers are eager to try new brands, a far higher figure than elsewhere. A recent study by Bain found that the top five brands in ten categories lost 30-60% of their customers between 2011 and 2012.

This creates several problems. With two or three times as many brands on shelves as found in other countries, competition is ferocious. This makes advertising and marketing vital—but the cost of publicity is soaring. Also, firms that thought they enjoyed a “first-mover advantage” have discovered that their brands are now seen as stodgy or old-fashioned. Olay, a cosmetics brand, defined skin care in China for a generation—but Carol Potter of BBDO, an advertising agency, reckons that “the new generation thinks it’s a brand from yesterday.” She adds that whereas Louis Vuitton once symbolised good and expensive taste in China, a new generation is seeking different, subtler luxuries. Luxury travel magazines like the Shanghai Travelers’ Club, an iPad publication reserved for High Net Worth Chinese socialites are also advocating a more sophisticated spending ” Today, the new generation of Chinese consumers want to differentiate from their parents – who have already Louis Vuitton products.” says Pierre Gervois, CEO of China Elite Focus Magazines LLC and Publisher of the Shanghai Travelers’ Club. “Buying a Cottin gold plated Laptop or a tailor made Goyard in Paris trunk is much more distinctive”, he added.Shanghai Travelers' Club Cover Summer 2013
Another complication for marketers is that many Chinese shoppers have a global outlook. When previous middle classes rose to prominence in America and Japan, the internet did not exist. People could not Google the latest European fashions or check discounts on Amazon. The arrival of cheap air travel has also made the Chinese more discerning shoppers. Mr Stocker argues that these factors have “compressed the discovery process”, which in Japan took 30 years, to less than ten.
The Chinese are already the world’s biggest shoppers abroad, but a report released on January 20th by CLSA forecasts that the number of outbound Chinese tourists will double to 200m a year by 2020 and that their spending will triple over that time. James Button of SmithStreet, a consultancy, reports a well established piece of etiquette: “You must let friends know when you are going overseas,” and take along an empty suitcase.
Many Chinese also use online shopping agents, who aggregate requests and bring back foreign goods. Sales by overseas purchase agents came to nearly 50 billion yuan in 2012, a leap of more than 80% on the year earlier; they jumped by half again last year to 74.4. billion yuan. Foreign websites, including Amazon, now offer direct delivery to China for certain products, and local e-commerce giants such as Alibaba run cross-border services.
Buying overseas saves money, since mark-ups and hefty taxes are the rule in China. Many ordinary folk travel not just to Hong Kong, the most convenient spot, but to Jeju Island in South Korea (where they can visit without a visa and shop duty-free) to stock up on cosmetics that cost much more at home. Price, though, is not the only motivation. Another is to avoid the counterfeit goods so common on the mainland. Even more important, consumers say, are the variety and freshness of the products available overseas.

Nowhere is this wide-ranging urge to spend more obvious than in the market for luxury goods. Globally the Chinese are the biggest buyers of expensive items, accounting for some 29% of purchases last year (see chart 2). Some two-thirds of Chinese spending on luxury goods takes place outside the mainland; a fifth of it in Europe. (Harrods of London has seen sales to Chinese shoppers, its largest foreign contingent, increase by 50% a year since 2011.) Consistently favoured brands include Lancôme, Gucci, Audi, Rolex and Tiffany.
The Chinese are also the world’s largest consumers of Bordeaux wine and cognac, though sales (like those of Moutai, a local grain alcohol) have fallen in the wake of official campaigns against gift-giving. At Berry Bros & Rudd’s bonded wine warehouse in Basingstoke, in southern England, where 4.5m expensive bottles are stored, more than 1m of those are owned by oenophiles from greater China. No longer, says the firm’s chairman, should the Chinese be pictured ruining fine wine by pouring Coca-Cola into it.
Although a government crackdown on corruption has crimped mainland sales, and some luxury firms slowed down the rollout of new boutiques there last year, Coach, Prada and Bottega Veneta continued to expand. Apple expanded too; it now has more stores in Shanghai than in San Francisco, and launches new iPhones in Beijing when it does in California. Mr Button of SmithStreet thinks brands offering affordable luxury—Michael Kors and Kate Spade, say—can capture both the upwardly mobile and the “post-luxury” elites in the cities, who want less flashy brands.
In the past, the Chinese showed little interest in Western art. That is starting to change, and may change quicker with the opening of a new museum of Western art in Shanghai. The richest man in China has just paid $28m for a Picasso, though he was condemned as “unpatriotic” on Sina Weibo. Ms Potter also observes that two-thirds of affluent consumers are keen to know the history and cultural background of foreign brands. So they love to buy Piaget watches in Geneva and Zegna suits in Milan, but reject unconventional offerings such as German watches or Japanese leather bags.
It is not only in luxury goods that Chinese shoppers are leading the way. China has become the world’s biggest e-commerce market, with spending forecast to reach $540 billion next year. On Singles Day, an annual online-marketing extravaganza held on November 11th, 400m Chinese spent $5.7 billion just on Tmall, an e-commerce platform run by Alibaba; Americans, on their Cyber Monday a few weeks later, spent only about $2 billion. China is the world’s biggest maker and consumer of smartphones, and will soon be the largest “mobile-commerce” market, too.
Perhaps because they distrust official information, the Chinese rely heavily on peer reviews. Research by BCG has shown that they write, and act on, online reviews of products and services far more than Westerners do. A recent study of purchases of moisturiser found that two-thirds of Chinese buyers relied on online recommendations by friends or family; the comparable figure in America was less than 40%. Millions of online shoppers follow the thoughts of Miumiu and Viviandan, leggy twins from industrial Chongqing, who started posting pictures of themselves in the latest fashions, with wry observations on trends and prices, a decade ago. Even now they post recommendations nearly every day on social-media sites such as Instagram, or on Weibo. Their likes and dislikes make or break products.Wealthy Chinese reading the Shanghai Travelers' Club magazine on its iPhone
Online shoppers in the remotest parts of China often know a great deal about a global brand’s attributes and pricing worldwide—which can put marketers on the back foot. Chinese consumers are no longer willing to pay a hefty premium for any old foreign brand. As they grow more discerning, multinationals are having to work harder to prove their worth—and are having to defend their brands on China’s wild social media. But creative approaches can pay off.
When VF Corporation, a large American clothing firm, wanted to promote The North Face, a brand of outdoor clothing, in China, it struggled. Whereas climbers and hikers in the West relish the thought of conquering mountains alone, the Chinese generally think of outings in Nature as a spiritual escape, to be enjoyed with friends. So the firm created an online community linking amateurs to clubs devoted to outdoor pursuits. The website offers points for activity and loyalty that can be redeemed for products. Sales are soaring, and VF now has a detailed database of over half a million keen customers.
The online awareness of Chinese customers has big global implications. According to Andrew Keith, the president of Lane Crawford, cosmopolitan Chinese consumers are now setting the agenda: “We are not teaching them, they are teaching us.” (He should know; his Hong Kong department store has half a dozen shops in greater China, 650,000 high-spending customers and, in the new Shanghai store, private suites for “Platinum VIPs” who spend 60,000 yuan or more a year.) Alexis Perakis-Valat, head of L’Oréal’s China business, agrees. He believes that the Chinese market, unlike those in Western countries, is driven by young urban consumers who are demanding something new and have no taboos. He points to peculiar and distinctive products developed for this niche in China, such as a black-foam face-scrub for men, which are now being launched around the world.
Another sign of such innovation is the reinvention of Johnnie Walker, a mass-market whisky brand belonging to Diageo, the world’s biggest spirits firm, as a luxury brand in China. Keen to win over sceptical consumers more accustomed to baijiu (a local firewater), the firm opened Johnnie Walker House in Shanghai almost three years ago. For around 800,000 yuan, or $132,000, the company’s master blender (with the delicious surname of Beveridge) will fly in and brew a special batch of Johnnie Walker precisely matched to a customer’s tastes. Certain rare blends, including some bearing the marks of the Chinese zodiac, are sold only at this venue.
This effort has helped Diageo introduce its whiskies to thousands of affluent customers, who in turn have pushed the firm towards new inventions—such as blends with a much higher alcohol content—which helped its whisky revenues grow twice as fast as the industry average. The concept has been such a success that the company has opened new Houses in Beijing and Seoul, and plans others. When Diageo unveiled Odyssey, a special-edition blend, in 2012, it kicked off the global launch not in London or New York but in Shanghai.
Life was simpler for foreign brands when they first came to China, reflects David Roth of The Store, an advertising agency: “It was a land grab…you just had to create awareness as quickly as possible.” Now the Western invaders must not only cater to the world’s most demanding shoppers, but also cope with increasing home-grown competition. Chinese firms are starting to catch up with their fancier foreign rivals. Some even aspire to become global brands.
Huawei, a telecoms-equipment giant, is making a big push into branded consumer electronics. “We have it easier than Samsung did,” says Colin Giles, chief marketing officer for its consumer business, because Korean firms paved the way for global acceptance of Chinese brands. Xiaomi, a startup smartphone manufacturer in Beijing, has developed a hugely popular phone-and-app system inspired as much by Amazon as by Apple. It could become China’s first global innovation powerhouse.
Leading the local pack is Lenovo, an electronics firm that previously bought IBM’s personal-computer business (and on January 23rd agreed to buy its low-end server business, too). When it launched its latest Yoga tablet last year it chose Ashton Kutcher, a Hollywood star who had played Steve Jobs in a film, as its spokesman. David Roman, Lenovo’s chief marketing officer, says that even a few years ago it would have been unthinkable to do a global product launch in China with a single tagline, unified advertising content and a Western spokesman. But now he thinks there is “a global consuming class”, with more in common across borders than within.
That sums up the rise of China nicely. Future consumer markets everywhere are going to look more Chinese. They will increasingly be cosmopolitan, luxury-minded and online. Firms that can flourish in China are not only winning today’s toughest market, but are also positioning themselves for tomorrow’s.

Source: The Economist.

Chinese HNWI consumers are richer than ever

Analysts now know that the best place to learn about Chinese ultra-rich consumers is not the mainland. Rather the Maldives, double-chain of islands near the equator, proves to be the perfect place to launch a case study of Chinese consumerism. In 2010, more than 118,000 Chinese visited the country: a 109 percent increase from the year before, making the Chinese the number-one inbound market of the Maldives. Tourists here have helped form the new profile of Chinese consumers.

More Chinese are traveling overseas from smaller cities, places where growing middle classes are accumulating more wealth and do not face the financial pinch of rising housing prices and inflation felt by similar demographics in cities like Beijing and Shanghai, which, according to Vincent Liu, a partner at BCG in Hong Kong, will eventually impact the spending power of travelers from first-tier cities.

“Many of them are richer than those from major cities,” says Roger Wang, head of Lukintl, a Beijing-based tour company that has taken thousands of Chinese to America since it was founded in 1996. “The tourists from the main cities are mostly from the middle class, while tourists from smaller cities are millionaires or government officials. Usually they have strong spending power.”

According to Wang, this demographic will spend more than $100,000 abroad, using credit cards or with money sent to them via wire transfer from friends. They tend to seek out famous brands.

A close look at these vacationers has enabled luxury companies worldwide to tailor their marketing strategies. “They are eager to buy something, because when they come here, they carry a lot of money,” says Shi Hui Ling, a so-called “guest experience manager,” who was handpicked from a tourism school in Dubai by Six Senses, a resort on a tiny island in an atoll called Laamu, to provide special service to guests from her homeland. “Something unique, they want to buy this.

However, it’s not just the unique that Chinese luxury vacationers are after: they still want the exclusive. Brands like Louis Vuitton are favorites in China and abroad. Travelers have no problem buying familiar products while on vacation, but they want the experience to be different.

“Our Chinese customers are buying more confidently into looks rather than individual pieces,” Jason Beckley, global marketing director at Alfred Dunhill, says. “They’re not impulse shoppers, and they’re discreet—they like a VIP or bespoke room, or even just to be offered tea or water when they are in the store.”

China’s Netizens, the name for the country’s 400 million web users, also offers creative labels the opportunity to enhance customers’ in-store experiences. “I think Internet shopping will be very hot in coming years,” says Wang. “People may choose the goods online and check when going abroad and finally buy. Because people here [in China] always doubt what is imported, I think overseas shops should have this business: reserve online and buy at the shop [abroad].”

Famous luxury travel clubs for China’s wealthy travelers such as the Shanghai Travelers’ Club, are very active on Chinese social media platforms such as Weibo, and exchange travel tips with their members. (For example, where to buy a US$80Million super yacht…)

To capitalize on the growing number of tourists from smaller cities, retailers abroad would do well simply to have salespeople who speak Chinese. But creating more brand awareness in China — beyond Shanghai and Beijing – will pay off both on the mainland and abroad.

Are “Luxury shopping tours” the future of luxury retail in China?

Chinese customers seem to have (relatively) deserted luxury flagship stores in Shanghai, but they are at the same time rushing into the same flagship stores in Paris, London, or New York. Is that a new trend? Who will be the winner?  Luxury industry or Travel industry?

We would like to thank all contributors for their participation to this collective article. This discussion has been started on May 17, 2010, and ended on June 4, 2010, on the professional blog “Luxury Society”.

Pierre Gervois Living in Shanghai I can see nearly every month a new flagship store bigger than the previous shops for brands such as Cartier, Louis Vuitton, Piaget, Chanel…
The problem is these shops are nearly empty. Between my home and my office, I can see directly a dozen of these flagship stores every day when I’m in the taxi. And I rarely see a Chinese customer inside… Most of the time, I can witness the staff looked really bored in these luxury, empty shops.
Obviously, the big groups (Richemont, LVMH, PPR…) have seen too big. The demand is very far to be what they have expected, probably based on false statistics on the consumption capacity of the Chinese consumers.
What is your opinion, specially if you live in China ?

Timothee Semelin Actually, I would say I was thinking the same thing a couple of years ago about the Beijing flasgship store scene. 
Then after I get to know more and more people in the luxury retail and working directly with some brands, what we can say is that the huge amount of money those brands make are not coming from the outstanding number of clients they have but more on the few BIG clients that they have .
On a one shot shopping that could spend hunderd of thousands of RMB and thus, those shops do not need many clients for now.
Plus those BIG clients may spend their time in the VIP area of the shops that you won’t see from outside the shop and I am not talking about the private sales… A flagship store is not always the key shopping place.
The question is how long this will last, because the BIG clients will have more and more brands to choose from and at some point, brands will also need more casual shopping people. when will they reach their turning point?
You should read this:http://thechinaobserver.com/2010/05/what-are-chinas-luxury-consumers-buying/

Pierre Gervois Many thanks for your very interesting comment. Yes, there are some private and discreet sales, but not that many. The biggest Chinese spenders will go directly to Paris, Geneva of NYC to buy the most expensive pieces. This is actually a big isue for luxury brands. They have not anticipated that Chinese consumers wuld travel abroad so easily for luxury shopping. 
In my opinion, the future of luxury retail for Chinese consumers is in “Luxury shopping travel”…

Timothy Coghlan Another two reasons for the big (albeit empty) flagship stores are as follows:
Prime real estate for luxury stores is running out fast in Shanghai, as it is in Beijing and already has run out in Hong Kong. Therefore brands are snatching up locations now before they run out even if it means operating at a loss for a few years.
The other reason is that they are simply acting as a ‘flagship’ that looks big and very pretty and gets noticed and lots of press. In this case the stores are more for show and prime streetside advertising space than as a revenue earner. Its essential for the brands to have presence in the big cities, but they often make most of their revenue from 2nd and 3rd tier cities, where the consumers are wealthy but not so sophisticated and prone to overseas travel.

Mireille Weber I have noticed that in Shanghai : luxury stores in beautiful malls , always empty, and staff yawning all day long.It is the other way round in Hong Kong!  We also know that the leases are quite expensive : between 150 000 and 180 000 RMB. per month if not more…. 
I guess it is part of the luxury brand’s strategy, they all have to be in Shanghai nowadays for obvious reasons. I do not agree with you : the demand is there, but most of the Chinese fly to Hong Kong to buy those items ( I am talking about luxury perfumes, my field), 
the import taxes in mainland China are too high + in Hong Kong, they are pretty sure to buy the real thing.

Ahn’na Hargrove Just finished our most triumphant supercar show in Monaco. We had partnership with The Hurun Report who brought one of their listed clients. He said that they preferred luxury travel and are the number 1 spenders in Paris at the great luxury stores. Buying in China for the richest doesn’t provide the international clout they have when travelling abroad.
Everyone at the show loved them and sought them. They loved the publicity and the cameras on them as they shot from one supercar to the next. It’s about time!

Felice Jiang I would agree that luxury travel is a major reason why those storefronts may be empty, and that it is not an issue with demand. We’ve covered outbound Chinese tourists extensively, with most predictions showing that they will be on the rise. As much as 75% of Chinese Businessmen are planning to travel even more this year. 
We also reported recently about the results of a survey, that 50% of luxury purchases were intended as gifts, likely a result of the loosening of travel restrictions and an increase in “shopping tourism.”
For the complete article: 
http://www.jingdaily.com/en/luxury/50-of-luxury-purchases-by-chinese-in-2009-were-gifts-survey/

Emilyn Lee Having store front = brand visibility and presence.
Brands that want to make an impact, giving an impression of having strong fundamentals and brand heritage, often go with a large store presence in key locations.
Besides, out of sight = out of mind.

Pierre Gervois Thank you for all these very interesting comments and analysis. Luxury travel is maybe the future of luxury retail for wealthy Chinese consumers…

Timothy Coghlan There is another reason I forgot to mention which is the malls will agree to a percentage of revenue (usually 5% or less) only as rental fee. For the top 10 or so luxury brands, developers will also pay 3000-4000 Euros per square metre fit out fee for the stores. Therefore the the top luxury brands get the store built for them and only have to pay a percentage of what they make.

Amalia Agathou What a great thread! Thanks everyone for the insights, I find the Asian market fascinating!

Jerome Mackay Yes, a great thread indeed! 
I must add that hearing about all these huge flagship stores does put off smaller brands who somehow get the impression that these big empty shops are the only way to do business in China and that it’s extremely costly. 
Surely there must be some smaller and successful operations too?

Alexandre Niepce Yes what an interesting subject and constructive insights! 
Living in Shanghai too for two months now, my point of view is that biggest Luxury Brands may have entered the game to easily and have omitted to elaborate a deep strategy to reach a maximum of customers. The Chinese market is much more complex than it first seems and even if the potential is there, huge and customers ready to buy, some key elements have to be taken into account: time, trust, culture understanding… Chinese market is also not waiting for us to undertake it but already shows signs of self development.

Pierre Gervois Yes, Alexandre, you have perfectly understood the core issue : Culture understanding. Major Foreign luxury brands have still a lot to do…