Tapping China’s luxury-goods market – Study April 2011

 

By 2015, Chinese consumers will account for more than 20 percent of the global luxury market. How is their behavior evolving?

APRIL 2011 • Yuval Atsmon, Vinay Dixit, and Cathy Wu

Source: Marketing & Sales Practice

 

(c) McKinsey research

China will account for about 20 percent, or 180 billion renminbi ($27 billion1), of global luxury sales in 2015, according to new McKinsey research. Even during the global recession in 2009, sales of luxury goods in the mainland rose by 16 percent, to about 64 billion renminbi—down from the 20 percent growth of previous years but far better than the performance of many other major luxury markets. To get a better idea of the dynamics, McKinsey surveyed more than 1,500 luxury consumers in 17 Chinese cities in spring 2010.2 Three findings stood out.

Shifting Attitudes

At a time of rapidly rising incomes, widely available luxury products (and information about them), and shifting attitudes toward the display of wealth, more Chinese consumers than ever feel comfortable buying luxury goods. As a result, China’s love for them is moving down the economic ladder, creating opportunities and challenges for marketers accustomed to serving only the very rich. While wealthy consumers (with incomes above 300,000 renminbi, or about $46,000) will continue to account for a majority of luxury consumption, our research shows that the 13 million households in China’s upper middle class (incomes between 100,000 and 200,000 renminbi) offer the biggest new growth opportunity. They already account for about 12 percent of the market, and their numbers are growing rapidly: we expect to see 76 million households in this income range by 2015, accounting for 22 percent of luxury-goods purchases (Exhibit 1).

Interest in them is moving beyond handbags, jewelry, fashion, and the like. A growing number of Chinese luxury consumers are also splurging on spas and other wellness activities. Consumption is growing faster for such luxury services than for luxury goods: 20 percent of these consumers said they were spending more on experiences, only 13 percent on products.

(c) McKinsey research

 

Greater sophistication

The Chinese are increasingly exposed to luxury goods through the Internet, overseas travel, and first-hand experience. As a result, they have become more discerning.

With the surge in the number of luxury stores, fashion magazines, and Web sites and the use of social media, Chinese consumers are now familiar with nearly twice as many brands as they were in 2008. Half of the consumers we surveyed in 2010, for instance, could name more than three ready-to-wear brands, compared with only 23 percent two years before. As Chinese consumers become more familiar with luxury goods, they are becoming savvier about the relationship between quality and price. In 2010, only about half of consumers equated the most expensive products with the best ones, down from 66 percent in 2008.

Price transparency contributes to this dynamic. More than half of luxury consumers check product details and prices online, compared with 13 percent of all urban dwellers. Since two out of three luxury consumers have made at least one trip overseas, they have access to external benchmarks for comparing prices back home. In 2008, only two of five people in China realized that in the mainland, prices were at least 20 percent higher than they were in places such as Hong Kong. By 2010, 66 percent did.

Luxury-goods companies have long waged a battle against counterfeit goods in China. But there’s good news for marketers: our research shows that consumers increasingly want the real thing. The percentage of those who said they would buy fake jewelry, for example, dropped to 12 percent, from 31 percent, in 2008. Some luxury buyers told us they felt sure that their friends would spot a counterfeit. A woman who used her first salary check to reward herself with a luxury handbag said, “it would be meaningless if it was fake.” What’s more, an internationally well-known brand has become one of the most important factors in making a purchase (Exhibit 2).

(c) McKinsey research

New geographic markets

Most of the world’s luxury-goods companies are already in China or contemplating increased investment there. They must tackle several big issues before making their next moves. First, delivering exceptional service in stores is critical; two out of three consumers are disappointed with the indifferent attitudes of salespeople. While the in-store experience is by far the most important factor driving purchasing decisions, the Internet has rapidly become the second-most-important consumer touch point for luxury categories such as fashion. Marketers will need increasingly sophisticated Web strategies; for example, they can work with social-media agencies to monitor and shape online conversations among consumers or to identify influential bloggers and help educate them about brands.

Finally, much of luxury’s allure comes from the opportunity to share in the rich cultural heritage associated with a brand. This concept is rapidly catching on with Chinese luxury consumers, and many leading brands are promoting their history and craftsmanship. But the picture isn’t totally straightforward: one-third of luxury consumers in China said they would prefer to buy products that were designed specifically for the country and incorporated Chinese imagery.

About the Authors

Yuval Atsmon is a principal in McKinsey’s Shanghai office, where Vinay Dixit leads McKinsey’s Insights China and Cathy Wu is a consultant.
The authors would like to thank Glenn Leibowitz, Lillian Li, Jia Liu, and Rachel Zheng for their contributions to the study and the development of this article.

  
Notes

1 At the December 2010 exchange rate.

2 The full report, Understanding China’s Growing Love for Luxury (PDF), is available on the McKinsey Insights China Web site.

about 20 percent, or 180 billion renminbi ($27 billion1), of global luxury sales in 2015, according to new McKinsey research. Even during the global recession in 2009, sales of luxury goods in the mainland rose by 16 percent, to about 64 billion renminbi—down from the 20 percent growth of previous years but far better than the performance of many other major luxury markets. To get a better idea of the dynamics, McKinsey surveyed more than 1,500 luxury consumers in 17 Chinese cities in spring 2010.2 Three findings stood out.

 
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14 Comments

Filed under Luxury acquisition, Study

14 responses to “Tapping China’s luxury-goods market – Study April 2011

  1. Hence more IPOs of luxury companies in HK soon… 🙂

  2. thank you for your comments, always greatly appreciated.
    Best regards,
    Alexandra Orloff

  3. Ma Jus El Suborionne

    one never ceases to get fascinated and amazed, i am spellbound by the Hong Kong-ers emphasis on authentic luxury! VIVE the likes of Messrs. Li Ka Shing and China!!! bonne journee, pour toujours…..

  4. Thanks for this article on China trends! I guess though for small luxury, niche brands it’s tough to compete and get introduced into the market. Considerable investment is needed, which is the every day thing for big established brands. Less so for small prestige start-ups. I launched a brand in Paris in high end personnalised jewellery. Maybe the way to start exposure in China is via top bloggers.

    • You are most welcome Antje, as for any strong emerging economies, it looks like the promised land, however an entry into any markets, moreover a new market is challenging and needs thorough research and study to see the real opportunities and efforts to reach the right segement and long term results.

  5. Winnie Gao

    Thanks Alexandra for sharing. i am currently advising two european luxury fashion clients on china e-commerce strategy, please feel free contact me to share china e-commerce insights and updates.
    winnie gao
    winniegh@gmail.com

  6. Talking about fakes, it is very interesting to see that only Eropeans in China are buying fakes, Chinese are not interested by fakes they buy authentic products and even if they are twice the price we pay in Europe because they cross twice the Pacific Ocean.
    Today wealthy Chineses are changing fast. They are starting to leave European luxury brands for more customised brands. They want to be different, to live in exclusive cities just designed in function of their need and surrounded by people with similar attitude (ex: Dragon Lake, outside of Nanjing). Tailor’s made or customised brands are introduced to them in private salon, designer clubs…
    Chinese customers mind is evolving faster and we will be the one buying the fake luxury “made by European in China” before adding one button in France to be “made in France”, at least Italian can show their Italian factories and justify their production.
    We will be the one to use the synthetic chemical cosmetics in compliance with our European regulations in favour of chemical. They will not as they are still virgin in regards of regulation, they have no law against natural. Chinese will soon come with new regulation for cosmetics and will be the first to be green, in favour of naturals, hand made cosmetics, approved by the Perfume Foundation and other organisations.
    For the next centuries China will definitely lead the world of luxury.
    Creezy Courtoy

  7. Thanks Creezy for your interesting point of view
    I am looking forward to seeing you in London next time you are here.
    Alexandra

    • Anu

      Hi Alexandra
      How are you?

      Absolutely enjoyed the write-up.
      I would like to borrow and echo Creezy’s point on Luxury consumption in my country – India. There is a segment of consumers here who want to pay for the worth and not Brand name. Their luxury items would be ordered from lesser known but genuine craftsmen than factory-made labels.
      There are others ofcourse, who pay for quality and presentation value both, thus wavering towards proven luxe brands.
      Hope this helps.

      Anu

  8. Hi Anu,

    Thank you for your message. I agree fully with you and Creezy.

    All the best
    Alexandra

  9. I just found your blog via LinkedIn. Good information, I’ve been interested in the Chinese luxury market since I lived in Hong Kong. Interesting trends emerging, especially in terms of social media marketing for me, since that is the field I seek opportunities.

    I plan to write a more extensive response as a blog post this week…

  10. Thank you for your comment and I will be looking forward to reading your thoughts on the Chinese luxury market.

  11. Great blog post Sasha! I think Chinese luxury consumers are one of the most hot topics at the moment. In fact I’ve written a blog post, analysing marketing strategies of successful luxury companies in China. http://wp.me/p2ZZDb-6d
    I also heard that many Chinese customers prefer to shop abroad, as the prices in China are so much higher for the same products. On the other hand, it gives companies the oportunity to win the customer’s loyality while he’s travelling. Therefore, many luxury brands have Mandarin speaking staff to offer best service possible.

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