Within the category for personal wearable luxury goods (including apparel, leather goods, personal cosmetics, jewelry, and watches), there is no more important market than that of China. It is predicted that by 2035, approximately half of the consumption of luxury goods will be driven by the Chinese consumer. This is despite the anti-corruption campaign launched by the Chinese government between 2015-17 to stamp out forgeries. Today, Luxury goods in China are bought almost exclusively for personal reasons, meaning going forward there is expected to be less volatility and a more direct correlation between the consumption of luxury goods and the economic development of the country.
Driving demand
The Chinese market is now considered by the industry to be a mature market. Over the next few years, experts consider there to be four drivers that will boost Chinese demand for personal luxury goods:
1. Economic growth: The growth of the economy has brought about the development of an aspirational middle class that aims to purchase luxury goods. The Chinese middle classes increased by 58 million between 2006 and 2016, representing 31% CAGR. While this growth is projected to drop to 7% CAGR between 2016 and 2026, it will still represent a significant increase of about 65 million people.
2. Technology: In the Chinese luxury market, consumers are spending 73% online on top of what they spend at physical stores. Brands are tapping into the extensive consumer data available through digital platforms, such as Tencent and Alibaba, and by doing so extend their ability to reach millions of potential consumers with whom they have had no prior interaction with. Digital platforms can also provide more control on counterfeit goods, as well as assisting brands in terms of logistical organization over the vast expanse that the country of China represents.
3. Repatriation: Approximately 80% of luxury products were purchased abroad in 2015, mainly because it was cheaper for the Chinese to do so. Nowadays, local spending is on the rise due to the Chinese government intervening in the phenomenon of offshore buying by reducing import and luxury taxes and introducing limits on tax-free and duty-free purchases. It is estimated that about 50% of the consumption of luxury goods in China is now via the domestic market.
4. Store networks: During the buoyant years of real estate development between 2007-2014, some brands opened stores in large luxury mall projects with variable results. Following the government’s anti-corruption campaign, the overall number of shops has been reduced. Going forward, there is expected to be a more balanced rationalization behind store openings, with a concentration of a few flagship stores (the “cathedrals” of the brand’s promotion) and in areas of high traffic. Meanwhile, online sites are expected to take up the largest proportion of sales with an increase of importance on the omnichannel retail and digital experience.
In addition, much attention is paid to the influence of social media, especially given that Chinese consumers are among the most connected in the world and extremely keen on interacting with luxury brands. The reputation of luxury brands, therefore, is key.
Long-lasting relationship
Over the past couple of years, the Chinese government’s objective of promoting domestic consumption has been good news for luxury companies. China is still one of the fastest growing economies in the world, and despite the fact the economy has slowed its pace of growth, most luxury brands nowadays have the Chinese ranking at the top of their list of consumers.
Though there will always be risks in terms of the direction of government policies and even potential competition from local brands, it is nevertheless believed that the Chinese consumer will continue their love affair with luxury for a long time to come.
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