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How to solve China’s luxury puzzle

The rise of China as an economic power has been a boon for luxurybrands. From LVMH to Burberry to Prada, countless high-profile fashion housesand premium labels now look to China for a key part of their sales. Culturalfactors explain this demand.

 

It is no secret that China has anenormous appetite for luxury goods. In fact Bain & Company data marks it asthethird-largest luxury market in the world – well behind the US, but creeping upon Japan at #2 in euro currency terms. In 2015, more than €17.9 billion wasspent on luxury items in China, an increase of 17% in Euro terms on 2014,helping it overtake Italy and France.

 

And a growing economy means consumption of luxury products islikely to continue to grow as more and more households rise up thesocio-economic ladder. According to McKinsey & Company nearly 54% of urbanhouseholds will be upper middle class – with earnings of 60,000-106,000 RMB ayear – by 2022, up from 14% in 2012.

 

These millions of consumers are going to continue to want to wearwonderful clothes, to sport beautiful watches and to fill their homes with thesmartest, most refined items.

 

But the rise of Luxury in China is not simply an economic story,it’s also a cultural one. That’s because both the social background to luxuryconsumption and the purchase journey in China is very different. In fact, as much as 80% of Chinese luxury consumption occurs outsideMainland China. The truth is that China is a far bigger luxury market than the dataindicates.

 

Understanding off-shore consumption is key. Brands that fail tograsp that are not just missing up to 50% of their top customers annually,according to Epsilon Research and the Luxury Institute, but they are alsomissing the opportunity to communicate and create a personalised experience tothem.

 

A demographic puzzle

 

According to Forbes in 2015, the average age of the Chinese luxuryshopper was in their mid-30s, already younger than the global average. But bythe end of 2016, the World Luxury Association predicted this will fall closerto the mid-20s.

 

China’s millennials amount to more than the working population ofboth the US and Western Europe combined. Goldman Sachs predict their aggregateincome to grow by $3 trillion in the next 10 years. They are not just a supersegment in China, but a cornerstone for global luxury consumption.

 

The average Chinese luxury shopper is likelyto live in a first-tier city, such as Beijing or Shanghai. Many are products ofthe One-Child Policy, ensuring they have the full attention of both parents,and often grandparents from both sides of the family. This intense dotingcreates a more individualistic outlook, as well as a lot more ‘pocket money’than their international peers.

 

So while their income appears lower thantheir Western counterparts, Hylink Digital Solutions reports that 96% rely ontheir family for support, which includes everything from money to housing. Manyof these luxury consumers are best defined by attitudinal and behaviouralindicators rather than income level.

 

In response some luxury brands are increasing their digitalpresence and improving mobile touchpoint experiences. They are also recruitingyoung idols as spokespeople, in order to entrench their positions among thisconsumer base.

 

During ShanghaiFashion Week, for example, youth brand Me & City partnered with Tencent tobring fashion to the streets. The goal was to bring the fashion show direct tothe target audience of young consumers. Using Tencent’s Maps app, the brandshot panorama images of the models, taking the catwalk to the streets ofShanghai. Users were able to view the products in real-world settings andpurchase from a linked e-commerce function.

 

 

The culturalangle

 

MediaCom’s Cultural Connections study reveals why offshoring issuch a strong trend. The cultural drivers for this behaviour can be explainedby the fact that Chinese consumers have the world’s highest scores on the marketing dimension of Badge Appeal,and an extremely high score for Vanity.

 

Badge Appeal measures the extent to which consumers are susceptible tothe glamour or allure of – often high-end – products.  Vanity measures how much consumers arelikely to buy certain products to feel good about themselves. Markets that score highly on this cultural dimension tend to preferpremium products. Think of it as a kind of ‘snob value’.

 

In China, these factors combine with a highAmbition score, to create a cultural framework in which there are compellingreasons to buy luxury goods and for consumers to showcase what they have bought,as well as where they have bought it.

 

Brands need to be careful, however, not tobecome too common. Big names such as Louis Vuitton were theepitome of high badge value. These items were so desired that white-collaredworkers starved themselves for a month just to afford one.

 

But everybody and their aunt came tohave an Louis Vuitton bag – which then became labelled as the ‘secretaries’bag’, while counterfeits also became ubiquitous. As a consequence, young luxuryshoppers are now turning more to niche luxury brands and minimalistic brandingto showcase their individuality and taste.

 

Ways to take advantage

 

The story of Chinese luxury is one ofeconomic success combined with cultural values. Brands that want to takeadvantage need to celebrate these behaviours to encourage more travelling consumersto seek them out.

 

They might find that their message isbetter targeted at the journey abroad, for example, capturing consumers whenthey are most likely to be looking for spending opportunities. Airportadvertising then might be better focused on international terminals rather thandomestic gates.

 

One of the fewbrands that has sought to target travelling Chinese shoppers is Cartier. ItsWeChat account allows the user to book an appointment at any Cartier boutiquein the world, and has a geolocation function that shows nearby Cartierboutiques. Being not Google or Baidu dependent is especially handy for Chineseconsumers overseas.

 

Traditional luxury brands are alsoseeking to regain their badge value. 2015 saw the closure of 34 retail stores by 11 fashion luxury brands,all outside the first tier cities, in a bit to regain their exclusivity. Otherstrategies include partnering with elite celebrities, improving brandexperience, tightening control on distribution, cracking down on the graymarket, extending personalisation options and introducing sub-brands.

 

Dior, for example, has sought to make thedigital purchase experience more personal and special. A recent campaign during the Qixi festival wastargeted at men in relationships, offering limited edition Dior handbags.Buyers were able to interact with brand reps over WeChat one-to-one, enablingthem to feel comfortable with their big money purchases. The bag models onoffer were sold out within a day.

 

It’s early days for such digital strategiesand it’s not yet clear if any are strikinga cord with the young generation. But as luxury brands are scrambling to playcatch-up in China, a tailored strategy must be catered to communicateeffectively with their primary consumer.

 

This is both aunique and historical challenge as luxury brands are forced to appeal to a muchyounger target audience, not just in their home market but right around theworld. 

 By Alex Zhang,

Strategist,MediaCom Shanghai 

 

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