China's Newest Luxury Consumers
By Avery Booker
Speak with any major luxury brand or retailer today and you will find that the Chinese consumer figures heavily into their long-term strategy, and for good reason. According to the official People's Daily newspaper, Chinese shoppers spent $46 billion on luxury goods at home and abroad in 2012 and are expected to account for one-third of global luxury spending by 2015. Emerging in the wake of the global financial crisis—just in time to offset a drop in demand in traditional markets—the mainland Chinese luxury consumer has changed the balance of power in the global luxury industry. But who is the Chinese luxury consumer, really?
On the surface, the Chinese luxury consumer largely defies easy characterization. Buying habits, preferred brands, and motivations remain highly segmented based on geographical location, income, age, education, and profession. Yet, the average Chinese luxury consumer is college-educated, relatively young, and digitally savvy—roughly 80 percent are under the age of 45, compared to 30 percent in the U.S. and 19 percent in Japan. Within this broad demographic, a growing percentage is female, lives in second-tier (provincial) and third-tier (county-level) cities, and belongs to a burgeoning middle class that at over 300 million strong, is already larger than all of the U.S.
Female luxury shoppers are taking on a dominant role
The increasingly youthful and predominantly feminine face of the Chinese luxury consumer is an important development. Since the first stirrings of China's economic reforms of the late 1970s, high-end purchases had traditionally been the domain of elite, middle-aged males in China's largest, richest coastal cities (like Beijing, Shanghai, Suzhou, and Tianjin). But by 2012, owing to greater financial independence and a desire to express themselves through high-end fashion and jewelry, women (a growing number of whom lived not only in China's largest cities, but also less well-known cities such as Shenyang or Wuhan) accounted for around 60 percent of luxury transactions in China. It is a trend that has not gone unnoticed, especially among brands like Burberry, Armani, and Hugo Boss, which are accelerating their expansion in inland China while also investing heavily in digital marketing efforts to reach the emerging shopper in second- or third-tier cities.
But as inland consumers have just started to acquaint themselves with high-end brands, the affluent, sophisticated consumer's relationship with luxury is changing on a fundamental level. Following six straight years of double-digit growth in China's luxury market, fueled by lavish spending on everything from cars, jewelry, apparel, and wine, consumers started to make more deliberate purchases in 2012. By late 2012, conspicuous luxury consumption had evolved into a more low-key affair among China's more seasoned spenders, but their more disciplined shopping still pushed the luxury market in China to 7 percent growth, which is still relatively high in a year that the European market grew around 5 percent thanks to Chinese tourist-shoppers abroad.
Anti-austerity reforms have given cachet to lower profile luxury brands
One of the main drivers of China's move toward a less lavish, more female-powered luxury market has been the shift in societal attitude towards excessive gift-giving, spurred by a spate of high-profile scandals. Following a tightening of restrictions on luxury advertising, as well as a crackdown on officials' spending on luxury goods in 2012, signs point to Beijing's much-publicized anti-extravagance campaign as having had a chilling effect on sectors once fueled by purchases of lavish gifts. (Among them, luxury timepieces and spirits.) But this freeze has been less apparent in segments such as women's apparel and jewelry. This is particularly the case when it comes to fashion. As a result, brands with a small retail footprint in mainland China have benefitted, as more sophisticated, affluent consumers have turned to brands that attract less scrutiny among colleagues and the general public. Yesterday's Louis Vuitton lover is today's Alexander Wang aficionado.
These enormous shifts within the luxury market say a great deal about the consumer in particular, and about China in general: both are evolving quickly and developing a more global mindset. Luxury purchases are seen as a way for the consumer to define and express him- or herself as an individual, rather than simply connote status.
In response, brands have created limited-edition collections available only in China, opening flagships in lower-tier cities, launching Chinese-language websites, and hiring local celebrity brand ambassadors. Yet at the end of the day, the consumer remains much the same as he or she was a half-decade ago: highly price-conscious and demanding. Stiff import taxes, which can inflate the price of luxury goods upwards of 40 percent in mainland China, continue to motivate consumers to shop online or in Europe, the U.S., or Hong Kong. According to China's official news agency, Xinhua, Chinese retail tourists spent 40 percent more on luxury goods while overseas ($27 billion) during 2012 than they spent on the category ($19 billion) in mainland China.
Successful luxury brands in China are those that can rapidly adapt to change
Over the long-term, luxury consumption in China will likely continue to follow two paths, one hewn by the early adopters—the mature, seasoned shoppers—and another by the emerging newcomer. The seasoned shoppers will look to reflect their individuality, knowledge, and class through less conspicuous heritage and niche brands that impress those "in the know," yet do not raise red flags in public. Meanwhile, the luxury newcomers, often based in lower-tier cities, will develop at their own speed, remaining price-conscious while still demanding high-end items, doing significant pre-purchase research and increasingly shopping online. What both groups will have in common, however, is that they both know their importance to luxury brands and expect the best in terms of products and service, whether they're buying in London or Lanzhou.
If the past is a prologue, brands arriving late on the scene should take note: the mainland China luxury landscape is littered with companies that expected to make a quick buck, yet are rapidly finding the market far more complex and segmented (and far less mature) than they'd ever imagined. What the companies that have succeeded on the ground in China have found is that adaptability is key. They expect the unexpected from the government as well as the consumer, invest in their long-term presence, and continue to walk alongside the buyer as she matures.
Avery Booker is the Vice President of Marketing at Bomoda.com, a Chinese-language luxury and fashion online community that educates and empowers China's globally-minded, fashion-forward woman to live the beautiful life. Previously, Booker was founding editor-in-chief of Jing Daily, a leading digital publication focusing on the business of luxury and culture in China. His articles have appeared in The Atlantic, the Asia Society, Forbes, Business Insider, and Fashion's Collective. Booker received a M.A. in New Media at New York University, studied Mandarin Chinese at Beijing Language & Culture University, and received a B.A. in English Literature from the University of Colorado.
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The following securities were not held by the T. Rowe Price European Stock Fund, the T. Rowe Price Japan Fund, or the T. Rowe Price Blue Chip Growth Fund, as of June 30, 2013: Armani, Burberry, Hugo Boss, Louis Vuitton, Alexander Wang. The funds' portfolio holdings are historical and subject to change. This material should not be deemed a recommendation to buy or sell any of the securities mentioned.
T. Rowe Price and Avery Booker are not affiliated.
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