China luxury market

China Luxury Market – A whitepaper from VAYTON & REBORN, Luxembourg ©2015

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The Thriving Luxury Market in China Today

THE CHINESE LUXURY MARKET TREND

The Chinese luxury market is a complex and constantly changing

terrain and it is thriving. Chinese consumers spent an estimated 233 billion

euros on luxury goods in 2014. China represents the third largest luxury

market, after the U.S. and Japan, and is soon expected to overtake Japan

(State of Luxury Goods Market 2014, Euromonitor International).

Income levels continue to rise, despite a slow-down in economic

growth (manufacturing in particular) in the last few years. Even with slower

growth, the Chinese middle class alone is equal in size to the entire U.S.

population and is expected to reach 630 million by 2022 (Alizila e-Commerce

News, 2015). At least 14 cities in China are likely to be among the top 25 cities


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worldwide with the highest GDP growth by 2020 (McKinsey Report “Meet the

2020 Chinese Customer). For the “value” customer, earning between $6,0000

and $16,000 annually, the income is expected to triple in two decades. The

affluent consumer with a household income of over $34,000 represents two

percent of the urban population at 4.26 million (World Bank Development

and Research Center of the State Council in China).

Increased urbanization and a shift from a labor intensive to a

consumption economy will be major growth drivers. A projected 60% of

Chinese will live in cities by 2020 resulting in about 100 million more urban

Chinese. For the four Tier 1 cities, there are 16 million households with a GDP

of 1 trillion and for the 23 Tier 2 cities, there are 38 million households with a

GDP of 2 trillion (Nielsen Report, China 2015).

Source: wsj.com

According to the Ultra High Net Wealth Report 2014-2015 (China

Minsheng Bank and the Hurun Research Institute), the number of rich Chinese


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is the highest in 15 years. The total assets for Ultra High Net Worth Individuals

amounted to 31 trillion yuan, which is ten times the GDP of Norway and 20

times that of the Philippines. At least 2.7 million High Net Worth Individuals

(with personal assets of at least $.95 million) live in China, the fourth highest

in the world after the U.S., Japan and Germany and higher than the UK and

France. Among High Net Worth Individuals, 60% are collectors and the top

item is the watch at 40%. In fact, the top overseas luxury purchases were for

watches at 65% (Huran Best of the Best Report Survey, reported by China

Internet Watch, 2014).

The push for more urbanization supports the Chinese government’s

plan to redirect a dwindling labor-intensive manufacturing economy to a

consumption economy, along with investing in smart (technology-driven)

manufacturing for products originating in China (Made in China 2025 released

by the State Council May 2015). To support this move, a new Silk Road

infrastructure, on land and at sea, and an improved Information Silk Road

(cross-border optical cables, etc.) in partnership with Asia, Europe and Africa

are planned by the Chinese government (The National Development and

Reform Commission, March 2015).

The luxury market in China poses different consumer dynamics than

for the US or Europe. Limited access to authentic luxury brands in China has

resulted in the largest share of Chinese luxury commerce being conducted

overseas. The Chinese traveling outside of Mainland China spent at least 209

million yuan on luxury goods last year (Fung Business International). The High

Net Worth Chinese consumers want assurance of having purchased an

authentic luxury brand, not to mention the added value of the exclusive “lux

experience” at boutiques.

Cost difference between shopping in China and overseas is another

factor that drives travel shopping. Consumers pay higher prices for luxury


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brands sold in China because multiple Chinese taxes add to the cost. Overseas

travel shopping is attractive because Chinese can visit world-class cities like

Paris, London, Rome or New York, enjoying the luxury hotels and restaurants

and having direct access to top luxury brand stores.

Luxury travel shopping as the primary way to shop for cross-border

luxury products is changing or will likely change in the near future. China is

piloting free trade zones, Shanghai in particular, with the expectation of costs

being more in line with what Chinese would pay when traveling outside of

China. Also, there is an emerging market for cross-border luxury e-commerce

for those wanting the convenience of shopping within the country. China is

the world’s second largest economy but captures the largest share of the e-

commerce market globally (Barron’s Online news).

Ruder Finn and Ipsos surveyed over 1,900 consumers in Mainland

China and Hong Kong from Tier 1, 2, and 3 cities to better understand the

luxury shopper (Red Luxury, Chinese Luxury Market Trends for 2015). The

average annual household income among the surveyed Chinese was $125,000

in Mainland China and $126,900 in Hong Kong. The survey results indicate

that Chinese will continue to travel shop for luxury goods and that cross-

boarder e-commerce is likely to increase if issues with trust are addressed.

Luxury shoppers are savvy, looking for heritage and quality rather than a

lower price. Also, within China, there is low satisfaction with retailers because

of limited selections and limited knowledge about the product by the service

staff.


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CHINA LUXURY MARKET TRENDS

Low satisfaction with service at retailers in China

- Limited product selection and limited knowledge of products

Luxury shoppers do not equate higher prices with luxury

- Looking for quality and exclusivity in luxury goods

China remains the first point of contact for luxury shoppers,

though a considerable amount of shopping is done outside of

China

Travel spending is likely to continue to grow

- 50% of surveyed Mainland Chinese planned to travel more

-38% of surveyed Hong Kong Chinese planned to travel more

Duty free shopping is on the rise (usually at airport stores)

- 53% of Mainland Chinese shopped at duty free stores

Online luxury shopping will increase

- Concerns about service, trust & credibility will have to be met

- 81% of Mainland and 78% of Hong Kong Chinese prefer

visiting a bricks and mortar store before making an online

purchase

Ruder Finn and Ipsos China Luxury Forecast Survey


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A Nielsen 2014 survey involved 1,005 respondents from Mainland

China Tier 1, 2, and 3 cities who had bought luxury goods while traveling

outside of China and who planned to cross-border shop the next year. The

survey results offer insights for new market strategies, especially for luxury e-

commerce, such as a preference for researching products before purchases,

valuing the established heritage of a luxury item and choosing official luxury

brand sites.

Nielsen Mainland Chinese Luxury Shopper Survey, Oct. 2014

97% say shopping is the key activity for travelling

63% have bought watches and jewelry

60% of respondents report social media and online forums and review sites

were the main sources of information for shopping

50% choose official luxury brand websites

90% know what items they will purchase before visiting a store

50% believe established heritage is important when buying luxury items

75% say convenience and time savings are factors for buying online

90% say they will buy luxury goods online within the next 12 months

Clearly, cross-border luxury shopping with multiple access channels is

the winning strategy for expanding markets in China. Issues of trust and

credibility and service when shopping at luxury brand stores in China or online

must be overcome to sustain and grow the market.


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THE HAUTE HORLOGERIE INTEREST IN CHINA

Globally, Chinese consumers have the highest interest in luxury watches,

or haute horlogerie, according to the Digital Luxury Group

(WorldWatchReport 2015 – Haute Horlogierie Edition). A preview of the 2015

world watch report was presented January 19, 2015, for the Salon

International de la Haute Horlogerie in Switzerland. The market research firm

analyzed over 600,000 online searches made everyday for 18 Haute

Horlogeries brands in 20 markets. The research found that overall the world

luxury market interest was up by 23%, with the interest in China much higher

at 41%. The three luxury brands most searched online were Patek Philippe,

Vacheron and Jaeger-LeCoultre.

According to Liang Zeng, Vice President of Baidu, the

top search engine in China, “Watches are part of the

fastest growing luxury segments in China right now”

(WorldWatchReport 2014). A recent development

has been an increased interest in women’s luxury

watches. In the US, over one quarter of the demand

was for women’s luxury watches. However, in China,

there was an impressive increase of +145.5% in 2014

compared to 2013. Women’s watch sales for the

Swiss watchmaker Vacheron Constantin jumped

66.2%. This is likely to give an extra boost to an already strong luxury watch

market in China.


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THE LUXURY E-COMMERCE POTENTIAL IN CHINA

Limited access to authentic luxury brands and to an exclusive luxury

shopping experience for those not in living in Tier 1 or 2 cities are obstacles to

market sustainability and growth within China. The other factor influencing

market trends are import duties driving up prices for luxury goods. The market

potential for China requires a different strategy based on those factors.

Significantly, in China the rates for mobile shopping and online searches of

products before purchases are higher than in other countries. Yet, luxury

brands have been slow to seize the opportunity to tap into this commerce

channel by providing multiple access points and a combination of online and

offline experiences for the luxury shopper in China. The top brands have been

unwilling to risk losing or diluting the exclusive shopping experience at bricks

and mortar stores or at luxury boutiques. For Chinese High Net Worth

Individuals, this means they must travel overseas to access many of the top

luxury brands. As a result, the market potential is limited for luxury brands.

Clearly, those luxury brands resisting e-commerce are overlooking a

significant sector of the High Net Worth population who want the

convenience and time-saving advantage of shopping with confidence online.

Ultra High Net Worth Chinese are pressed for time (Luxury Dailey, 2015).

Furthermore, for luxury brands with bricks and mortar stores in Tier 1 and 2

cities in China, there is still the risk of counterfeiting and a problem with

overall dissatisfaction with services and the shopping experience.

Compounding the disadvantage of not having an aggressive multichannel e-

commerce strategy is the fact that most affluent Chinese shoppers research

luxury goods online and through social media sites before visiting a retail store

for purchase.


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Exane PNP Paribas Research and Contact Lab developed a digital

competitive map for the world’s top luxury brands and the results show that

most are lagging behind in adopting winning e-commerce strategies for

countries like China where smart phone shopping and social media are the

preferred channels for luxury searches and shopping. The research group also

surveyed 5, 500 Chinese consumers in 48 cities, finding only 7% buy from

luxury mono-brand websites: 45% buy online through local e-tailers; 35% buy

daigou (smuggled goods from overseas sold locally) and 13% buy from foreign

websites.

Of note, 100% of Chinese respondents cited authenticity as a criterion

for choosing an e-commerce website and 70% indicated that authenticity was

a major concern. Access to luxury goods is very restricted as only nine of the

top 28 luxury brands had e-stores in China, according to the digital research

group.


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The Digital Competitive Map for Luxury Brands

Prada is missing an important organic growth opportunity, by trailing all

players in its digital engagement.

Burberry is excelling in E-commerce Strategic Reach (number of countries,

languages, product categories offered online) and is top of the league in

terms of quality of the Digital Customer Experience (website navigation and

online purchasing process).

Louis Vuitton’s Digital Customer Experience has improved significantly

following the website revamp in July 2014. Yet, the depth and breadth of

its product offer online remains sub-optimal (no e-store in Mainland China,

no RTW offer available online).

Balenciaga, followed by Zegna, Coach and Cartier, are the best followers

on both dimensions.

Italian Brands powered by YOOX (Armani, Valentino, Cucinelli, Moncler)

on one side have accelerated in terms of E-commerce Strategic Reach and

website usability, but are still penalized on the customization side (cross-

channel services, delivery flexibility, etc.).

Gucci and Tiffany, which rank top on Digital Customer Experience, are

unexpectedly slow in their E-commerce expansion (e.g., China delivery and

Russian /Portuguese languages still missing!)

Source: Exane PNP Paribas Research and Contact Lab, 2014


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Jean-Claude Biver, head of LVMH Watches, believes social media is the future

for luxury brands (South China Morning Post, June 2015, interview). According

to FitForCommerce consultant Jay Holand, there are several advantages of

multichannel e-commerce for luxury brands: “The supply versus demand

quotient globally, the ability to tell a brand story online and connect directly

with customers by mining web usage and purchase data, means luxury

retailers can grow and manage high value customer relationships more

carefully around the world. It’s essential now to weigh this against investment

in retails locations and staff” (Luxury Daily 2015).

The Offline to Online or Online to Offline (O2O) Market Strategy is fast

becoming the smart choice for luxury brands targeting Ultra High Net Worth

and High Net Worth Chinese consumers. The PR firm Ruder Finn in its report

China Luxury Forecast found social media

essential, second only to close friends and

relatives, for Chinese consumers when

searching for information about luxury

brands (Jing Daily). Among surveyed

Mainland Chinese, 55% say they use social

media to research luxury goods. O2O is an

excellent strategy because it creates the

total luxury experience, from live luxury brand events to parallel social events

through interactive cell phone applications. Luxury watch brands have

brought master watchmakers to their boutiques and invited customers to

witness first hand how the timepieces are made. Luxury watch brand Jaeger

LeCoultre did this at one of its Shanghai boutiques with considerable success

(ChinaConnect, 2015).


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China’s WeChat provides an exciting, interactive platform to engage with

the brand. Jing Daily cited some creative ways of using O2O marketing by top

luxury watch brands:

Tag Heuer incorporated WeChat marketing into its “La Maison” touring

exhibition in Beijing by featuring a special mobile game that users could play

by scanning codes and answering questions as they walked through the

exhibit.

Tissot created a game for users to “wind” a watch on the screen by spinning

their smartphones clockwise as quickly as they could.

Piaget created a special app for users to compose a three-line poem and send

to loved ones.

Jaeger-LeCoultre has launched a knowledge contest on WeChat, featuring its

grande complication model, Hybris Mechanica Eleven

In addition to the O2O market strategies adopted by top luxury watch

brands, there are two primary models for e-commerce that address higher

prices for cross-boarder luxury goods bought in China, referred to as haitao:

direct mail and bonded area import. While the O2O strategy works well in

Tier 1 cities like Beijing and Shanghai or Hong Kong, other cities with High Net

Worth Chinese do not have luxury flagship stores and physical boutiques or do

not offer a high caliber luxury shopping experience. For the direct mail model,

luxury consumers buy items using e-commerce platforms or e-tailers and the

product is shipped to free trade zone cities in China. For the bonded area

import model, goods are warehoused in free trade zones before the customer

places the order. The two models sidestep import taxes, consumption taxes

an VAT for general goods because they are considered personal consumption

items and require less taxation.


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Haitao is a cross-border e-commerce activity that has become popular

because prices for luxury products sold in China are higher than those sold

overseas. The Chinese government has established seven pilot zones for

cross-border ecommerce services for better equity in product prices

(Shanghai, Chongqing, Hangzhou, Ningbo, Zhengzhou, Guangzhou and

Shenzhen) and four free trade zones in Shanghai, Tianjin, Guangdong and

Fujian (Fung Business International). This trend suggests a strong interest in

cross-border luxury goods within China, as long as the prices are not driven up

by import taxes.

A sometimes overlooked added value of e-commerce technology for

luxury brands is being able to collect data on web searches for luxury goods

and customer buying habits in China. In fact, such crucial marketing

information for China has been a “black box,” with luxury brands relying on

general survey data conducted by marketing firms. Big data collected through

e-commerce platforms will make a huge impact on future marketing

strategies in China.

In the near future, more luxury brands will adopt multiple strategies

informed by the unique buying traits of the Chinese consumer and new e-

commerce technologies that overcome concerns about authenticity and the

exclusivity of the luxury shopping experience. Euromonitor International

predicts 40% of luxury goods will be available on the Internet in less than five

years (Reuters, 2015). Ultimately, multichannel e-commerce strategies have

the potential to provide more access to top luxury brands, to gain greater

trust in brand authenticity and to deliver higher quality services and online +

offline shopping experiences within China.

Economy & Finance

China luxury market