China is snapping up luxury brands

Middle class keeps market growing

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SHANGHAI--Well-heeled consumers in cities like Hong Kong and Tokyo have been fueling Asia’s consumption of luxury goods consumption for decades but China is catching up in a hurry.

The mainland already accounts for 12% of global sales for luxury goods, such as watches, fashion apparel, perfumes, cosmetics, jewellery, automobiles and premium spirits,. That figure is likely to double within a decade. Such growth would make China the world’s largest market for brands like Louis Vuitton, Versace, Chanel, Giorgio Armani, Lancôme, Swarovski, Cartier, Tiffany & Co. Today, luxury sales in China generate more than $2 billion in annual sales, according to Ernst & Young. By 2015, it expects that figure to top $11 billion.

“If the sales value in China of top luxury brands grows at the same speed seen in recent years, of between 10% and 20% annually, by 2016, the nation could be buying up to 25% of the world’s luxury goods each year,” said Jim Sailor, Shanghai-based managing director, China of the market research agency, TNS.

Despite the growing receptiveness to luxury goods among Chinese, including the country’s rising middle class, marketers of luxury brands should not expect quick and easy returns, he warned. “Consumers are savvy. Niche brands especially will need to work hard and certainly cannot assume they are going to be immediately recognizable.”

Numerous luxury brands have already made significant inroads in China, such as Louis Vuitton, one of the most recognized brands overall. In general, their brand image is developing along the lines of the brands’ international image.

Volvo is associated with superior quality and safety. Mercedes-Benz is seen as majestic and formal, Dior has a bold, sexy and glamorous image, and Japan’s Shiseido brand has a calm, intelligent and gentle image.

Three requirements

Marketers looking to enter China’s luxury sector should meet “three key requirements,” said Nanda Griffioen, Diageo’s consumer planning director in China, based in Beijing.

They should charge high prices, because price is not a barrier for affluent Chinese and it sends the message that their product is the best. The brand must be international and not too localized, which will diminish its stature. And they should not limit their marketing tactics to high net worth individuals.

“Even middle-class Chinese will save money to pay for high priced items,” said Ms. Griffioen. The most aspirational brands among the middle class include Versace, Chanel, Swarovski, Rolex, Louis Vuitton, BMW and Remy Martin.

Although 300,000 Chinese have a net worth greater than $1 million, that figure represents less than 0.02% of the country’s population. China's middle class, defined as households in Beijing, Shanghai and Guangzhou with monthly incomes of at least $6,000 or above $4,500 in tier-two cities, accounts for 25% of urban households today. Tier-two cities include provincial capitals or prosperous cities such as Harbin, Shenyang, Dalian, Tianjin, Xian, Nanjing, Chengdu, Wuhan, Chongqing and Wuzhou.

Marketers already are expanding into the provincial cities. LVMH plans to open 25 stores for its Sephora beauty brand in markets like Hangzhou and Ningbo over the next few years, while Italy’s Salvatore Ferragamo wants to double its retail utlets to 50 by 2010. These marketers are also looking at Macau, a former Portuguese colony in southern China that has become a gambling mecca attracting thousands of affluent mainland Chinese.

Significant potential among middle class

“Many have yet to grasp the high levels of wealth in Guangdong province in the new cities such as Shenzhen, Dongguan, Shunde and Zhuhai,” says Mr. Sailor. “Shanghai is not the only place with money and marketers of luxury brands need to work closely with market researchers to target the consumers with money. There is significant market potential among middle-class Chinese.”

Overall, middle class Chinese have a positive attitude towards luxury brands. Sixty-four percent equate ownership of luxury brands with “having a successful life” and 54% believe it indicates “good taste.” Less than one-quarter of consumers interviewed for a recent study saw luxury goods consumption as “showing off,” “wasting money,” or behaving “superficially.”

While consumers in tier-two cities were equally positive about luxury brands as residents of China’s most sophisticated cities, TSN discovered gender and regional distinctions. Chinese men see luxury goods as a way of boosting their confidence, while women are motivated by self-indulgence.

There is a higher inclination to buy luxury products in eastern and northern China, compared to the central and southern parts of the country.

In eastern China, including Shanghai, consumers have a tradition of pursuing the “high life” and the economy is very developed. The attitude towards luxury brands there is “very positive,” said Sandy Chen, Shanghai-based research director of TNS.

In northern cities such as Dalian, Harbin and Beijing, consumers also have a positive feeling towards luxury goods, “but they pay more attention to status and peer groups and use luxury goods to enter social circles,” she added. Consumers in central China, where the economy is the least developed, are the least receptive to spending on luxury goods. In the south, even affluent consumers tend to be frugal. “They appreciate practical spending and often think luxury brands are a waste of money.”

Spending by the middle class is still limited overall, “but since we see a positive attitude towards these brands, we expect the future of the luxury category to be very strong in China,” she added.


The most aspirational brands among China’s middle class

Fashion: Versace (19%); Chanel (17%); Giorgio Armani (11%)

Cosmetics/perfume
: Chanel (31%); Estée Lauder (10%); Lancôme and Dior (each 9%)

Jewellery
: Swarovski (24%); Cartier (22%); Tiffany & Co. (11%)

Watches
: Rolex (36%); Omega (17%); Longines (10%)

Handbags/footwear
: Louis Vuitton (42%); Versace (15%); Dunhill (13%)

Autos
: BMW 26%; Ferrari 12%; Rolls-Royce (10%)

Spirits
: Remy Martin (26%); Hennessy (18%); Chivas Regal (10%)

Source: TNS China

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