Analyze the reasons why China enters the early stage of luxury consumption

Introduction

Some objective facts indicated that the Chinese have a strong preference for buying luxury goods. Mainland China has entered the early stage of luxury consumption and dominates the global luxury market due to its large population.

Young generations are expected to drive YOY growth of 18-20 % (at a constant exchange rate) in the region, which demonstrates solid consumer confidence and willingness to buy luxury goods. According to the statistics from Bain Consulting, the scale of luxury consumption has reached 170 billion RMB in 2018, which is more than twice the growth rate of the total retail sales of domestic consumer goods.

Chinese consumers’ attention to luxury goods and continued growth in demand is due to increasing income and acceptance of western culture. In terms of product categories, Chinese consumers are mainly concerned about luxury cars, cosmetics, and famous cigarettes.

But since 2016, the growth of these categories has differentiated. This may be due to tariffs on imports of different products, and relevant policies have led to market trends that have led consumers to pay different attention to different categories of products. For example, from 2016 to 2018, the growth rate of mid-to-high-end cars remained at around 20% for two consecutive years. Compared with 2016, the growth rate of imported high-end cosmetics retail sales in 2017 and 2018 was 47% and 71%, respectively.

Tencent’s data management platform has done a statistical analysis of 2620 consumers buying luxury goods in the past 12 months. For this sample, the researchers conducted the demographic analysis, regional distribution analysis, participation pattern analysis, and KOL influence analysis. Analysis of the consumption behavior of Chinese luxury consumers based on big data is of great significance.

Because these objective results can better guide the future development of the Chinese luxury market. For example, female consumers account for 71%, which is significantly higher than men. And the main consumer would be the young generation as they have a strong preference for buying luxury goods, especially those with a high education background. More findings will be discussed in the consumer analysis part of this article.

The development of China’s luxury goods market indicates the changes in China’s consumption structure. It means people began to pursue higher quality food and clothing by pursuing life and cultural diversity. The purchasing power and influence of Chinese consumers are promoting the development of the global economy. 

Case Study of LVMH

LVMH is the world’s leading luxury goods group. In 2019, the annual revenue is € 53.7 bn, which is 15% YOY. It has 4,915 stores in 70 countries with 163,309 employees. The revenue by region since 2019 is shown in table 1.

Table 1. Revenue by geographic region of delivery – LVMH Group

From the table, sales in Asia have always remained the largest since 2019. The little drop in sales between 2019.06-2019.12 is due to the unexpected global epidemic. While only Asia (excl. Japan) increased by 4% during this special period. China is the largest contributor to Asia (excl. Japan).

It indicated that China’s luxury consumer market has great potential. Even when the world is in crisis, Chinese consumers still have strong spending power and willingness to spend compared to consumers in other countries. China’s consumer base is large enough to support the consumer market quickly responded to the crisis and gave the market some benign signals.

As a luxury group, the product categories are not limited to clothes and watches. For now, the business group of LVMH expanded the categories into six groups. The revenue distribution of six groups in 2019-2020 is shown in the following table 2.

Table 2. Revenue by the business group – LVMH Group

Data in this table indicates that the revenue of fashion and leather goods keep the largest in these durations. One of the reasons is that fashion and leather goods is the largest product category with the largest number. Another reason is that Chinese young consumers pay the most attention to products in this category. Advertisements on fashion and leather goods are widely spread in kinds of websites, magazines, Instagram, fashion bloggers.

Case Study of Hermes

Hermès is another famous luxury group in the world. It employed 15,417 people worldwide and had 311 exclusive stores at the end of 2018. For now, the Hermès is active in fourteen sections including leather goods and saddlery, footwear, Jewellery, Watches, and so on. The profit contribution rate of each category of Hermès in 2020 is shown in figure 1.

Figure 1 The profit contribution rate of each category of Hermès

Similar to the statistics of LV Group, the leather goods, and saddlery share the largest percentage of 50%, and the second one is the ready-to-wear & accessories. The results demonstrated consumers’ preference in these two product selections and innovation direction to companies.

Worldwide, sales in different regions are also different. The sales contributions with the specific percentages in 2019 have shown in the following figure 2.

Figure 2 Activity by geographical zone 2019 of Hermès (2018)

For Hermes, Asia-Pacific (excluding Japan) is the largest contributor to sales revenue. In the first half of 2020, all the geographical regions were impacted by the health crisis and shop closure. The revenue generated in the group’s stores was decreased 22% at constant exchange rates.

The revenue in Japan decreased by 23%. The decrease is higher in America, which is 42%. And the decrease is 36% in Europe excluding France and 38% in France. However, in the Asia-Pacific (excluding Japan), the decrease is only 9%. The sales are growing strongly as all stores reopened in Mainland China in March.

From the sales data of the above two groups and the status quo of China’s luxury goods market, it can be found that the Chinese market in the early stage of luxury goods sales has great market potential in the future. Luxury companies will also continue to pay attention to the changes in the Chinese market and consumer preferences in order to better grasp the Chinese market share.

Therefore, the following of this article will discuss the status quo of the luxury goods market in China, and analyze the consumption behavior and consumer psychology of Chinese consumers for luxury goods.

Analysis of the Chinese luxury market

The current situation and development trend of China’s luxury market is discussed in many papers. Because China has become an important market for luxury brands that cannot be ignored for all luxury brands. Referring to the topics of this article, understandings on Chinese consumer behavior and their consumption psychology is very important.

At the same time, consumer behavior preference will also play a guiding role in the strategic development of luxury brands. Luxury brands not only transmit their brand stories to consumers but also follow the trend and market pace with the customer as the center. The following summarizes several features of Chinese luxury markets.

1. The growth of the main consumer group

Different from western countries, luxury goods are mainly purchased by the wealthy middle class. Wealthy households with annual incomes of more than RMB300,000 are the main consumers, and the increase in the number of these groups has contributed to the rapid growth of international luxury sales in the Chinese market.

Another fact is that young people in China have a strong desire to buy luxury goods because they have a high sense of identity and acceptance of Western culture, especially those who have overseas travel and study experience. The age distribution and the proportion of consumers are shown in Figure 3.

From the table, the average age is 28. And age between 18 and 24 is the largest proportion, which is 36%. The second is consumers aged 25-30, accounting for the proportion32%. A whopping 76% of consumers are younger than 30. The reasons are not only related to the fact that young people are easy to be attracted by marketing and make an impulsive purchase but also related to the increasing excessive consumption concept of young Chinese consumers, the elder’s doting on the only child, the increase of income, and other factors.

Luxury goods to young consumers, not only is a material demand, but also a spiritual level of satisfaction. Because of luxury goods in our country is more inclined to affirm identity, young consumers’ desire for status is released by consuming luxury goods.

2. Competition situation of international luxury brands in the Chinese market

Except for the top brands of the luxury group entered in China, more and more international brands are based in China. They mainly from Europe and Japan and South Korea brand luxury goods.

Some of them might not are worldwide luxury brands, but misunderstood as luxury brands once they entered China. Because in fact, luxury is just a concept, there is no strict definition to define what a luxury brand is. Especially in the early days, consumers will mistakenly believe that the price is exorbitant and that foreign goods are luxury goods. This misperception can disrupt the luxury market. For example, some brands have been redefined as a light luxury in order to distinguish them from real luxury brands.

To attract new customers and create customer loyalty, large luxury groups are expanding their product category continuously. For example, LVMH has wide product categories, covering jewelry, cosmetics, watches, and other fields. And Hermes has 14 different kinds of categories. Therefore, luxury brands are facing fierce in China’s luxury market. Especially, some local luxury brands are fast-growing.

3. Online and offline sales models coexist

International luxury goods in the Chinese market mainly through online and offline two ways to carry out sales. The offline market of international luxury goods is mainly through duty-free shops. These shops are mainly controlled by The Day duty-free line, Shenzhen duty-free goods company, China Duty-Free Co., Ltd., and Zhuhai duty-free goods company. As of 2018, the duty-free shop proportion has been shown in figure 4.

4. Number of duty-free shops

Buying luxury goods from duty-free shops is one of the offline channels for Chinese consumers to buy luxury goods. It is a traditional way but still has a large influence on Chinese customers, especially for Chinese travelers.

China Free Company is responsible for 170 duty-free shops. Shenzhen Free Company is responsible for 10 duty-free shops. Pearl Free Company is responsible for 3 tax-free stores in China. And the Daily Duty-Free Bank is responsible for 5 duty-free shops in China.

Although China’s luxury goods market has a lot of room for profit and growth, there are still some problems. One of the problems is the mismatch between price and value caused by higher international luxury transport costs and tariffs. In the Chinese market, the way of luxury price quotation is unlike with other markets. The tax burden is even higher than the total of Europe and the United States. Therefore, the price of luxury goods in China is much higher than in other cities.

Analysis of the buying motivations of Chinese consumers

Some articles found Chinese consumers are motivated to buy luxury goods not simply because they like the products. There are several interesting phenomena for Chinese consumers to buy luxury goods such as

• Gender difference in preferences
• Prefer to buy abroad, such as in European countries
• Youngsters have strong power in desire and money to buy luxury goods

The motives behind these consumption behaviors have also been discussed by many scholars. The most popular motivations concluded are

• High recognition of the history, value, and quality of luxury brands
• Self-reward attitude
• Brand commitment
• The need to be recognized by society and others

French luxury brands enjoy a high reputation in China due to their expertise, romanticism, the long history, and traditions. It indicated the influence of western culture is fast growing in China, especially in the super cities like Shanghai, Beijing, Guangzhou. Therefore, the recognition of luxury brands is the highest in these cities.

The more expensive the brand, the more affluent recognition it gets in China. (Hines, 2007). Because Chinese consumers generally recognize that good things must be expensive. In other words, consumers simply equate value with price measured in currency. As mentioned above, imported luxury goods are different from general products, and import tariffs are an important part of the cost.

Due to the large differences in the regional distribution and income levels of the Chinese population, it is very difficult to analyze Chinese consumers. The convergence and divergence factors of a country depending on the demography, income levels, and gender of customers.

In order to better understand the luxury consumption behavior of Chinese consumers, this article divides the factors that affect consumers’ luxury purchases into groups and personal factors and discusses them in detail.

Group level factors

• Exposure to luxury trends & cultural traditions (byways of social relations, gifts)
• National culture (high power distance, social representation of status, social class, success, uncertainty avoidance & collectivism)
• Global consumer culture (high conformity and social prestige, luxury symbol, prestige, global image)

Individual & psychological factors

• Personal values: success, wealth, social class
• Attitudes: premium, classy, stylish
• Nonpersonal factors: conspicuous, uniqueness
• Hedonism: extended self, feel good, comfort

Hofstede’s (1980) mode of consumer psychological behavior mentioned that luxury could bring satisfaction to customers. These satisfactions come from respect for others, symbols of status & wealth, self- happiness caused by possession of global luxury brands. Statistics from the article concluded proportions of each factor that affects the consumers’ decision on luxury consumption. From the pie figure below, the largest and second proportions are quality and package design.

The high price of luxury goods makes it becomes a symbol of wealth and social status. In fact, in the history of Western countries, luxury goods are also a symbol of status and class. In the early stage of China’s entry into luxury goods, a more accurate definition is the connection of high-quality products and luxury goods in Western countries, especially Italy, France, and other European countries. Therefore, to some extent, the pursuit of a refined and elegant life incites young generations to buy luxury.

However, researchers also found that luxury products have additional functions. Unlike normal products, the use frequency of luxury products is very rare except for some special occasions like banquets and potluck. This phenome well explained that luxury products are usually used to represent social status and personal wealth.

Effects on the Chinese economic development  

 The development of the luxury market will also make difference to the Chinese economy. For now, China is in the initial stage, there is huge potential to develop. Luxury groups make profits from sales channels and meanwhile it incites related loops of service and profits to make economic benefits. therefore, the development of the luxury industry makes a positive impact on Chinese economic development.

In addition, the western luxury brands could give insights into the Chinese local brands. The first western luxury brands to enter the Chinese market where French luxury brands. After they were introduced into China, these luxury brands are committed to making consumer groups identify with their brand’s culture, history, and style, the emotional connection between designers and customers. The aesthetic experience is the core of brand culture.

At present, the French luxury brand is the mainstream of China’s luxury consumption, which highlights its uniqueness and value, as well as a long history of brand heritage and history. Compared with foreign brands, China’s domestic brands are weak, lack history and brand positioning, but this trend is changing, the rise of emerging domestic luxury brands in the China market can be seen. Therefore, the positive feedback to Chinese local brands is that they can focus on building excellent quality and service to meet the needs of highlighting achievements and prestige.

Currently, some Chinese original luxury brands desire to enter the international market and make worldwide impacts. To achieve this goal, Chinese original luxury brands could learn from the French luxury brand culture and their essence of the experience. It is true that certain brands corresponding to the spirit of progress and innovation is creating a new generation of modern luxury culture construction.

Reference

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