The Bottom Line.
In this Asia-Pacific Insight, luxury expert Emmanuel Sidem and Christophe Granier explore China’s luxury market trends. From new purchasing behaviors and increased specialization to click and brick luxury evolution, they propose a fascinating big picture and analysis regarding what luxury will be about tomorrow. New definitions, new clients and new challenges, where is the industry going next?
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China & Luxury Markets: So Far, So Good.
[By Emmanuelle Sidem and Christophe Granier]
According to the Statista portal, the world turnover of luxury goods reaches USD 323.2 billion annually, with an average growth from 2019 to 2022 approaching 1.9% per year. The most important segment remains fashion (with USD 94.6 billion) followed by accessories, but trends are also worth noticing from various perspectives.
While most of the sector’s turnover is still generated in the United States (USD 72 billion), it however seems that the Chinese buyers represent an essential driver of global development.
After a year 2017 marked by a recovery of sales (+20%), luxury goods in China have experienced a period of consolidation (+13% in 2018) and the main signs suggest that the market fundamentals are stable: a strong demography, an increasing purchasing power and a sustained appetite for consumption, whether at home or abroad, make of luxury a promising market.
In reality, China’s domestic dynamism relates strongly to the fact demand for luxury goods continues to increase. At this stage, interestingly, around two-thirds of the luxury products purchased by Chinese consumers would however appear to be made outside China, mainly during their travels abroad. In 2018, in fact, China accounted for nearly 20% of the world luxury market, while the Chinese consumers represented around 33% of the total luxury consumers globally – a rate which, for some brands, has reached 50 to 60%.
In this market, the young people – who in China represent 30% of the buyers – are the least sensitive to economic variations. In fact, Bain Capital goes as far as confirming a forecast according to which Chinese buyers will account for half of the world’s luxury spending in 2025.
New purchasing behaviors in the luxury sector.
New purchasing behaviors can be observed, however. In particular, China’s domestic consumption is for instance boosted by the growth of digital sales, which now account for 10% of total global luxury sales and are expected to account for 25% of the market by 2025. Overall, generalist online sales portals are not only booming, they increasingly make room for the fashion and the luxury sectors while the main web players specialize in the more attractive high-end segments.
From anti-counterfeiting efforts to specialization.
Perhaps more interestingly, behaviors evolve in relation to anti-counterfeiting.
Once severely criticized for selling doubtful products, the Tmall and Taobao portals have for instance taken measures to influence their advertisers, who now tend to display rather effective brand certificates as guarantees. Since 2017, Alibaba has in fact taken the lead by creating the AACA (Alibaba Anti-Counterfeiting Alliance), an association of 120 partner brands that helps the leading online retailer fight theft of intellectual property.
To avoid mass market reputation losses, another logical step was the establishment of specialized portals such as the Alibaba Luxury Pavilion (since August 2017, more than 50 brands) and Top Life (of equivalent weight) by JD.com, which also created a parallel delivery service named JD Luxury Express. In this regard, it should be noted that in late February JD.com sold Top Life for USD 50 million to its British partner Farfetch, which in return gave it access a variety of brands with which interests converge.
As often, Tencent has alternatively developed parallel strategies which for instance consist in offering brands a complete ecosystem and real personalization opportunities with targeted campaigns through its WeChat mini-programs.
Among the leading luxury platforms is also Secoo, which is probably the most focused brand on the market, with significant international strategies led by an Italian director whose methods and performances are rather impressive.
From Chinese brands to foreign brands aimed at Chinese consumers.
Also worth noting when drawing the big picture of the Chinese luxury market is the presence of several dedicated and high-growth sites created to sell only luxury, fashion and cosmetics of foreign origin. These would for instance include Red (Redbook or Xiaohingshu), VIP International, Beyond (the digital version by DaiGou) or LOOK.
All four are halfway between sales portal and social network and operate by systematically using influencers, sometimes WeChat-focused and usually targeting the younger generations.
In effect, the start-ups dedicated to servicing a very young Chinese clientele are particularly positioned on the daily and ready-to-wear segment and they experience truly enviable growth rates. Listed in New York, Mogu has for instance just announced that its figures will grow by more than 20% annually in 2018.
More fundamental for many brands is the impressive rise of online video applications such as Douyin (ByteDance), which under the name of TikTok reaches an audience of young girls with high purchasing power.
>> Read also: Digital Transformation talks with Ashley Galina Dudarenok.
Even though mass-exposure sites attracting more than 500 million users per month might have a deteriorating effect in terms of branding, luxury brands such as Christian Dior, Louis Vuitton and Chanel have been tempted to play the game. Hence, the main question is the following: will this abundance of media have a growth impact on sales or could it affect markets negatively?
Future will tell, but one of the most visible consequences of the trend is the expansion of all types of traffics on the Chinese internet, where celebrities can now buy hundreds of followers on Weibo or Douyin. The ongoing investigation initiated by CCTV into the Cai Xukun idol of the Nine Percent group would be anecdotal if this celebrity had not already been recruited by L’Oréal and Chanel.
To illustrate the online Chinese fashion potential, the best example in the ready-to-wear segment is a winter jacket by Orolay, a small manufacturer created in Zhejiang in April 2015 whose videos have become viral on the networks. So much so, in fact, that Americans now call it the “Amazon jacket”. Hence, such examples could soon enough be reproduced in the luxury sector.
The click didn’t kill the brick.
In physical shops as well as online, the reduction in price gaps between China and the United States which began in 2015 is also a significant element on the luxury market big picture.
Luxury market evolutions.
This gap, reduced to 25-30% in 2018 compared to 70% previously – is due to the pricing policies of many brands and to the measures increasingly taken by the Chinese government to promote domestic consumption (reduction of customs duties and tighter controls at borders to limit imports by “DaiGou” shops who resell products purchased abroad on Chinese sites).
Interestingly, this situation has already facilitated the emergence of specialized multi-channel groups such as Hemei, an agent for several brands (mainly Armani with 80 stores) and recent owner of the well-known luxury retailer Chonggao, which also expanded its spectrum through the acquisition of online sales sites such as Shangpin.com. Strategies differ from that of the major online players, however, as these actors now bet on in-store sales being made in parallel to digital technology invasions.
Also worth noting is the idea that, with millennial going into deeper debt to acquire luxury items, the public authorities now keep an eye on the market. In fact, discussions were held during the recent People’s Consultative Conference suggesting that an increase in taxes on luxury goods might be considered sooner or later.
Luxury shopping and tourism.
Another trend can be identified as more Chinese consumers travel outside China.
Guesstimates suggest that abroad trips could go from 150 million in 2018 to nearly 200 million in 2020, but the luxury purchases made during stays abroad are unlikely to compete with national luxury sales.
According to a Ctrip report, the preferences of Chinese tourists are changing, with personalized “tours” for instance increasing by 173% in 2018.
In 2018, Europe accounted for 11% of the trips made by Chinese consumers (just behind Asia) with an average of USD 1763 per head. A large proportion of Chinese tourists passed through France, the world’s leading destination in terms of cultural offerings: wines and spirits, gastronomy, fashion and luxury being the main beneficiaries of the tourist waves.
In a hyper-competitive market with a plethora of offers, the current and future behavior of Chinese consumers would overall appear to evolve in two different ways.
First, consumers turn to “cocoon” brands which provide safe value with a long and robust history, traditions and proven know-how. These brands grow very strongly and benefit from a success bonus. As Bernard Arnault said on the CNBC economic news channel while comparing his industry to others, “I have a lot of admiration for Apple, having an iPhone myself. But can you say that in twenty years’ time, people will still be using an iPhone? Maybe not (…) I can guarantee, however, that in twenty years’ time they will still drink Dom Pérignon”.
Second, the young Chinese customers are on the lookout for small, authentic, local and niche brands and labels. As gourmets and connoisseurs, they appreciate an experience-based luxury related to gastronomy and enology, travel, culture… Thus, young Chinese fashion houses are beginning to emerge on the international scene. This is for instance the case of Icicle, a ready-to-wear brand which invests in natural materials and promotes respect for the environment. This is also the case of Li Ning, a sport-inspired fashion brand that paraded last year at New York Fashion Week (which might showcase 22 Chinese brands during its next edition in 2019).
Imported luxury or Chinese luxury?
Another vector of development, already perceptible for several years, is the acquisition of brands by Chinese financial conglomerates, to be used as guides and introducers to the Chinese, Asian and international markets.
Some of these groups remain specialized, and countries such as France are often the target of these raids. In recent years, in fact, France has seen spectacular acquisitions (Baccarat by Fortune Fountain Capital in June 2017, Karl Lagerfeld Greater China and Shanghai by Septwolves in August 2017). The time of wild acquisitions seems to have passed, however, as seen with the various setbacks of real estate and mining groups investing in luxury. After buying 85% of the Milanese jeweler Buccelatti in August 2017, Gansu Gangtai for instance decided to sell it back to Richemont in October 2018.
Much more significant is the formation of specialized integrated groups. Shandong Ruyi, the purchaser of several European brands – including Sandro Maje Claudie Pierlot in France and Suisse Bally – has for instance positioned itself in a niche market of ready-to-wear with some luxury elements. The group proceeds in stages, first stabilizing financial accounts affected by various acquisitions, then making itself listed on the Singapore Stock Exchange, before turning to other targets.
Rare enough to be reported, the Chinese government has recently delayed Ruyi’s acquisition of the Israeli manufacturer of clothing for Bagir.
More opportunistic and diversified, versatile groups such as Fosun organize entire supply chains dedicated to fashion and luxury within their organization, such an operational model being easier to adapt to demands of all sorts.
Emerging Chinese brands should also be followed closely, especially as some tend to belong to international luxury groups. While Shanghai Tang was sold by Richemont because of a lack of performance, the luxury jeweler Qeelin – Kering since 2012 – is a symptomatic example of forthcoming success. Patiently building its brand around millenary symbols of ancient China and benefiting from known muses with an international influence, the group might one day become attractive to an international clientele increasingly fond of Chinese symbols.
The wulu gourd, an image of protection, security and eternity seen on actors like Maggie Cheung and the young Nazha, is on its way to tour the world as the brand is already present in 19 countries.
New definitions for luxury.
It is important not to confuse luxury consumption with the consumption of existing luxury brands, however.
Luxury is set to change in its definition under the impetus of young, globalized Chinese customers who create the industry’s growth while influencing the consumption patterns of their peers around the world.
These customers look for a more accessible type of luxury that is easier to live with, but also to buy and consume. This is evidenced, for instance, by the success of the EUR 1000 snickers which have attracted tremendous attention. But these consumers are also sensitive to their well-being, to health, education, and safety matters, thus forcing brands to give more weight to ethical and responsible behaviors.
New challenges for China’s luxury market.
Beyond financial performance requirements, luxury brands are also facing a new challenge: with its growth, China is gaining awareness of its own power and increasingly wants to preserve its culture (and the use that is made of it).
One of the best examples is the disastrous effect of an advertising campaign by Dolce Gabanna aimed at promoting the Shanghai fashion show in 2018, and which ironic comments proved insulting to the Chinese culture.
More recently, Zara was charged by the Chinese blogosphere for “ugly-ing up” China by presenting its new lipstick on a model with no make-up and visible freckles.
Another example came with the immediate and viral reactions of the Chinese blogosphere following an incident at the department store ‘Le Printemps’ in Paris, where a Chinese customer was reportedly thrown ashore after protesting against other customers in a queue for Balenciaga sneakers. A video of the incident broadcasted on the Internet caused a deluge of comments on WeChat, denouncing brand racism such as “#Boycott de Balenciaga which discriminates against the Chinese”.
These incidents are no longer acceptable and point towards an excessive cultural gap separating the staffs of some Western brands from their Chinese clients. In this respect, it is therefore becoming absolutely essential to develop the best practices of Western brands, so as to for instance introduce more Chinese talents into management teams.
Such progress would be essential to the long-term success of Western brands on the Chinese Luxury markets, and it would in particular help to create links with local elites who will ultimately become potential investors and partners in the future. This is, in fact, what Fosun does it its own way: by buying up French and European brands, the group internationalizes its teams and progressively builds a pool of leaders capable of creating a real dynamic of creation and development of luxury brands.
To be continued…
This insight was originally published in French in « La Lettre de la Chine Hors Les Murs » N°28, March 2019, by the French External Trade Advisors (Comité National des Conseillers du Commerce Exterieur).
Emmanuelle Sidem | China Luxury Expert Contributor.
Emmanuelle Sidem is co-founder and partner of ConnexConsulting strategy consulting firm, founded in Paris in 1998, with a unique client portfolio composed of most luxury Maisons and prestige brands in all categories: ready to wear, leather goods, watches and jewelry, wines and spirits, cosmetics, high-end hospitality, airlines…
She advises her clients to develop worldwide, to find the right positioning, to be attractive and trusted in a multi-faceted world.An important part of her activities is directed towards China: advising French and European brands in China, advising Chinese brands to move up their value chain and become global.
She participated in the design and launch of the first executive Luxury management program in Japan, and the elaboration of many programs and courses for executive managers. She writes chronicles about Luxury in various newspapers.
Christophe Granier | China Expert Contributor
During his 37 years banking career, Christophe Granier was most of the time involved in asset finance activities, running specialized leasing subsidiaries of Soc Gen in seven countries including Japan, Turkey, and the Netherlands.
His main positions were Senior Country Officer of the Bank in Pakistan, Managing Director of Trilease International Ltd and Sogelease in Hong-Kong, before moving to Shanghai in early 2005 to establish the wholly-owned Soc Gen subsidiary specialized in leasing and renting activities.
Christophe Granier devoted more than 10 years of its career to Greater China. French Trade Counselor since 2000, he was also the Secretary-General of FTC sections in Hong Kong & China for 8 years. Coordinating the booklet on the International Strategies of French Groups in 2011, he took the lead of the worldwide inquiry on the China globalization “La Chine Hors Les Murs” in 2013, publishing the main study in 2014 then heading the Observatory for China Globalization.
Disclaimer: The views expressed are those of their author(s) only and do not reflect those of The Asia-Pacific Circle or of its editors unless otherwise stated.
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