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Just a few years ago, whatever product had the highest price tag motivated China's nouveau riche to spend money and show off their newfound wealth. But as affluent Chinese grow accustomed to the good life, many are reaching international levels of sophistication when consuming luxury products and are no longer swayed solely by price.

Chinese consumers now buy more than $6 billion worth of luxury items a year, making them the third largest segment in the world after their counterparts in the United States and Japan. My firm estimates that luxury consumption will grow 20 percent a year for the next five years and that the volume of luxury goods sold on the Chinese mainland will hit $12 billion a year in the next decade as China's emerging middle class tops 250 million people. Taking a high-end measurement, there are an estimated 300,000 Chinese with a net worth of over $1 million who are actively buying luxury items.

Companies such as Louis Vuitton (OTCPK:LVMHF) , Gucci and Zegna are establishing stores throughout the country to capture market share and turn profits. On the downside, many luxury retailers will be squeezed out if they do not cater to the demands of clients. Chinese consumers are notoriously fickle in their wants. If luxury retailers do not offer the product lines, shopping environment and services that Chinese consumers want, they will not be able to tap into the Chinese market.

My firm, CMR, decided to take a look at what motivates male luxury product consumers in the first-tier cities Shanghai, Guangzhou and Beijing. We conducted one-on-one interviews and surveys in these three cities to track the trends of male consumers and their attitudes and shopping habits.

Although female consumers are reaching parity in China, Chinese men buy more more luxury goods.

Professional image

As more and more men accrue wealth, there is added pressure in business and social settings to visibly display personal success. We found from our interviews that a high percentage of men felt that in order to be successful, they needed to invest in items such as luxury watches and pens that would help them exude professionalism and capability.

The numbers support the growth boom. The Chinese watch market was valued at $3.8 billion in 2005. Of that, $2.1 billion worth of sales were attributed to Swiss makers such as Swatch Group (OTCPK:SWGAF) , owner of Omega, the most popular luxury watch brand in China with a nearly 70 percent market share for high-end watches. Exports of Swiss watches to China increased 69 percent from 2002 to 2005 and increased a further 10.1 percent year-on-year through the first 10 months of 2006. The Federation of the Swiss Watch Industry announced that in 2005, China became its 10th largest importer.

Many of those interviewed bought expensive watches and pens from Montblanc to "demonstrate their success" or gave them as gifts to show "appreciation" to valued business partners. They bought items for themselves to "be different but not too different" from their peers. In other words, they want to buy watches that will set them apart from others, but they still want their purchases to be recognizable. Rolex and Omega topped the most desired watch brands for their "premium" status, while Montblanc was far and away the most coveted pen brand by respondents over Parker and Waterman.

Lesser-known brands could also potentially benefit from Chinese men's thirst for watches and pens, but they will have to determine exactly what consumers want and their marketing managers will have to position their brands properly. If they don't, these firms will bleed money.

Spouses and girlfriends

Men are not only buying for themselves but also for their spouses and girlfriends, according to our findings. Cartier has proven itself to be particularly apt at getting into the heads of Chinese consumers that its products are the "luxury of luxury." Cartier has announced that it will double its presence to 24 stores on the mainland by 2008 to leverage its position in the minds of Chinese consumers.

Indeed, many Chinese women still look at the size of a wallet before deciding whether or not to date a person. Some Shanghaiese women we interviewed said that they would "not marry a man unless he had a house and car without a mortgage." For many men, buying luxury items for their significant others from retailers like Tiffany's (TIF) or Mikimoto is not only a way to demonstrate love, but also to show that he can afford to take care of them.

Overseas destinations

One potential question that arises is where Chinese will purchase luxury products, as only one-third of luxury purchases are actually bought in China. Instead, mainland Chinese tourists are going to hotspots like France, Italy and Hong Kong to shop and play golf. There still is a cache for men to say that they bought this watch or wallet on a trip to the Gold Coast in Australia, where they played golf and stayed at the Versace Hotel.

High import duties have also incited Chinese to travel abroad to shop. In April 2006, China slapped a 20 percent tax on imported watches.

The response by foreign makers was that the market is so hot at this point that Chinese are willing to pay the premium. Additionally, the government has levied a 30 percent tax on watches purchased abroad, so for Chinese, buying in China may not necessarily be more expensive than buying abroad.

Conclusions

China is the best market for the world's luxury makers to experience growth. While the majority of sales have been in the cities we surveyed, the biggest growth will develop from China's second and third-tier cities such as Chengdu, Harbin, Wuhan and Chongqing, as consumers begin to enjoy the fruits of China's stunning economic boom. Smart luxury retailers will take note and strategize accordingly so that they can share in China's boom.

Note: This article originally appeared in China Daily. CMR Analysts Anna Li, Natale Zhu, and Ben Cavender contributed to this article.

Source: Fashionably Sensitive In Chinese Investing