Luxury Products in China

|
 |  Includes: EL, RL, SWGNF, TIF
by: Shaun Rein

China is the third largest consumer of luxury goods worldwide, and its appetite for the good life continues to increase in step with the rapidly growing economy. Estimates have China consuming 29% of the world’s luxury goods by 2015, making it second worldwide to only Japan. Savings rates are finally falling from the historic 40% rate as Chinese consumers are increasingly optimistic about their futures and look to enjoy life by buying items from companies like Ralph Lauren (RL), Tiffany’s (TIF), and Omega (OTCPK:SWGNF). Luxury retailers cannot get on the scene fast enough to try to catch up to market leaders like Zegna and Gucci. 

Yet luxury sales on the mainland still have room to grow. In fact, only a minority of Chinese consumers $6 billion USD worth luxury purchases are actually made on the mainland. Many of China’s super-rich, who many retailers think are low-hanging fruit for luxury retailers, are doing their shopping abroad in Hong Kong and Italy where there is more cachet. And while some consumers will inevitably skip town solely for the added cachet of shopping abroad, or to avoid the mainland’s considerable import taxes, there are other very important reasons numbers are low at home, and much that can be done to ensure luxury retailers hit their revenue goals for China.

Product Selection 

A significant place to improve the overall shopping experience in China, and an important aspect to winning consumers back from Hong Kong, is in product selection. Choosing the right product mix is not easy on the mainland, as more than elsewhere, luxury retailers in China must satisfy everyone from the first time luxury purchaser to the seasoned super-rich with a wide range of disposable income. 

The seasoned super-rich want more product and brand availability, access to products that will really make them feel “special”. Yet currently in mainland China many such luxury brands and products are difficult to find, or simply not sold. Manolo Blahnik, MiuMiu, and Bottega Veneta are a few such names often missing from the racks. And of course, when it comes to fashion, these high-end consumers demand the newest, most up-to-date products. In a recent CMR study one thirty-five year old Beijing woman told us, “I go to Hong Kong to do my shopping because I know I can get the newest things there. I can’t always find the latest items on the mainland.”  

Target demographic 

More important than the super-rich, though, are those who do not leave the mainland to shop, but are not buying luxury at home either, or not as much as they could be—the 250 million members of China’s quickly growing middle and upper-middle classes, and upwardly mobile women in particular. The next five years will be incredibly important for developing brand loyalty, and a taste for luxury products.  To win loyalty and build market share companies should focus on those consumers who may not yet be buying the entire luxury catalog, but can afford a signature item, either for themselves or as a gift, to showcase their status. 

Therefore, while large luxury retailers and shopping malls must provide the products and brands the super-rich need if they want to lure these shoppers back from Hong Kong, they must also bait the aspiring middle class. CMR research shows that new luxury purchasers typically seek out signature and entry level products on the lower end of the price spectrum that will still give purchasers the feeling of belonging to a brand culture.  

Within the emerging middle class, luxury retailers should focus on aspiring women in particular. While men may have outspent women on luxury in the past in China, the rapidly increasing purchasing power of upwardly mobile and aspiring women makes them increasingly important luxury targets.  

According to our research, women are more likely to buy luxury products for themselves than men, who are more likely to purchase luxury as gifts for others. In fact, a recent CMR study revealed that many younger white-collar Chinese women are willing to borrow heavily to land the “right” luxury item for themselves to signal status and style, such as a Louis Vuitton bag or expensive cosmetics from Estee Lauder (EL). Many women will borrow because they view these purchases as an investment; something that will help them get ahead at work or in their social circle. Access to the newest, most up-to-date fashion items is important for these too; when shelling out an entire month’s salary on her first luxury handbag, an aspiring young Chinese woman does not want to have to worry about whether her bag is the newest style or a leftover from last season.

Service 

Retailers must also be aware that it will be many of these customers’ first time purchasing a luxury item. They should be given an easy, enjoyable shopping experience. CMR research shows that when it comes to luxury, particularly regarding fashion items, consumers appreciate guidance and product education. Among other things, women are interested in learning how to wear the latest trends and apply makeup, while men are interested in learning how to match clothes and choose gifts. Yet instead of guiding new shoppers with service and product advice, many mainland salespeople are scaring them away. Potential purchasers are deterred from shopping at luxury stores because they fear salespeople will treat them poorly or make it difficult for them to see and experience products. As one stylish, aspiring Shanghainese woman told us, “I wanted to buy some Lancome products, so one weekend I went to the Lancome retail store. I was wearing casual clothes because it was the weekend and I wanted to be comfortable. The salespeople looked at me and did not want to talk to me. So I left without even trying anything.” Winning the business of such aspiring young women is crucial to building luxury sales on the mainland. Salespeople should make the process easy and luxurious, not scary.  

To bring the luxury shopping experience up to par, mainland retailers need to invest significantly in their staff. In many ways, service on the mainland needs to be better than elsewhere, as staff need to be able to court everyone from the super-rich to the aspiring beginner purchaser. While service has improved, luxury retailers have a long way to go.  

As I have written previously in Forbes in a commentary entitled “How Multinationals Err in China", training employees is a daunting task in a country where turnover is high and well-trained individuals hop from job to job in search of the biggest carrot. To prevent this, companies must offer their employees the right incentives to stay. In other countries, where most luxury shopping is done locally, retail salespeople have the incentive of building up their record and earning commission. But this incentive is weaker in China—why should a salesperson bend over backwards to court a customer in Beijing if the customer, once she has developed an interest in the product, flies to Hong Kong to purchase?  

Atmosphere and Image 

Without a doubt, luxury retailers must ensure that the physical store space they occupy matches the brand image they are trying to relay. Too often China’s luxury stores are too small and cramped, or poorly located. While location is hard to control—landlords may promise a store will be neighbored by certain luxury brands when in actuality they will not— space should be less of an issue.  

The retail store is yet another opportunity for brands to build their image in consumers’ minds. Between décor, layout, products, and salespeople, retailers must impress upon consumers what makes their brand special. Ferragamo, an important but somewhat lesser known luxury brand in the west, is trying to reinvent itself as one of the top six best known luxury brands in China, according to CEO Michele Norsa. Ferragamo chose Shanghai as the location for their 80th anniversary as a way to gain visibility on the ground here. During the months leading up to Ferragamo’s 80th anniversary in Shanghai, for example, the fashion house displayed a larger-than-life sculpture of its classic 1938 rainbow platform shoe outside its location at Times Square on Shanghai’s main shopping street, helping gain visibility for the brand and portray itself as an innovative fashion leader, conveying the prestigious background and long history of the company.

Customer Relations Management 

Luxury producers can go a long way towards improving their prospects in China by data mining, both at home and on the luxury purchases made by Chinese overseas.  There is a wealth of information about what products Chinese want to buy and what they are interested in.

Finally, the popularity of VIP cards and membership programs in China cannot be understated. While sales and other promotions can hurt the luxury brand image, VIP program discounts can be a deciding perk for an aspiring luxury purchaser deciding between brands, and a good way to build brand loyalty.  

There is much that can be done to increase luxury sales in mainland China. Luxury retailers must work to improve the overall shopping experience by improving brand and product selection, store atmosphere, and customer service. Most importantly, they need to look beyond those who can already afford to spend heavily on luxury, and not only because many of them skip town to shop. Retailers should prioritize the aspiring and upwardly mobile members of China’s emerging middle class, and women in particular, as this will be the group to drive the bulk of luxury demand in the future. The demand for luxury is booming on the mainland and retailers should act now to win their place in consumers’ hearts.

China Market Research Group Senior Analyst Ben Cavender contributed to this article, as did CMR Analysts Charlotte MacAusland, Natalie Zhu, and Meredith Sun