China’s consumer confidence has reached record levels this past quarter. According to a joint study conducted by China’s National Bureau of Statistics (NBS) and Nielsen, China’s consumer confidence in Q1 2010 has reached levels not seen since 2007 . I am often skeptical of the figures reported by NBS, however this does fit with the trend of growth in China fueled by government spending and domestic consumption. Within the Chinese consumer market, I would like to focus on one group in particular, the luxury consumer market.

China is currently the fastest growing and second largest luxury goods market in the world, second only to Japan. It is expected to reach the number one spot by as early as 2015. In 2009 Chinese consumers purchased 27.5% of the world’s luxury goods at a total of 9.4 billion USD, in comparison to 2004 when their total was only 2 billion USD. The rate at which China’s luxury market has grown is tremendous, and China is now home to both the world’s second largest diamond market and the number one automobile market.

My recent interview with McKinsey’s Asia Consumer Director Vinay Dixit, highlights one of the key differences in China’s luxury consumer market – the relative youth of Chinese luxury consumers. He explained that on average they are roughly 20 years younger than their counterparts in the US, Japan and other developed nations.

Additionally, it is important to note that not all luxury consumers in China actually have the salary to support such purchases. China’s online message boards are filled with accounts of young Chinese white-collar workers who skip meals and only eat instant noodles in the evening in order to save up for a luxury purse made by Richemont or Louis Vuitton. Post 80’s generation Chinese refer to these individuals as “modern Madame Bovarys.” This type of Chinese luxury consumer lives beyond their means to attain a luxurious lifestyle like that of the main character in Gustave Flaubert’s famous novel.

Specific types of purchases vary depending on individual consumer’s tastes and preferences, but several trends emerge from the top consumer purchases. In general foreign luxury goods are preferred, with top purchases being automobiles, clothing, cosmetics, purses and watches. Despite the vast size of China’s luxury market, luxury goods consumption is relatively new in China, with consumers’ knowledge and behavior primarily driven by overseas brands.

Looking forward, much of China’s luxury market growth will continue to originate from cities outside of top tier metropolises like Beijing and Shanghai. In order to facilitate distribution and ease of purchase we can look for more e-commerce solutions. Websites like Taobao.com are often used by more price-sensitive consumers, however e-commerce in the luxury good sector correlates closely with convenience and access. For instance, wooha.com is a popular e-commerce site with a luxury-focused section selling Coach, Prada, Burberry, Cartier, Armani and others. This is just one example, but there will likely be others.

China’s luxury market is one of the world’s largest, and yet the luxury consumer population is only a small percentage the entire consumer population. Consumer confidence is at a high and the luxury market will continue to expand, but it is always important to remember that the majority of China’s consumers are still concerned more with solving 温饱问题 wenbao wenti or how to stay warm and adequately fed, rather than saving for their next luxury purse or watch. Nonetheless, luxury consumption is on the rise and will continue to be a key area to watch.

Inside Observer Intelligence: Richard from the excellent All Roads Lead to China blog provided us with the following insider perspective:

“In the past couple of weeks, I have met the GMs for a number of luxury brands in China, and all I can say is that they are smiling ear to ear.

There is a recognition that there is an imbalance/ paradox that is playing out here (i.e. there is a limited pool of people, but they are spending BIG), and groups are aggresively expanding to take what they can get while the gettin is good.

But, in each of these conversations, there is also something between the lines that they are not ready to say.. and that is that while people are spending now, there is a market saturation effect that is beginning to occur.. and that by going so far into the 2nd/ 3rd tier cities, there is a concern that they may cannibalize their 1sst tier city sales in the process.

It is not something that will stop anyone at this point, as many expect the next 3-5 years to be nothing but growth, but after that, nearly everyone I spoke with agreed that would be the timeline that proves the model.. or breaks the bank.”

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