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Long-term Consumer Outlook for China Luxury

Joel on March 29, 2011 - 8:02 am in Archive, Consumer Intelligence, Data & Facts

As investments by companies like Louis Vuitton (LVMH), Gucci and Chanel in China’s luxury market increase, McKinsey continues their ongoing series of Chinese consumer surveys. Vinay Dixit, Senior Director of Asia Consumer Centers whom I previously interviewed on The China Observer sent me their latest report entitled “Understanding China’s Growing Love for Luxury” which summarizes the results of an extensive survey of over 1,500 Chinese luxury consumers during spring 2010. I do not necessarily agree with all of the report’s findings, but McKinsey does provide an interesting framework to analyze luxury consumer behavior.

The report highlighted the following three key findings:

  • “Rapid increases in wealth, and shifting social mores that sanction the display of that wealth, are driving a growing infatuation for luxury goods among Chinese consumers.”
  • “Access to an explosion of information on the Internet, an increasing penchant for overseas travel, and first-hand experience purchasing and consuming luxury goods are contributing to a substantial rise in sophistication among luxury consumers in China. Contrary to popular belief, a growing number of Chinese luxury consumers are exhibiting a noticeable trend away from overt displays of wealth, and towards more understated forms of luxury consumption.”
  • “Rapid urbanization and growing wealth outside of China’s largest cities is driving the emergence of several new geographic markets with sizeable pools of luxury goods consumers. Over the next 5 years, [McKinsey] expects that the number of such cities will double from 30-60.”

In addition to these three trends, McKinsey classifies Chinese luxury consumers into four broad categories as follows:

1. Core luxury buyers: Affluent households that spend 12-20% of their income on luxury goods per year (20,000-60,000 USD).

2. Luxury role models: Young and fashionable, most are self-employed or corporate executives living in Beijing or Shanghai. Buy to indulge themselves and seek to feel unique rather than show off their wealth

3. Fashion fanatics: Middle class, typically in junior to mid-level positions; includes some housewives. Spend a disproportionate amount of income on luxury. Stronger “enjoy now” mindset, willing to buy on credit. Exert a strong influence on other consumers, sharing their purchases and opinions in social circles and online

4. Middle-class aspirants: Middle class living in Tier 2/3 cities. Infrequent buyers of luxury products. Buying luxury goods makes them feel successful and fulfils aspiration of belonging in a higher social circle. Less knowledgeable about luxury brands and thus are more cautious spenders.

I am always a bit skeptical of all-encompassing classifications of consumer groups. However, three key areas to me signal long-term growth in China’s luxury market. The first is the ongoing rise of luxury spending in Tier 2 and 3 cities. The report found that 1/3 of luxury consumption in China today came from just nine markets: Chongqing, Dongguan, Foshan, Guangzhou, Hangzhou, Nanjing, Shenzhen, Tianjin and Wenzhou. The second is that there is an increased willingness for people who can’t afford luxury items to spend a disproportionate amount of their income on luxury. According to the report, 13 million upper-middle-class households (earning 15,000-30,000 USD) are stretching budgets to buy luxury watches, jewelry, handbags, shoes and clothing. This form of consumption represented 12% of Chinese luxury consumption in 2010, but is expected to reach 22% by 2015. The last is the relative youth of China’s luxury consumers. Approximately 73% of luxury consumers in China are under age 45, significantly younger than their counterparts in western nations or even nearby Japan. Should these trends continue to develop China may very well be the world’s largest luxury market by 2015; however, as the events in Japan have dramatically impacted luxury retailers in the world’s current #1 luxury market, unforeseen circumstances may alter future development in the Middle Kingdom.

*To access the full luxury consumer report, click on this link.