Winners, Losers and 20 Percent Luxury Sales Growth in China

Luxury sales in China experienced 20 percent growth for the second year, but some brands stumbled while other brands soared.

Consumers in a Beijing mall.

SHANGHAI  The luxury industry in China maintained 2017’s record-breaking 20 percent growth rate last year, according to Bain & Co.’s annual China luxury study, released Tuesday.

But in the face of a domestic economic slowdown, luxury sales growth is not guaranteed, and some brands have learned this the hard way. For every brand that grew at a rate of more than 25 percent in 2018, there were two that grew by less than 10 percent, according to the report. The key: localization.

The report highlighted the four main drivers for growth in China’s luxury market:

• Engaging Millennial consumers.

• Repatriating Chinese luxury spending.

• Effective digitization strategies.

• Attracting the rapidly expanding middle-class.

Luxury brands that have come out on top in China are the ones that have been able to successfully navigate the nuances of these four main drivers in that dynamic market.

The Bain & Co. study focused on the Chinese urban population and urban consumption. Of the 20 percent growth in luxury sales, Millennials contributed to almost all of the incremental growth of the market over the past year. Chinese Millennials are financially able and willing to spend money on luxury brands, with 57 percent of luxury purchases made from family funds and 38 percent from self-made funds.

Chinese Millennials’ spending power is also positively impacted by the fact that 70 percent of the country’s Millennials own their own home, which is double the rate of those in the U.S., according to a HSBC report from 2017. What’s more, a recent UBS survey found that 71 percent of Chinese Millennials have a positive financial outlook, and 81 percent expect their incomes to increase.

“Millennials are digitally savvy, they spend their time with their smartphone and, as a result of that, they are very, very knowledgeable about brands. They value innovation and newness, so they are not really price sensitive. They are not looking for bargains or discounts, that’s why they actually buy more often now in China. They are very opinionated, they know what they like and what they don’t like, and that’s why we see a divergence of brands’ performances. Some brands are doing well with Millennials, and that is fueling their growth. But, if you are not doing well with Millennials, then it is going to be hard for you, as a brand, to be successful in that particular segment,” said Bruno Lannes, a Bain partner and the report’s author.

Many brands that have localized, and targeted this particular consumer group, have done so by merging the boundaries of sportswear, streetwear, and casualwear with luxury, examples being Balenciaga’s Triple S sneaker and the collaboration between Louis Vuitton and Supreme, which both proved successful in China.

“Chinese consumers are younger than the average consumers of luxury worldwide, but also, they also have a lot more of an open mind about what luxury brands stand for. If you go to Europe, for example, I think we have some archetype of ideas of what the brands stand for because the brands have been there forever, and we have somehow been educated to think that the brands are like this. I think Chinese consumers don’t have this and they say, ‘Why not sneakers from Gucci?’” said Lannes.

The repatriation of luxury spending is also having a long-lasting effect on the luxury fashion industry in the country. Chinese shoppers made 27 percent of their luxury purchases within the country in 2018, up from the 23 percent made onshore the previous year, according to the report. This figure is predicted to rise to 50 percent by 2025. In total, luxury spending by Chinese shoppers, both domestically and internationally, now represents one-third of the global luxury market.

Reasons behind the repatriation to China of luxury purchases include a reduction in import duties, luxury brand price harmonization, and a stricter control over grey markets, aka the daigou (the practice of individuals buying products overseas and bringing them back into China illegally to resell) crackdown. On the first day of 2019, the Chinese government enforced a new law that requires all online vendors to register as official businesses and pay taxes, therefore nullifying the benefit of tax circumvention when buying abroad.

“[Daigou rules] are part of the government policies, with an objective to repatriate purchases in China, so that these purchases are registered in the GDP and pay taxes. Especially at a time of a slowdown in the economy, it can bring additional consumption and also growth,” said Lannes.

The last time a strict daigou clampdown was put in place was in 2015, which led to a growth in cross border e-commerce, the official way to import foreign goods. This was also sweetened with tax incentives at the time, noted Lannes. Additionally, the emergence of legitimate e-commerce platforms in China, such as Net-a-Porter and Farfetch, both of which have joint ventures with local platforms, offers consumers products from around the world and make daigou trade redundant.

As China re-shores luxury spending, the obvious assumption for brands is to reallocate more product to China. The same should also be considered for investment. “If you have more and more consumers coming to China, then you need more stores and you need more people to serve those consumers. You need more after sales service and you need to do more event campaigns, because you have more people to address. So, I think as a result, you need to have more resources and investment in China,” said Lannes.

Digitization, both in terms of e-commerce and consumer engagement on digital channels, has also proven to be critical to the success of luxury brands’ growth in China.

Brands that have succeeded with Chinese Millennials have utilized digital campaigns and marketing to appeal to those young consumers. Chinese Key Opinion Leaders have also been monumental in bridging the gap between luxury brands and Millennial consumers. This engagement comes at a high price, however, which not all brands have been willing to pay. “Larger brands are benefiting because the cost of doing business in China is increasing, so some of those big brands have actually done very well last year,” said Lannes.

Successful luxury brands have had to increase their digital marketing budget for China, assigning around 60 percent to 70 percent of their total marketing spend to various online and social media platforms. WeChat has come out as a front-runner, with luxury brands spending between 40 percent and 70 percent of their digital marketing spending on the Tencent platform.

“WeChat is not directly an e-commerce platform, but it is really helping brands engage with consumers in a very specific way and then drive those consumers into their stores. So I think that’s the value that brands see today on WeChat,” said Lannes.

Although digital consumer engagement has taken off over the past year, the report showed that luxury e-commerce progress has stagnated. It was noted that online luxury sales had increased by 27 percent in 2018, to reach 10 percent of the sector’s revenues, but this was mainly fueled by cosmetics, with online penetration in other categories lagging. One reason for this could be due to a lack of confidence.

“One of the reasons I am cautious about the growth of luxury online is because of counterfeits. I think there is still an issue with that in China, at least in the mind of the consumer. I think that the reality is much less than it was. The government has done a lot of work to stop this. Platforms have done a lot of things to control this. So, I think it is less of a reality, but it is still very present in the minds of consumers,” said Lannes.

Another issue, particularly in China’s luxury sector, is the abundance of e-commerce ecosystems; brand owned, co-operators, aggregators and luxury verticals.

“I think, today, it is still quite confusing for consumers. What’s the difference and what can you get if you shop on those different platforms?” mused Lannes. However, he believes that it is possible to overcome this confusion by giving consumers clarity on the positioning of the platforms.

The middle-class continues its stratospheric rise in the country, with middle-class consumers poised to represent 65 percent of all Chinese households by 2027, according to a Bain & Co. report for the World Economic Forum. As such, there will continue to be a relentless pool of first-time luxury buyers across the country ready and willing for luxury brands to dip into, so long as they approach them with the right strategy.

Overall, Lannes predicts low- to midteen growth in Chinese luxury sales in 2019, when taking into account the general economic slowdown in the domestic market. “These four drivers continue to exist and continue to play in 2019, so that’s why we believe we will have healthy growth again in 2019,” he said.

View article on the Women’s Wear Daily website here.

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