A new report explains why in just four years, China will overtake Japan as the largest luxury goods market in the world.
Yuval Atsmon, Max Magni and Vinay Dixit
Stroll through any of China’s gleaming new high-end shopping malls and you can expect to see some of the world’s priciest and most prestigious luxury brands on display. Fashion powerhouses such as Louis Vuitton and Hermes have more than tripled the number of their stores in China since 2005, scrambling to take a bite out of the pie that is China’s luxury goods market. The reason for the rush is simple: while many other markets are flat or shrinking, luxury goods are booming in China. Even in the teeth of the global recession in 2009, luxury goods saw 16 percent sales growth, a moderate slide from the 20 percent level of the previous few years, but still far better than many major luxury markets.
In order to gain a better sense of this thriving market, McKinsey & Company conducted an extensive survey of over 1,500 luxury consumers across 17 Chinese cities in the Spring of 2010. This report highlights three key findings from the research.
Rapid increases in wealth, the wide availability of luxury products, and shifting attitudes toward the display of wealth is driving the Chinese consumers love for luxury down the economic ladder, creating opportunities as well as challenges for marketers accustomed to serving only the very wealthy. The research shows that the 13 million households comprising China’s upper middle class (incomes between 100,000 and 200,000 renminbi, or $15,000 to $30,000) offer the biggest growth opportunity. They already account for about 12 percent of the market, and their numbers are growing rapidly: we expect to see 76 million households in this income range by 2015, accounting for 22 percent of luxury goods purchases.
Access to information on the internet, an increasing tendency 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. With the surge in luxury stores and fashion magazines and websites, Chinese consumers are now familiar with nearly twice as many brands as they were in 2008. Half of the consumers we surveyed in 2010 could name more than three ready-to-wear brands, compared with only 23 percent two years before. As they become more familiar with luxury goods, Chinese consumers are becoming savvier about the relationship between quality and price.
Price transparency is contributing to this dynamic. More than half of luxury consumers check product details and prices online, compared with 13 percent of all urban consumers. With about two of three luxury consumers having made at least one overseas trip, consumers have access to external benchmarks for comparing prices back home. In 2008, only two of five people knew that mainland Chinese prices were at least 20 percent higher than places such as Hong Kong. By 2010, 66 percent of consumers were aware of the difference.
New geographic markets
Rapid urbanization and growing wealth outside of China’s largest cities is driving the emergence of several geographic markets with sizeable pools of luxury goods consumers. Our research indicates that over the next five years, the number of such cities will double, from 30 to 60. More small cities will become large enough to justify a luxury-store presence. Luxury consumption in cities such as Qingdao and Wuxi are expected to triple over the next five years, and by 2015 consumption in such cities will approach the level of Hangzhou and Nanjing today, which are among China’s most developed luxury goods markets. By 2015, luxury consumption could pass 500 million renminbi ($76 million) in more than 60 cities.
Most of the world’s luxury-goods companies are already in China or contemplating increased investment there, but they must tackle several big issues before making their next moves. In this report, we examine who are China’s luxury consumers; what are they looking for; and how are they making decisions. Finally we identify some key tactics that draw upon insights from our study to help luxury marketers maneuver the unique challenges presented by China’s luxury market.
About the Authors
Yuval Atsmon and Max Magni are principals in McKinsey’s Shanghai office, where Vinay Dixit leads McKinsey’s Insights China.