Spending by Chinese consumers on luxury products now exceeds that of any other country
Yuval Atsmon, Diane Ducarme, Max Magni, Cathy Wu
Growing at a pace far surpassing expectations, spending by Chinese consumers on luxury products now exceeds that of any other country. Having leapt past Japan’s luxury market, which until recently was the world’s largest, China has become the paramount driver of growth in this sector, with purchases by Chinese both at home and abroad accounting for over one-quarter of the global total. China’s current economic slowdown has caused the growth rate in the country’s luxury spending to subside recently, and another factor leading some consumers to become more wary is heightened concern about corporate gifting to government officials. Even so, the nation’s share of global luxury spending will continue to soar, to more than one-third by 2015.
This extraordinary boom prompted us to expand upon our previous findings about Chinese luxury shoppers by undertaking another in-depth study of this market, which McKinsey has been following closely for the past half-decade. Our research is based on face-to-face interviews with over 1,000 luxury shoppers in 14 cities, as well as extensive data analysis and conversations with industry insiders.
Despite the cooling in the growth rate of Chinese luxury spending, a number of factors will ensure that demand remains relatively robust. These include the rising number of very wealthy consumers, who have a marked tendency to trade up to more expensive and more luxurious products. At the same time, new entrants into the luxury category – those just attaining middle-class status – are increasing at an explosive rate as incomes head upward. Moreover, levels of financial confidence in China are astonishingly high; three quarters of the country’s affluent consumers believe their household incomes will increase significantly in the next five years. The rising purchasing power of women is yet another growth driver. And gifting by individuals shows every sign of staying strong or even increasing, while the decline in corporate gifting may well prove a temporary phenomenon related to the transition of the nation’s leadership. Despite all the forces fostering growth and increasing sales, this market is also changing fast, in ways that make it harder and more expensive for luxury brands to win over the nation’s consumers.
A rapidly-growing share of Chinese luxury shoppers are doing their purchasing abroad – and although Hong Kong and Macau rank among their favored shopping destinations, Europe is also rising quickly in popularity. Increasing foreign travel by Chinese is one important reason for this trend; so is the fact that luxury goods are not nearly as expensive overseas as they are in the Mainland, where the government imposes stiff taxes on such goods. About half of Chinese luxury spending currently takes place abroad, our research indicates. This phenomenon raises the danger that a brand may lose consumers’ trust if its stores or products fail to present a consistent image both in China and elsewhere in the world.
Furthermore, Chinese consumers’ tastes in luxury products are maturing with surprising speed. Shoppers with just a few years’ experience as buyers of such products increasingly prefer low-key and understated goods to ones that are emblazoned with popular logos. Yet the market is splintering, because the fastgrowing numbers of new entrants still favor widely-recognizable brands that show off their status. As tempting as it may be for firms to try satisfying all kinds of consumers, doing so risks diluting their brands’ cachet.
Finally, the in-store experience is proving increasingly important in this market as the key touch point for consumers making decisions about buying luxury. Respondents to our survey heavily attributed their choices to a variety of aspects concerning the experiences they had in luxury boutiques. A rapidly-growing number of them reported buying on impulse, or after only brief consideration, highlighting the cruciality of the in-store factor. For ultra-wealthy consumers, providing a VIP shopping experience, with private rooms and dedicated salespeople, is essential, as is establishing effective customer relationship management programs. As for online commerce, which is exploding for many consumer products in China, the amount in the luxury sector is still small, but experimentation is taking place and this channel cannot be ignored.