As the world’s fast- est growing luxury market, China’s appetite for luxury goods is fast becoming insatiable. China will account for over 20% of the global luxury market, overtaking Japan as the world’s largest luxury market, according to McKinsey’s latest report“Understanding China’s Love for Luxury”.
Sensing the ample op- portunities in China, foreign luxury brands are making every eff ort to tap the booming market.
China luxury market: an oasis of hope
McKinsey’s report says that, while many other markets are fl at or shrinking, luxury goods are booming in China. Even in the teeth of the global recession in 2009, luxury goods saw 16% sales growth, a moderate slide from the 20% level of the previous few years, but still far better than many major luxury markets. Sales in that year hit RMB 64 billion (about US$10 billion). Robust economic growth rekindled the market in 2010, and the market is on track to reach 180 billion in 2015 (US$27 billion at fi xed exchange rate).
Sales of luxury goods in China are exploding, despite a hefty tax on importing them. A new report by CLSA, a broker, forecasts that overall consumption in China (including boring everyday items) will rise by 11% annually over the next fi ve years.
A new report by T e Boston Consulting Group (BCG), titled China’s Luxury Market in a Post-Land-Rush Era, shares the same view. It says China has suff ered far less than other countries in the global downturn, and its luxury market off ers tremendous opportunities in a recession-battered world. Although Chinese consumers may continue to be somewhat cautious in their spending, they still aspire to luxury brands.
McKinsey’s report is based on the survey over 1,500 luxury consumers in 17 Chinese cities in spring 2010, and cites its 2009 wealthy consumer and urbanization models spanning 800 cities. T e research paints a picture of a rapidly-growing pool of increasingly sophisticated and discerning consumers of luxury goods in China, and highlights the three following key fi ndings:
First, rapid increases in Chinese luxury consumers’ wealth, and shifting social mores that


sanction the display of that wealth, are driving a growing infatuation for luxury goods in China.
Second, luxury 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. 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.
And third, rapid urbanization and growing wealth outside China’s largest cities is driving the emergence of several new geographic markets with sizeable pools of luxury-goods consumers. Over the next fi ve years, it is estimated that the number of such cities will double from 30 to 60.
Gao Boxuan, a senior researcher with CIC Industry Research Center, attributes the soaring luxury in China to the following reasons: One point is about consumer characteristics. T e consumption of luxury goods in China has three features:
First, some consumption is associated with culture elements. Some consumers regard luxury goods as a kind of status symbol and attach importance to their meaning in the public. T is stable group, well-off in the society, has strong demands for luxury goods.
Second, some consumption is based on individual value orientation. Some consumers tend to raise their recognition in the society by purchasing luxury goods, which they tend to show off .
T ird, some consumers buy luxury products for personal indulgence, and the number of this group is growing rapidly, rising from a quarter in 2008 to 36% in 2010.
The above features together contribute to the great demand in the Chinese luxury market. On the other hand, foreign luxury brands are taking advantage of their brand marketing. With the increase of their investment in China, and their entry into the second-tier cities, the brands, to some extent, boost domestic need of luxury goods.
Source of the growth
Chinese consumers are becoming more comfortable with treating themselves to luxury goods. T ese new luxury consumers, of which a growing number are residents of lower-tier cities, are reshaping the luxury landscape in China, according to McKinsey.
Among China’s wealthy households, those with annual incomes between RMB 300,000 and 1 million (US$ 45,000 – 150,000) comprise a reliable base of customers that is growing at 15 percent a year. By 2015, 5.6 million households will fall under this income category.
The research indicates that the ranks of the very wealthy – those with household income of more than RMB 1 million (who typically own assets greater than RMB 10 million)– are growing even faster, at about 20 percent a year, reaching 1 million households by 2015. T is group will drive 38% of the growth in the luxury market over the next fi ve years.
China’s love for luxury is rapidly trickling down to broader swathes of consumers, even those who by traditional standards would not be considered viable target consumers of luxury goods. T is is creating new opportunities as well as challenges for luxury goods marketers accustomed to serving only the very wealthy.
A phenomenon that deserves attention is that China’s 13 million upper-middle-class households (with incomes between RMB 100,000 and 200,000, the equivalent of US$15,000 to $30,000) are stretching their budgets to purchase luxury watches, jewelry, handbags, shoes, and clothing –goods that until very recently were the exclusive domain of the wealthy.
Moreover, apart from their counterparts in other markets, one of the most striking characteristics that set luxury consumers in China is their youth: 73% of luxury consumers are under 45, compared to just over a half in the U.S. As many as 45% of China’s luxury consumers are under 35, compared to 28% in Western Europe.
Besides, the research stressed that Chinese consumers have rapidly become more brand conscious and increasingly sensitive about the relationship between quality and price.“If in the past, a steep price automatically signaled quality, fewer luxury consumers make that assumption today as they get better at assessing what luxury goods are worth,” the researchers wrote.
In addition, they are looking for price transparency, using the internet to source additional information and to do price comparisons, and they have become more insistent about the authenticity of the product, thus raising their appreciation for well-known brands. Half of the consumers who accepted the survey in 2010 could name more than three ready-to-wear brands, compared to only 23% in 2008.

Foreign brands aim at Chinese market
Nowadays, the world’s priciest and most prestigious luxury brands are scrambling to erect massive retail shrines in urban China’s toniest shopping districts.
At present, Shanghai and Beijing have as many luxury point-of-sale locations per capita as both New York and Chicago. Plus, the two Chinese cities have a slightly higher concentration of luxury watch outlets than other major city in the world.
As China’s wealth has spread from the largest coastal cities to smaller inland cities, luxury stores have followed in a land rush for space. More than half of all sales outlets for luxury goods in China have opened in just the past three years.
On the other hand, the Japan earthquake is likely to have far-reaching consequences on consumer spending in Japan, which is a main source of consumers of luxury goods in the world. T is may lead to foreign luxury goods companies concentrating on the Chinese market, so as to minimize the impact of the catastrophe on their businesses.
T e research shows that Louis Vuitton, a maker of surprisingly expensive handbags, now has 36 stores in 29 cities across mainland China, compared to stores in just 10 cities in 2005. It is said that China is already the largest market for Louis Vuitton, accounting for 15% of its global sales.
Gucci has expanded even faster, starting with just six stores in the beginning of 2006, ramping up to 39 stores today. Hermès quadrupled its stores from fi ve in 2005 to 20 today.
According to Financial Times, Burberry is reaping
record sales in China after buying out its local franchise partner last year. The retailer revealed recently a 30 percent sales increase in China in the second half of its financial year to March 31. Burberry has opened 10 new Chinese stores in the current year, with a medium-term target of 100 stores.
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, it is estimated that the number of such cities will double from 30 to 60.
While China’s largest cities, especially Beijing and Shanghai, will continue to remain centers of gravity, the market is likely to grow at a faster pace in smaller cities like Taiyuan, Changchun and Yantai.
More small cities will become large enough to justify a luxury footprint. It is expected that luxury consumption in cities such as Qingdao and Wuxi to triple over the next 5 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 RMB 500 million (US$76 million) in more than 60 cities, compared to just 30 today, the research predicts.
However, the research points out that, even with the proliferation of luxury stores in recent years, China is far from reaching saturation. Even with 20 stores, Hermès’ footprint in China still falls well short of its 45-store presence in Japan. Similarly, Chanel’s 50 stores in Japan far outstrip their 8 outlets in China.
Luxury goods made for China
To meet the increasing needs in China, where luxurygoods business is booming, luxury fi rms are making products


tailored especially to the Chinese consumers, who are becoming more discriminating than ever.
According to Newsweek, the French luxury giant Hermès, opened a boutique in Shanghai last year for its new Chinese brand, Shang Xai. T ere are Ming-style chairs, eggshell porcelain bowls and jewelry inspired by unusual Chinese collectible baubles, such as teapots. T e materials used — zitan wood, lacquer, and Mongolian cashmere — are luxurious, and local. Packed with customers since opening, the boutique has generated huge buzz.
Similarly, other fi rms have recently launched products custom-made for the Chinese. BMW introduced a Chinaonly limited version of its muscly M3, called the Tiger, which is named for the 2010 Chinese New Year and features fi ery orange-and-black coloring.
These firms’ actions have take effect. Foreign luxury brands are becoming more and more attractive for Chinese consumers, who have growing demand luxury goods. T ey believe in foreign brands’ high quality and view owing foreign branded products as a symbol of social status and good taste, said Gao Boxuan.
“Now the products in our store have been enriched, due to more and more consumers coming,” said Ms. Chen, a salesperson with Dior at Financial Street Shopping Center in Beijing.
A middle-aged man was choosing leather shoes at Salvatove Ferragamo when the reporter met him. “T e shoes fi t me well and is quite good-looking,” said him. While, he told the reporter he had no favorite for certain brand. As long as the goods fi t him, he will consider them.
A young lady, on the contrary, said her favorite brands are Salvatove Ferragamo and Gucci.
Challenges for foreign brands
Foreign luxury brands enjoy great advantages in China. Gao Boxuan points out that, the main competitive edges of foreign brands are: abundant capital, clear product positioning, eff ective marketing strategies and channels, and reliable product quality.
However, these brands still have room for improvement. Some brands are not doing enough in market analysis, product design and especially, after-sales service. Due to diff erent consumption habits resulted from culture disparities, some brands do not pay enough attention to after-sales service, such as lack of on-line consulting service, long time spent on service, and complicated process, he added.
T ere’s enormous potential in China, but marketers still face stiff challenges. Although luxury consumers are relative newbies, they are becoming more discerning and demanding, and marketers will have to change in order to appeal to a more confi dent and sophisticated Chinese consumers.
According to Max Magni, the head of McKinsey’s consumer practice in Greater China, there are some points for attention based on its recent survey:
First, quality counts. Better quality is the reason to buy luxury goods, said 50% of the consumers during the survey— up from 36% in 2008. Quality and craftsmanship are the top two considerations when making purchase decisions about ready-to-wear clothing, leather goods, jewelry, and watches. Smart companies have already realized this.
Second, subtlety is chic. A growing number of buyers are shunning overt displays of wealth in favor of subtle ones. Contrary to popular impression, more than half of China’s luxury shoppers say they want less showy fashion — up from 32% in 2008.
Third, service matters. The importance of service has shot up from 17% in 2008 to 30% in 2010. Two out of three consumers said they were disappointed with the indiff erent attitudes and poor service of salespeople in China. In addition to training staff to be more courteous and patient, luxury marketers should re-examine how they defi ne roles and compensation.
For example, Louis Vuitton doesn’t tie the compensation of in-store specialists to sales, thereby ensuring that they concentrate on their task of communicating the brand’s heritage to shoppers.
Even so, in the future, it is generally believed that foreign luxury brands will dominate China’s market for a long time, posing great threat to domestic brands. How to shape brands, expand consumption market and raise competitiveness remain great problems for domestic brands, if they are willing to catch up with foreign brands.