China is on the verge of overtaking Japan as the world’s largest consumer of luxury goods, spending $13 billion, or 22 percent of the world total, in 2010.
Sales there are soaring 20 percent a year, and luxury retailers are rushing to open stores. Dolce and Gabbana announced it was going to open 15 boutiques in China over the next two years. Ralph Lauren has similar expansion plans.
Luxury retailers are targeting China's 115 billionaires and nearly 1 million millionaires. Will they succeed?
A lot is riding on China for luxury retailers. As Chinese spend more on luxury goods, demand in Japan, for now the world’s largest luxury market, is scaling back. The jeweler Tiffany & Co. announced that Japan's nuclear disaster might hit revenue there by 15 percent this quarter. Some analysts estimate Japanese luxury sales will drop 30 percent over this period as consumers re-prioritize spending.
Even before the tragedy, younger Japanese seldom bought luxury products with the same fervor as their parents. Why? They lack optimism and deflation makes consumers look for cheaper products. They have been going to mid-rung brands like Uniqlo and also dollar stores. In fact Versace announced two years ago that it was shutting its Japanese outlets to focus on China.
But rising sales figures from China only tell a part of the story. There are many luxury retailers who still don’t understand who their target group is and offer the wrong products. The reality is China's truly rich rarely buy luxury goods on the mainland.
In interviews I conducted with a dozen billionaires, the majority reported 90 percent of their luxury purchases are made when traveling abroad. They buy in China on impulse, for children and for gifting. Why?
One, there’s more prestige in buying a Bulgari bag in Milan than in Beijing. Two, prices are also 30 percent cheaper abroad because of taxes and tariffs. Even billionaires don't want to waste money.
Only 40 percent of the $13 billion worth of luxury items sold to the Chinese last year were transacted in the country. That explains why Chinese tourists in France are now the highest per capita spenders there.
Thirty percent of several hundred women between the ages of 26-32, making more than $1,000 a month, in four cities told my firm they expected to travel abroad once over the next year, with luxury shopping their main reason for the trip.
Savvy brands like Omega and Cartier have planned to increase points of sale in Hong Kong. Brands should hire Mandarin-speaking salespeople, even in New York. Creating strategies to sell to Chinese tourists is critical for products like jewelry that can be easily worn or packed into luggage.
To spur consumption, the government is establishing duty-free shopping on Hainan Island and looking to reduce tariffs. Until that happens, billionaires and consumers who travel abroad are not buying in China. Who are? The aspiring class – often younger people under the age of 30 who cannot afford to travel abroad and who still live at home rent-free, or those who live in second and third tier cities where it is hard to get visas to go abroad.
It is common for 25-year-old secretaries making $600 a month to save two months’ salary to buy $2,000 Gucci bags or drop $200 on a La Mer facial cream. Wealthy mining tycoons in fourth tier towns often cannot get visas, so they buy in China.
Many luxury brands are likely to fail in China as they only stock products that the elite buy when they should also be offering entry-level products for the younger, aspiring class.
For instance, pearl jeweler Mikimoto only sells high-priced items and has failed to gain traction. Popular luxury brands like Gucci and Louis Vuitton have done so well because they sell products fit for billionaires as well as key chains and trinkets together with big pieces depending on the market they are in. They slowly upgrade their products in keeping with the rise in their customers’ incomes.
The speed of wealth creation in China has been staggering. A decade ago, $6 million in net assets was needed to rank among the 100 richest. Last year? The bottom line was $120 million. Many of China's aspiring class see themselves on way to becoming truly wealthy. They scrimp and save to buy luxury items like handbags, which they often use to project an image of success.
As consumers in Japan and in Western countries hold back on high-ticket purchases, the Chinese have become the great hope for luxury retailers. However, brands wanting to tap into this swelling demand need to understand that their customers are not just the super rich and adjust their product mix, regional roll-outs and marketing accordingly.
Shaun Rein is the founder and managing director of the China Market Research Group (www.cmrconsulting.com.cn) a strategic market intelligence firm, and is based in Shanghai. Follow him on Twitter at @shaunrein.