Download Luxury goods, in general has experienced slow

Luxury Goods in China
EXECUTIVE SUMMARY
Recovery for Luxury Goods Is Seen in 2014
Luxury goods, in general has experienced slow growth in 2013. This is largely due to the government’s
anti-corruption policy on gifts. However, growth has seemed to rebound in 2014 given the fact that
leading players in luxury have emphasized on increasing and developing personal consumption.
Sluggish Economic Growth Leads to Conservative Expansion Plans
2014 has been another year when China experienced slower GDP growth. Consumers’ willingness to
purchase luxury goods was dampened due to uncertainty regarding the economy. Due to slower
growth in luxury goods sales compared to previous years, many luxury goods brands adopted more
conservative outlet expansion plans, with fewer new stores being opened in 2014.
Big Luxury Players Actively Promote Their Brands among Heightened Competition
China has long been considered as the market with the greatest potential for luxury goods sales. Many
leading players are focusing on the country as many brands are being launched. This has led to
intensified competition, especially in last year (2014), when players were competing for more sales in
the context of an unfavourable economic situation. Given this kind of competition, luxury goods
players used a variety of ways to promote their brands, including customised services, direct local
operation and more advertising, in order to maintain and consolidate their competitive position in
China.
Specialist Retailers Continue To Dominate but Lose Share to Internet Retailers
Non-grocery specialists continue to have a dominant position in terms of luxury goods sales.
Consumers trust these outlets and appreciate the customer service they provide as well. However,
most luxury goods players slowed down their outlet expansion due to the bearish economy and rising
operational costs. To add to these factors, increasingly hectic lifestyles have made people more willing
to purchase in convenient ways. As a result, internet retailing (including the phenomenon of
“Showrooming”) has become a more popular purchasing channel. Only a limited number of luxury
goods players have set up their own online sales platforms, but there has been a boom in third-party
internet retailers, such as JD Jumei, which sell a wide range of luxury goods online.
Sales of Luxury Goods Expected To Maintain a Healthy Growth
Healthy growth is expected for overall luxury goods sales over the forecast period. The strong desire
of Chinese consumers to own/buy luxury goods will contribute to the continued growth. However, a
lower CAGR (Compound annual growth rate) is expected in the forecast period compared to the
review period. Sluggish economic growth, gradual maturity in tier-one cities and increased purchasing
abroad will be major factors causing the slowdown in growth.
KEY TRENDS AND DEVELOPMENTS
Economic Slowdown and Anti-corruption Policy Have A Negative Impact on Luxury Goods
The overall economy situation and government policy continued to hamper luxury goods
development in 2014. Real GDP growth in 2014 was 7.3%, which was slightly slower than in the
previous year, at 7.7%. The significant economic slowdown in the latter part of the review period
dampened consumers’ confidence, which affected the consumption of luxury goods. Anti-corruption
policies, which started in late 2012 and strongly affected luxury goods in 2013, continued to have a
negative impact in 2014. The central government of China not only prohibits purchasing luxury goods
with public funds but has also investigated government officers who own luxury goods. The giving of
luxury goods to both government officers and businessmen, effectively as bribes, has been clamped
down on, which has significantly affected luxury goods sales, as this type of giving used to form a big
part of luxury goods sales in China. Product categories such as luxury timepieces, fine still light grape
wine and luxury cognac were most severely impacted, as these products were widely used as gifts or
consumed during banquets using public funds. Consumer purchasing behaviour saw some changes in
2014. While absolute luxury products are still desired as status symbols, there has been a growing
preference for affordable luxury brands like Coach, as well as designer brands like Michael Kors, which
are priced lower than brands like Hermès and Chanel. Catering to this demand, affordable luxury
players speeded up outlet expansion in 2014. For example, Coach operated 151 luxury bags and
luggage specialist stores in 2014, 35 stores more than in the previous year. More designer brands were
introduced to China, along with more promotions.
Outlook
The Chinese economy is not expected to see a major rebound during the forecast period. Real GDP
growth is forecast to be only 6.2% in 2019, which is one percentage point lower than in 2014. However,
the number of upper class consumers will continue to increase, due to a polarisation trend in personal
incomes. The population with an annual income of over US$150,000 is expected to grow by a CAGR
of 16% over 2014-2019, reaching 7 million. The overall economic situation will still have a negative
impact on luxury goods sales, but strong demand from the rising number of upper class and middle
class consumers will support the further development of luxury goods in China. The anti-corruption
policy is expected to continue, with interest in the issue not just from the government but also from
the public, influenced by social media like Weibo, which will continue to restrain sales of gifts.
However, the effect of the anti-corruption policy is expected to weaken as manufacturers redirect
their attention to target personal consumption. Responding to these macro factors, luxury goods
players are expected to broaden their product lines to cater to the polarised demand. For absolute
luxury brands, accessible sub-brands are expected to be developed to target middle class consumers,
while maintaining a super-premium brand image. Affordable luxury brands are expected to increase
their exposure to consumers by means of expanding stores into lower tier cities, as well as offering
attractive promotions. On the other hand, due to the overall economic slowdown, most luxury goods
operators will adopt fairly conservative plans in terms of outlet expansion.
Female Consumers Emerge and Drive Luxury Goods Sales
The increasing power of women, due to better education, as well as rising equality between men and
women in Chinese society is making women a more important group for luxury goods consumption.
According to trade sources, college admission rates for women have surpassed those for men for four
years, which is likely to increase the proportion of women who have high incomes. In addition, men’s
luxury consumption has tended to rely more heavily on gift sales, because most government officers
who receive gifts are men. The anti-corruption policy has significantly restrained gift sales, which has
had a stronger influence on sales of men’s luxury goods than on women’s. As a result, women’s luxury
goods, such as women’s designer apparel, women’s luxury jewellery and timepieces, and women’s
luxury bags, outperformed the equivalent men’s categories in terms of value growth in 2014.
Outlook
Women will continue to become more important for luxury goods consumption. Women themselves
will be more able to afford luxury goods, while parents are also becoming more willing to spend on
purchasing luxury goods for their daughters. The purchasing group for luxury goods will increasingly
extend to include young women in their 20s. Also, it will be more common for boyfriends and husband
to purchase a luxury bag or jewellery as a gift for their girlfriend or wife for occasions such as
Valentine’s Day, birthdays and wedding anniversaries. Due to higher demand from women, more
women’s products are expected to be launched. Even the brands that used to focus mostly on men’s
products, such as Mont Blanc, will launch more women’s series. Conversely, some product categories
which used to be solely consumed by women, such as skin care and colour cosmetics, will see growing
demand from men.
Various Strategies Being Used To Cope With Intensified Competition
Due to the booming of the Chinese economy in recent years, more and more luxury goods players
have their eyes on the Chinese market. Strong expansion in outlet numbers has been seen, along with
a significant rise in the number of luxury brands available. Consumers are also becoming more
sophisticated in terms of choosing luxury products, going beyond the best known brands such as Louis
Vuitton and Chanel. In addition, the economic slowdown and anticorruption policy in 2014 restrained
overall luxury goods sales. As a result, competition in the luxury goods industry has intensified. To
stand out among the intensified competition, luxury goods players have pursued several strategies to
attract consumption. Customised services are increasingly provided to Chinese customers to make
them feel special. For example, Salvatore Ferragamo provides customised service on for its footwear
that enables consumers to choose their favourite colours to be used on their shoes. Also, product
design is catering more towards local consumers’ preferences. For example, major players are using
less obvious logos design to meet consumers’ preference for less obviously ostentatious products.
There are more new items with small logos, such as “Made in Italy by Gucci”, instead of the more
obvious double G logo. In order to gain more control over their business in China, more luxury brands
owners have ceased cooperating with local distributors in order to operate directly themselves. For
example, Burberry, Mont Blanc and Ralph Lauren have changed to direct operation in China, while
another major player, Hugo Boss, announced that it was to purchase back the 40% stake in its
partnership with its licensed retailer Rainbow Group in 2014. After the acquisition, Hugo Boss will be
directly in charge of its business in Greater China, where the company plans to focus its attention.
Outlook
The competition in the Chinese luxury goods industry is expected to become more intense in the
upcoming years, due to more companies’ putting an emphasis on China. Although growth in the
Chinese economy is likely to slow, it will still outperform most Western countries, and will thus offer
great potential for further growth in luxury goods sales. In addition, Chinese consumers will be
increasingly interested in luxury brands. With the price of mass brands increasing, people will prefer
to pay a little more to purchase an affordable luxury brand instead of a mass brand. As a result, luxury
goods players will continue to make efforts to attract local consumers. To make it easier for people
from lower tier cities to access their brands, luxury goods players will extend their distribution
channels beyond the first tier cities. The new stores opened in 2014 were mostly located in mid and
west China. For example, in 2014, Giorgio Armani opened a new store in Changsha, while Fendi, Chanel
and Louis Vuitton opened new stores in Chengdu. Other strategies, such as increased advertising,
fashion shows held in China and one-to-one service are expected to be used to attract local
consumers.
Social Media Is Growing Significantly for Luxury Brand Promotion and Sales
In line with the popularisation of the internet and smartphones, social media is increasingly being
relied on as a daily communication tool, as well as a platform to express personal views. While foreign
social media, such as YouTube and Twitter, are prohibited in mainland China, local social media,
including Sina Weibo and WeChat, are popular not just among young people but have also extended
their use to middle-aged and older consumers. There were reportedly 500 million users of Sina Weibo
by the end of 2013. According to Tencent, by June 2014, the number of active users of WeChat had
reached 438 million. Thus, around one third of Chinese people are using Weibo and WeChat. With
such a large number of users, luxury goods players also have their eyes on these media as an important
tool to promote their brands. Many luxury brands, such as Louis Vuitton, Chanel and Hermès, have
official Weibo accounts, with millions of followers. Information such as brand history, new launches,
advertisements, videos of fashion shows and celebrities’ recommendations are posted on Weibo to
promote luxury brands. Besides promoting brands, social media is used to provide one-to-one service
and even directly sell products. Many luxury goods companies have a personal WeChat account in
order to connect with their customers by sending information about new items and promotions. If the
customer is interested in the products, they can pay for them directly via WeChat and the products
will be delivered to them.
Outlook
Social media will be increasingly important in the future. Due to increased urbanisation, more people
will spend longer commuting. People often use this time to browse the internet using a smartphone.
Hence, more luxury goods players will develop their own apps to post brand information and even sell
products through these apps. As well as communication via social media, video sharing sites such as
iQiyi and Youku will be used to play advertisements in order to attract young and middle-aged
consumers, who will spend more time watching videos through these sites instead of on TV.
Distribution
Table 1: Selected Luxury Shopping Centres 2014
Store
Shin Kong Place
IFC
Plaza 66
Golden Eagle
Lane Crawford
City Location
Beijing
Shanghai, Chengdu
Shanghai, Shenyang, Jinan, Wuxi and Tianjin
Shanghai, Nanjing, Yangzhou, Xuzhou, Nantong, Taizhou, Huai’an,
Yancheng, Changzhou, Suqian, Kunming, Xi’an, Hefei and Huaibei
Beijing, Shanghai and Chengdu
Sources
Official Sources
1) Customs General Administration, People's Republic of China
2) National Statistics Bureau
3) State Tobacco Monopoly Administration (STMA)
Trade Associations
1)
2)
3)
4)
5)
6)
7)
8)
Bureau National Interprofessionnel du Cognac (BNIC)
Cámara Nacional de la Industria Tequilera
China Alcoholic Drinks Industry Association
China Association of Fragrance, Flavour & Cosmetic Industry (CAFFCI)
China Horologe Association
China Luxury Institute
Cigarium
Comité Colbert
Number of Outlets
1
2
7
26
4
9)
10)
11)
12)
13)
14)
15)
16)
17)
18)
19)
20)
21)
22)
Comité Interprofessionnel du Vin de Champagne (CIVC)
Consejo Regulador de las Denominaciones de Origen Jerez
Consorzio per la Tutela del Vino Marsala DOC
Distilled Spirits Council of the United States
Gin & Vodka Association
Guangdong Cosmetics Association
Instituto do Vinho Bordado e do Artesanato da Medeira
Instituto dos Vinhos do Douro e Porto
International Apparel Federation
International Tobacco Growers' Association
Office International de la Vigne et du Vin
Scotch Whisky Association
The Altagamma Foundation (La Fondazione Altagamma)
The Cosmetic, Toiletries & Fragrance Association of Singapore
Trade Press
1)
2)
3)
4)
5)
6)
7)
8)
9)
10)
11)
12)
13)
14)
15)
16)
17)
18)
19)
20)
21)
22)
23)
24)
25)
26)
Beauty Business News
Beauty-on-line
BeverAsia
China Cosmetics Review
China Daily Chemical Products
China Daily Cosmetics Info
China Enterprise News
China Industry News
China Tobacco Corp
China Tobacco Market
China Wine News
Cigar Ambassador
Cosmade.com
Cosmetic News Weekly
Cosmetics International
Cosmetics Newspaper
Cosmetique News
Drapers
Drinks International
Financial Times Luxury Business
Forbes
GCI Magazine
Happi China
Intelligent Life
Just-style
Xinhua News