China already holds second place in the world’s luxury-goods market. According to 2011 statistics from the World Luxury Association, sales of luxury goods in China stood at US$12.6 billion, second to Japan (which posted luxury sales of about US$14.5 billion). In 2011, growth in luxury goods sales in China rose to 18%, the strongest in the world. Based on these figures, many associations and research organizations estimate that China will overtake Japan to become the largest market for luxury-goods sales before 2015.
Raised consumer awareness and purchasing power
Luxury goods are products that are not daily necessities and are usually consumed by the high-income bracket. The main characteristics of luxury goods are: high cost; brands with a long history; and the embodying of a fashion statement.
With the rapid development of China’s economy over the past 20 years, incomes have seen a several-fold increase for many Chinese, and their purchasing power, particularly in urban areas and coastal regions, has increased dramatically. This can be seen in China’s falling Engel’s Coefficient, which demonstrates that the proportion of income spent on food (a basic need) decreases as income goes up, suggesting a higher standard of living. Over the past decade, the Engel’s Coefficient for urban areas of China has been below 40%, with 30% to 40% being categorized as a “well-to-do” standard of living by the UN Food and Agriculture Organization—in other words a ‘‘middle-class’’ level of income.
Many luxury brands are now allocating more and more resources to the China market. Luxury-goods marketers spend huge sums of money on branding activities in major cities in China, including billboards, hiring Chinese celebrities as spokespeople, and glamorous events and shows, all of which lead to an even higher level of awareness of luxury-goods brands among the Chinese.
Raising the noise level and making branded items more provoking has involved the transformation of the sales mode from single-channel to multiple formats and channels. Meanwhile, the specialty store has become the major distribution and brand-building channel for luxury goods in China. Many luxury brands have opened their own specialty stores, not only in key cities such as Beijing and Shanghai, but also in many second-tier and third-tier cities where income levels have risen rapidly.
In addition to the bricks-and-mortar stores, Chinese consumers may now simply buy luxury goods in high-end department stores, flagship stores, and stand-alone outlets, as well as through online retailing. They can also obtain a huge amount of information on trends, new releases, prices, and consumer comments from the many relevant websites.
When money is no concern, and temptation is so easily accessible, it is hardly surprising that the luxury market is flourishing in China.
Local players: tapping in
The supercharged purchasing power of Chinese consumers offers many opportunities for local luxury players.
Many Chinese traditional products, such as tea, silk, Hotan Jade and Nanjing Brocade, have the potential to be transformed into global brands. Several domestic players have already been working at moving up the value ladder and hope to stake a claim in the luxury market in China. NE-TIGER Fur Fashion and Kweichow Moutai (maotai liquor) are two notable examples of this.
For other enterprises in China, what is the best way to launch their domestic luxury brands on the national stage? Domestic luxury players need to establish a targeted sales-and-branding strategy to promote their brands in the China market. Because of widely differing tastes in luxury goods in China, local enterprises need to operate a portfolio of brands to satisfy different consumer requirements in different areas.
During their marketing exercises, domestic luxury players can consider introducing cultural elements into a brand’s history and context, thus building greater awareness and brand loyalty among consumers. Local players’ edge over foreign brands lies in the fact that they are already inside the market, without the burden of the extra costs of market entry, and that they are familiar with the behavior and mindset of their target customers.
To increase market share and exposure, multiple sales formats and channels need to be established. Local luxury brands can open their specialty stores in prime locations and then expand to second-tier and third-tier cities. For the sales format, online retailing is a good choice due to its relatively low cost considerations and wide coverage. Many B2C online retailers have emerged in China in recent years, such as www.360buy.com, www.glamour-sales.com.cn, etc. They all have extensive experience in helping foreign brands enter local markets and can also act as good partners for local enterprises.
In past years, when foreign luxury brands first landed China, many of them chose to work with distributors or sourcing agents in China. China's domestic luxury players can learn from these successful cases, and can also enter other countries and regions by working with top global buyers. Several B2B platforms are available to help them link up with global buyers.
Support from the government is essential. Local players will have been pleased to see the founding of the China Luxury Trade Commission in May 2011, which is sponsored by the China Council for the Promotion of International Trade and the World Luxury Association. The China Luxury Trade Commission will implement policies relative to promoting domestic brands and assist them in enhancing their businesses.
Given the basic fundamentals of China’s domestic economy and continued growth in the number of “middle-class” households in both key and secondary cities, the future for luxury-goods sales looks optimistic as the Chinese consumer develops an increasingly sophisticated taste for upscale merchandise and earns even more money to pay for it.