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SHANGHAI — “Consumers in China are just like anywhere else in the world. They have the same aspirations and, increasingly, the same tastes,” remarked Edoardo Tocco, China general manager of Diesel, in a new report on the luxury industry by market consultancy KPMG China.
Tocco is one of nine profiles in the report, which mixes survey data and tax law developments with individual insights. In Diesel’s case, its the challenge of selling high-end casualwear and appealing to fashion-forward Generation Y trendsetters in a luxury market dependent upon older customers with more conservative tastes.
“The advertising market here is very cluttered, but in some respects it is starting to become more defined. We have tended to work with international fashion and lifestyle magazines. However, we are now expanding into a number of purely local magazines and newspapers as well,” said Tocco.
The 40-page report “China’s Luxury Consumers: Moving Up the Curve,” found that, “China’s consumers are bombarded by brands like never before. In such a crowded market, local experience and a demonstrable track record can be the keys to success.”
The report suggests China’s luxury market has become more mature and sophisticated, but also more saturated and segmented. Competition — for customers, retail space and staff — has become more intense as ever more brands pile into the market. Although many luxury brands see China with its huge population and rising incomes as the new El Dorado, only a few are striking gold here.
The absolute purchasing power of China’s so-called middle class, defined as those earning over 3,500 yuan, or $509 at current exchange, a month in second-tier cities and over 5,000 yuan, or $727, in the first-tier cities, is limited, and purchasing on credit remains rare. Even those defined as upper-middle class with monthly incomes over 8,000 yuan, or $1,164, earn far less than their equivalents in North America, Europe, Japan or Hong Kong. The report cites figures from China’s National Bureau of Statistics that in 2007, retail sales in the country topped 8.9 trillion yuan ($975 billion), up 17 percent from 2006 and doubled from 2001; urban per capita income rose 18 percent to 13,876 yuan, or $2,019, while spending went up 14.7 percent to 12,667 yuan, or $1,843.
KPMG found middle-class consumers continue to exhibit enthusiasm and aspiration for foreign luxury brands, primarily driven still by the desire for status and prestige over fashion trends. While statistics in China are infamously unreliable, with survey respondents often inflating both their earnings and their spending out of a desire for image and “face,” the survey analysis and the accompanying profiles of industry insiders presents as accurate a snapshot as any of China’s luxury brand marketplace.
Much of the information in the report derives from a survey of 902 middle-class consumers ages 20 to 44 in 15 Chinese cities in early 2008. These cities represent a total adult population of 60 million people, of which 30 percent are middle class and above. In addition to the tier-one coastal cities of Shanghai, Beijing, Guangzhou and Shenzhen, the study also surveyed consumers from the second-tier cities of Xi’an, Tianjin, Shenyang, Harbin, Chengdu, Dalian, Chongqing, Wuhan, Hangzhou, Fuzhou and Nanjing. China has 656 cities and over 40,000 towns, with incomes and consumer cultures varying widely.
“Status is still the primary motivation for consumers across China, but there are interesting differences in tastes,” observed Giovanni Di Salvo of StraBranding in a profile. “My experience has been that consumers in Beijing are particularly interested in understanding what is behind a brand, its history and heritage. So in Beijing a brand archive exhibition might be the most effective channel to promote a luxury brand, whereas in Shanghai a glamorous event, such as a fashion show or a party, might work better.”
Luxury consumers in the second-tier cities looked more to Shanghai to find out what is trendy, the report found, but according to Denise Lo of Chanel Hong Kong in another profile, Beijing is “where the money is,” although tastes are more conservative there compared with Shanghai and “people are less inclined to stand out for all sorts of reasons.”
Also profiled in the report were Stan Lee, vice president of Xinyu Hengdeli Group, a Hong Kong company that distributes watches for LVMH Moët Hennessy Louis Vuitton, Compagnie Financière Richemont and Swatch in China, and Nelson Chan of Dickson Concepts, which operates Seibu Department Stores and franchises brands including Tommy Hilfiger, Ralph Lauren, Tod’s and Rolex. Chan predicted China’s potential market for imported luxury goods could reach 200 million to 300 million people, with 100 million in the high end. The other profiles were of executives from Swarovski, B&W Group and Ports.
KPMG conducted a similar luxury survey in 2006, and this year’s report used the preceding one as a barometer of changing attitudes. For example, the 2008 study found that in general 49 percent of respondents had aspirational attitudes toward luxury brands, answering that they desired such products but were unable to afford them; the percentage climbed to 62 percent for respondents aged 20 to 24. These numbers were respectively 54 percent and 58 percent in 2006. Credit spending remained minimal: 29 percent had no credit cards, and only 19 percent had three or more cards. Five percent or less were willing to use credit to buy clothing, bags, footwear or cosmetics or perfume, but 25 percent would use credit to purchase watches and 21 percent for jewelry, reflecting how those categories are considered investments in China.
Brand awareness is definitely on the rise — respondents recognized an average of 63.9 luxury brands, compared with 51.7 two years ago; recognition was highest in Shanghai and Beijing (73.3 and 70.5 percent, respectively) and for imported cars with 65 percent brand recognition. However, consumers’ motivation remains most strongly that of social status, and what the report called the “bling” factor of wanting to show off factored far ahead of personal indulgence, connoisseurship and trendsetting. Sixty percent of respondents were willing to pay a premium for prestigious and famous brands, with the percentage climbing to 66 percent in the second tier. Fashion and trendsetting were motives for over 60 percent only in Shanghai and Beijing, and in the age groups of 20 to 24 and 40 to 44. Celebrity endorsements influenced 13 percent of respondents in Guangzhou and 23 percent in Shanghai; in the other cities 10 percent or below were swayed by celebrities. The study found 19 percent of total respondents were willing to pay a premium for North American brands, compared with 32 percent for European brands; the preference for European brands was 46 percent in Shanghai.
One of the more substantial factors that customers were willing to pay more for was customer service and store environment. In general, 59 percent of men and 67 percent of women expressed their willingness to pay a premium for a positive retail experience and better service, and those figures increased to 74 percent for respondents earning over 8,000 yuan, or $1,164, a month. While an opportunity for brands, it also presents an obstacle as both quality retail space and staff are hard to come by in China, and in ever tighter demand as more and more brands compete for limited supply.
Chinese luxury consumers are also a growing force to be reckoned with internationally, as liberalizing visa rules and the appreciating yuan make it easier for them to travel overseas. In 2006, there were 34.5 million outbound international journeys from China. Of those KPMG surveyed this year, 33 percent went overseas at least once a year, with 40 percent of those from Shanghai and 64 percent from Guangzhou traveling abroad. Those with incomes over 8,000 yuan, or $1,164, a month averaged 2.3 international trips a year.