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Balancing the Bling in China

A new study from McKinsey & Co. reveals that the country's emerging luxury consumers still want to show their wealth — but not so conspicuously.

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SHANGHAI — In a country where people are continually trying to show their status and their place in society, superrich Chinese are always looking for the next best thing to buy.

There is disagreement as to who, exactly, these Chinese are and what their level of brand sophistication might be: Is the most expensive label always the best? Do overt logos matter? Is understatement desirable? Is bling bad?

One thing is agreed on, though: The tastes of Mainland Chinese consumers are changing — and changing fast. A growing segment of very wealthy and increasingly fashion-savvy Chinese is shunning the notion of aggressively distributed, more accessible labels as it begins to temper its interest in overt bling. These consumers are developing discerning tastes and seek the finer things in life: art, expensive wine, exotic travel, understated elegance.

China’s new luxury market, which McKinsey & Co. estimates will number around 5.6 million households by 2015, is changing more rapidly than in the past, especially as the country’s more experienced and wealthier luxury consumers, who serve as points of reference for style, alter their tastes. “The bottom of the pyramid is [composed of] the new entrants,” said Mary Bergstrom, founder of the Bergstrom Group, a Shanghai-based consultancy. “If the top of the pyramid and the middle of the pyramid have already changed directions, the new entrants are not going to follow the old model.”

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A 2011 McKinsey study on China’s evolving luxury market reported that, in 2009, during the height of the global recession, sales of luxury goods grew by 16 percent in China, reaching 64 billion yuan, or about $10 billion at current exchange. The market is expected to reach 180 billion yuan, or about $27 billion, by 2015. By then, China will account for 20 percent of the global luxury market, overtaking Japan to become the world’s largest luxury market.

Further, the number of households on the Mainland that are considered wealthy — with annual incomes between $45,000 and $150,000 — are growing by 15 percent a year. By 2015, 5.6 million households will fall into this income category.

As significant a market as China is — and will be — some observers argue that consumer sophistication is a longer-term evolutionary process rather than an overnight transformation.

“There is this idea that there are all of these sophisticated people out there,” said Paul French, chief China analyst for the market research firm Mintel. “Send me some names and addresses of them.…You can’t buy sophistication. It is about a certain level of security and comfort earned over a certain period of time. Here, they are all drinking wine, but it is still either about a faux craving for Western tastes or showing off money.”

Matthew Liu, who sells modern art in Beijing, sees the situation differently. He admitted many of his clientele, particularly those from smaller cities across China, have not yet developed the sophisticated tastes of the typical Western art client. But he also noted that isn’t the point. While there are now more defined strata of wealth, all rich in China are new rich, given that the country has only been opened up to the outside world for less than half a century. “For the last 200 years, all [cultural] things became secondary. When you are starving, you don’t care about such things. It is too hard.”

The point, Liu said, is that while changing tastes in China might be tied directly to wealth and status, the Chinese are incredibly eager to become more cultured as quickly as possible — almost as if they are making up for lost time.

“The Chinese people, in general, love art,” Liu noted, while arguing that during the last 50 years, they have been suppressed even in their ability to develop appreciation for things beautiful and significant. “Now it is wide open, but they never went through any art education, so they don’t know. I have to tell them, ‘This is Picasso,’ and ‘This is very important.’ When they stumble onto it in my gallery, it is like an electric shock. They want to have it.”

The acquisitive desire isn’t all about radiating refinement. While wealthy Chinese consumers’ interest in obviously flamboyant luxury has been tempered by the newer desire to appear cultured, some observers say the overt style statement still exists.

According to P.T. Black, senior creative director for “Thoughtful China,” an online marketing talk show produced in Shanghai, luxury consumers will, for a long time, seek certain elements of what could be, particularly through a Western lens, considered as bling. This is because social relations and power structures continue to be somewhat messy in China. Perceptions of stature, either political or in business, can change literally overnight. Thus, members of different social circles are constantly trying to reassert who they are and where they stand among each other and with outsiders. A crucial way of communicating these messages is via what people own, have access to and wear.

“Bling is an aesthetic criticism based on being over the top,” Black said. “In the context of China, it is a little more complex because the criticism is levied by more developed nations toward Chinese in general, and then by Chinese toward other Chinese. There are multiple levels of accusation and nonunderstanding. The country’s culture is still very much hierarchical and there are important power dynamics at any kind of social gathering.”

Black said that in Beijing and Shanghai, the bling factor is beginning to become more “subdued in tone.” Certainly, social messages are still conveyed by what people own. Increasingly, however, those cues are manifested in more discreet ways: opulent fabrics, access to rare cognac, owning a Picasso. In third- and fourth-tier cities, where there is less education about luxury and more explosive wealth, tastes still hinge on a bourgeois aesthetic, he contended.

“As those sorts of structural things settle down, there will be a question of what the aesthetics of Chinese people are, and that question in the context of bling is a long-term and important story,” Black said. “What is the relationship between wealth and power and display and the aspirations that underpin and propel that? China, for a long time, will continue to be more flashy.”

All this means is it is becoming more imperative for luxury brands — both old and new to the Chinese market — to sharpen and, in some cases, reengineer their game plans for reaching the country’s vast, varied and quickly changing luxury consumer. “Where the brand places itself is very important,” Black said. “In Western countries, people choose a brand to represent their personalities. Here, people choose a brand to highlight the part of their personality they want to highlight that day, but it is not in a way to show the real you. On the contrary, it is a way to show the you that you feel is appropriate in a certain situation.”

Luxury players are also learning what is appropriate to show to different consumers in different situations. Increasingly, it is becoming a delicate balance of inclusion and exclusion. The overriding goal is to reach large segments of the Chinese market. However, there is a risk that if brands expand too quickly and reach too many consumers, they could lose their exclusivity. As a result, some brands are putting the brakes on previous strategies to open as many stores as possible in China and instead are choosing slower, more calculated expansion.

“It is a dilemma, definitely,” said Leo Lui, head of Hermès’ China operations. “We have to be very careful. If one brand becomes too popular, or it exists everywhere, the desire from the customer will lessen because it will become too mass. Some companies have experienced this kind of problem.”

Lui said Hermès will now only open a store in one new city a year and is shifting its focus to improving customer service and the overall experience in existing retail operations. He added that it is becoming increasingly important for the brand to educate consumers on its heritage and, particularly, the craftsmanship behind its products. “We don’t want everybody to have an Hermès product,” he said. “We don’t want to open everywhere like a 7-Eleven. At the end of the day, we are in the luxury business. It is true there will be big potential in secondary cities, but more so for the second-tier brands. For us, we want to develop our business in China gradually.”

It is also becoming apparent that there is more potential than ever for more niche brands to enter the Chinese market. While brands such as Hermès and Chanel are often-cited examples of labels Chinese sophisticates gravitate toward as they ascend the luxury ladder, some smaller players are also finding stunning success on the Mainland.

One example is Roger Vivier, the shoe and accessories brand owned by Tod’s. The company has just 10 stores worldwide. In 2010, it opened one of those stores in Shanghai’s Plaza 66, one of the city’s most prestigious shopping malls. Liu Xiaoxi, who works as a district manager for Roger Vivier in Shanghai, said in the beginning, while it was tough for the brand, Roger Vivier leveraged Tod’s existing VIP client list to attract shoppers. The majority of clients find Vivier via word of mouth. “In China, the socialites and the rich have a certain look,” Liu said. “So once they are wearing our products, others know the products are good and they will spread the word quite quickly.”

Liu said product mix has also been crucial. The store has maintained elements of bling, such as a healthy mix of handbags with Roger Vivier’s large signature buckles, to lure in newer luxury consumers, while also having plenty of more understated products for its more discerning clients. Private shopping events with limited-edition lines have been a priority — and a success.

“Certain customers are ascending higher within the hierarchy, and they are looking for something more discreet,” she said. “But the majority of the market is still looking for something more blatant.”

• The very wealthy, which are households with incomes of more than 1 million yuan, or $158,500 at current exchange, and have assets greater than 10 million yuan, or $1.6 million, are growing at 20 percent annually and are expected to reach 1 million households by 2015. This segment is expected to drive 38 percent of the growth in the luxury market over the next five years.

• The country’s 13 million upper-middle-class households, which have incomes between 100,000 yuan and 200,000 yuan, or $16,000 and $32,000, stretch their budgets to buy luxury goods. This sector accounts for 12 percent of the market now and is expected to account for 22 percent of luxury sales by 2015.

• The percentage of Chinese consumers who are buying luxury products for personal indulgence rose to 36 percent in 2010 from 25 percent in 2008.

• In 2010, more than a third of Chinese consumers “traded up to more expensive brands and products” compared with 6 percent of Japanese consumers.
 
• Half of the consumers McKinsey surveyed in 2010 could name more than three ready-to-wear brands compared with 23 percent in 2008. In 2008, the top five rtw brands accounted for 83 percent of top-of-mind consumer recall. By 2010, that number fell to 62 percent, as consumers have been exposed to more new brands.

• More than 50 percent of China’s luxury consumers say they want less flashy products, up from 32 percent in 2008. More than 40 percent say that “showing off luxury goods exhibits poor taste.”

• Total luxury market spending by Chinese consumers in 2010: 212 billion yuan, or about $31 billion at the exchange rate at the time. Of that, 60 percent was spent outside of China.

• Sixty percent of growth in 2011 in China came from new consumers.

• Louis Vuitton, Chanel and Gucci were the most desired luxury brands in China in 2011.

Sources: 2011 McKinsey & CO. study on China’s evolving luxury market AND 2011 Bain China Luxury Market Study

 

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