SHANGHAI — There’s no place like home.
The latest findings from Bain & Co. on the China luxury consumer underline a strong repatriation of high-end spending, with the domestic market growing 20 percent year-over-year, outpacing the outbound travel shopping segment.
China luxury has demonstrated “spectacular growth overall in 2017, after four years of lukewarm performance and decline,” the report released Wednesday said. The country ate up 142 billion renminbi in luxury goods — $22.07 billion — in 2017, up from 117 billion renminbi the year before.
The homeward bound pivot, first predicted by the strategy consulting firm in 2015, comes thanks to a range of Chinese government policies to encourage domestic consumption and control parallel import “daigous,” ranging from slashed import duties and the expansion of free trade zones, as well as leading brands’ strategies to harmonize prices across markets. These radical alterations are now reaping rewards for the domestic marketplace, which is also undergoing a rebalancing toward female-oriented categories.
Broken down by segment, cosmetics, perfume and personal care saw the biggest upsurge growing 28 percent, thanks to the “premiumization of masstige” brands and overall recruitment of new consumers. This was followed by jewelry, leaping 27 percent, on strong growth from high-end as well as affordable and bridal ranges, and women’s wear, growing 24 percent boosted by a greater appetite from the younger generation for street and casual wear. In contrast, men’s wear grew 8 percent.
Globally, Chinese spending now accounts for 32 percent of the luxury market, the only nationality to gain market share, increasing from 30 percent in 2016. The report attributed the gains to a wealth effect from robust residential property appreciation and stock market gains in the country and narrowing product price gaps.
“Chinese [consumption] is 32 percent of global consumption, but China is only 8 percent of global consumption,” said Bruno Lannes, a partner in Bain’s Greater China office who authored the report. “It means that 24 percent is happening outside China, so there is still a long way to go.”
European consumption maintained its share at 18 percent, while all other nationalities dropped one percentage point: American (22 percent), Japanese (10 percent), other Asian (11 percent), and Rest of the World (7 percent).
Brands have wisened up to the importance of young luxury consumers worldwide but nowhere is the trend more pronounced than in China. “Five years ago, Chinese ‘luxers’ were 10 years younger than other countries,” Bain quoted an unnamed luxury brand executive. “Now Chinese ‘luxers’ are closer to 20 years younger than other countries”.
Seventeen percent of Bain’s surveyed 1,170 consumers said they purchased their first luxury item between the ages of 15 to 19, and nearly half — 48.1 percent — said their first luxury purchase occurred between the ages of 20 and 35. On average, Millennials bought more, counting eight luxury purchases in 2017, compared to five for other age groups.
As a result, Lannes observed that brands have begun to study Chinese luxury consumers for digital marketing practices that could potentially be applied elsewhere.
“Simply because digital is a lot more advanced here, and also because their consumers, when you think about them being 30 years old, have been raised with a smartphone or an iPad and it is natural for them to live with that,” Lannes explained.
“So, engagement with brands, use of KOL, use of user generated content, stories, celebrities online, all of this is part of the digital marketing toolkit that brands have been able to develop and master over time. It is fair to say that the marketing teams in a lot of countries are not that advanced.”
Overall, online penetration for luxury consumption remained low, constituting 9 percent of the overall luxury purchases, with the exception of cosmetics (15 to 20 percent of the category sales). Still online is mushrooming quickly, with the channel growing 43 percent since 2015, as off-line retail trends toward fewer but larger “retail-tainment” stores.
Even more revealing was how exactly brands were going online. “Most brands have launched their brand.com [or planning to do it in 2018], but only few are considering other online options,” the report said.
Consumers also seem to prefer the direct brand experience, despite the arduous efforts of JD.com and Alibaba to sign brands on to their dedicated luxury platforms. Of the surveyed, 70 percent responded that they used “brand.com,” a site built and operated by a brand itself, 42 percent mentioned WeChat, 30 percent luxury verticals such as Secoo and Vip.com. Only 21 percent bought from aggregators such as JD.com’s Toplife and Tmall’s luxury pavilion.
The most frequent offered reasons were product authenticity, followed by an exclusive shopping experience, and after sales service. Last week, Alibaba’s C2C site Taobao was relisted on the U.S. Trade Representatives’ Office’s notorious marketplaces list, due to the persistent large volume of fake goods available on the platform.
“I think, to start with, not all the brands will be on the aggregators because they don’t see any value in being there,” Lannes said. “If anything, they see more risks in being there as they don’t really control as much. When you are in this category, your level of control of what is going on the site is much less and the price at which your product is sold and the way consumers are handled, all of this is out of your hands essentially.”
“Some brands are just entering China, or have a low share and low awareness, they need the platform to get known, to get visibility and to get traffic, and that is why they would be there. But some of the top 40 brands or so, they have already a huge awareness, they have already millions of followers, why would they go on a platform that would bring additional traffic when they don’t really need that for now?”
RELATED: “Notorious” or “Scapegoat”? Alibaba and Trump Administration Trade Barbs >>
According to Bain, 40 to 50 percent of brands’ total marketing budget is set aside for digital channels, up from 35 percent in 2015 — and a hefty amount of 30 to 50 percent of their digital budget is devoted to a single platform: WeChat.
Of the top 40 luxury brands, as pinpointed by Bain, all have WeChat accounts. Fifty-five percent have used it for commerce, with customer service and membership management cited as other common uses.
“We believe that [the coming] year is going to be low double digits, probably not much lower than this year,” Lannes added. “The brands that we spoke to are very bullish and very excited about this new China. Bain believes that unless there is an exceptional political incident of some kind then the fundamentals of that consumptions should continue for low-double digits.”