LONDON — Upper-middle income Chinese consumers are poised to spend, spend, spend in the coming years, and are already being targeted by the big fashion and luxury houses, according to a new report by McKinsey set for release this week.
The latest edition of the McKinsey China luxury report, which will be published on Friday, said Chinese consumers will account for 40 percent of the world’s luxury spending by 2025, and will be a major contributor to growth in the sector over the next six years. The last edition was published in 2016.
“China delivered more than half the global growth in luxury spending between 2012 and 2018, and is expected to deliver 65 percent of the world’s additional spending heading into 2025, according to McKinsey’s estimates based on UnionPay transaction data,” the report said.
The report added that, in 2018, Chinese consumers at home and abroad spent 770 billion renminbi, or $115 billion, on luxury items, equivalent to a third of the global spend, with each luxury-consuming household splashing out an average of 80,000 renminbi a year.
The growth has been driven by an explosion in the number of upper-middle-class households. “Their outlay is set to almost double to 1.2 trillion renminbi [or $183 billion] by 2025, when 40 percent of the world’s spending on luxury goods will be conducted by Chinese consumers,” McKinsey said.
The report also points out that despite the sharpest slowdown in China’s economy since the financial crisis, the luxury segment remains robust.
“Young Chinese consumers view ownership and affiliation with designer brands as a form of social capital; not just something to wear, but a lifestyle choice that marks them part of a distinct and exclusive community,” it said.
The report is based on a survey and analysis, conducted from October 2018 to January 2019, of around 1,000 Chinese luxury consumers, ethnographic research of representative young Chinese luxury consumers, and market research of global luxury companies.
Lan Luan, a coauthor of the report and a partner at McKinsey in Shanghai, said: “The market has evolved from early recovery to stable growth,” adding that it is increasingly a “winner takes all” market.
“Explosion of social engagement with multiple social media platforms and maturing influencer marketing” is a new phenomenon, she said, “along with social engagement, innovative ways to create newness and viralness — from collaborations, limited editions, nicknames, next-gen store concepts, to new event concepts — are emerging and driving growth.”
Luan also said “consumers increasingly demand personalization, especially personalized services and recommendations,” and “lower-tier cities are of great potential. Besides digital engagement, travel retail is another critical channel as they are making more and more domestic and overseas trips.”
The U.S.-based worldwide management consulting firm said its 2019 report sheds light on “a new generation of Chinese consumers that are powering the global luxury market, and the double-edged sword they present to the world’s leading luxury brands.”
The post-Eighties and post-Nineties generations, many of them new to luxury, are fueling the Chinese market. “Post-Eighties, consisting of 10.2 million luxury consumers, accounted for more than half the total spending on luxury by Chinese consumers in 2018,” McKinsey said.
“Generation Z are delivering the shot in the arm China’s luxury market needed to emerge from several years of stagnant growth.”
Two-thirds of post-Nighties surveyed told McKinsey their parents support their luxury spend. Upper-middle-class Chinese families are topping up their children’s bank accounts by at least 4,000 renminbi per month, or half their children’s personal income.
“This financial cushion has a large impact on these young consumers’ willingness to spend, and spend big, on luxury,” the report said.
Only 13 percent of post-Eighties and Nineties luxury spenders said they grew up in a family familiar with the finer things in life, while half of the post-Nineties, and 31 percent of post-Eighties, consumers only made their first luxury purchase in the last year.
For brands to succeed, the report said promoting “iconic brand-product combinations” is key.
The idea of a “brand” remains key when it comes to informing taste across all the surveyed generations, but is relatively less important for younger consumers, according to McKinsey. Almost 70 percent of post-Nineties adults interviewed told McKinsey they buy luxury to “feel different, rather than fit in with society.”
The post-Sixties and Seventies said they have no interest in buying Chinese luxury brands, but there are signs that such negative perceptions about domestic players are beginning to fade among the younger generations. One in 10 post-Nineties said, “they would opt for a high-end Chinese brand”, and this likely will increase in the near future as Chinese brands gain greater prominence.
The research also suggests young consumers are loyal not to brands, per se, but to iconic brand-product combinations. “Online commentators often bestow nicknames on these products, helping to circumvent problems less sophisticated consumers might have with pronouncing English and French names, and making it easier to share and discuss a product on social media, or to talk about in person with sales staff,” the report said.
“Nicknames are most often coined by the local market, and are based on a product’s appearance, transliterations and translations, or pop culture references.
For example, Prada’s Saffiano handbag earned the nickname “killer bag” after actor Léa Seydoux’s assassin character carried it in the 2011 movie “Mission: Impossible Ghost Protocol.” While Chloé’s Drew bag was meant to be a seasonal style when it was launched in 2014, it went virally popular when Internet users began to call it the “Piggy Bag,” as “Drew” sounds like “pig” in Mandarin.
The report also finds in-person experiences in retail stores are the most impactful when it comes to making a purchase decision, despite consumers’ affinity for digital discovery.
“All of the 1,000 respondents we surveyed consulted a mix of online and off-line sources during the three to five hours per week they spent absorbing information on luxury and fashion, with every single one saying they were exposed to digital influence at some point in their customer journey,” the report said.
“At every touchpoint, from e-commerce to in-store, and through social media, consumers are seeking to pick up information about the latest luxury products, the celebrities who promote them, and the lifestyles they embody. Only traditional ads fail to command the avid attention of consumers, according to our research.”
E-commerce and KOLs are vital for consumers in gathering information. “Consumers use e-commerce platforms to source facts about products, as well as read peer reviews and product experiences,” and young Chinese luxury shoppers are heavily influenced by KOLs. Celebrities like Angelababy, Yang Mi and Tiffany Tang, as well as fashion bloggers like Gogoboi and Mr. Bags all play a major role in raising awareness of new products.
“While WeChat remains the foremost platform for branded media, it is also increasingly used to drive interactive consumer engagement, both through official accounts and through mini-programs within the WeChat ecosystem that host interactive digital games and other experiences such as product trials, service reservations, consumer advice, and more,” the report said.
While discovery is digital, purchases are influenced — and made — in person. “Sales staff play a critical role in providing purchase advice and suggestions, including in the form of WeChat messages,” the report said.
“The younger generation expects a more personal service, down to the staff who can help pick out accessories based on an intimate knowledge of the customer’s personality, as well as their previous purchases or preferences. They also value staff who can make fashion shows or parties more accessible, and who keep in touch, more as a friend than merely a salesperson.”
The report said off-line channels will continue to dominate luxury sales in the near future, offering a compound annual growth rate of about six percent over the next several years.
Brands should also devise a targeted travel retail strategy that captures these consumers on the move. They should pay attention to affluent residents of China’s lower-tier cities, most of whom remain underserved by brick-and-mortar stores, the report said.
When they are off-line, the post-Nineties generation shops across different types of bricks-and-mortar stores and no longer only focuses on premium department stores. The post-Eighties are most inclined to frequent brand stores, and the post-Sixties and Seventies most partial to premium malls.
McKinsey forecasts online to grow by “up to three times” the current market size to account for one-eighth of China’s 1.2 trillion renminbi luxury market by 2025. Major luxury players are active in brand-owned channels, while participation in mainstream B2C e-commerce and luxury verticals are still low.
The report concludes that “the imperative for global brands is to become the leading form of social capital for China’s young luxury consumers, and stay there.”