PARIS — Chinese consumers are back, yet more fickle than ever, as Millennials rewrite the rules for luxury brands seeking to capture a slice of the country’s business.
After slowing down for three years, Chinese spending on personal luxury started to rebound in late 2016 and has shown strong growth since, with Chinese consumers spending more at home than abroad, according to Bain & Co.’s 2017 China Luxury Report.
“Chinese Millennials helped accelerate luxury spending here, particularly in the last year,” said Bruno Lannes, a partner in Bain’s Greater China office and author of the report.
However, not all luxury brands have profited equally from the rebound.
While groups such as LVMH Moët Hennessy Louis Vuitton and Kering reported record revenues in 2017, Compagnie Financière Richemont said sales were dented by its ongoing program to buy back excess watch stocks, as Asian spending on watches and jewelry lagged fashion and leather goods.
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The drivers of Chinese luxury spending have evolved. Since 2015, most of the increases in luxury consumption have come not from first-time buyers, but from those accustomed to purchasing luxury goods, consulting firm McKinsey & Co. said in a study.
These increasingly demanding consumers are expected to power a continued rise in luxury spending, with Chinese households seen representing one trillion renminbi, or $157 billion, in global luxury sales by 2025 — the amount generated by the U.S., U.K., French, Italian and Japanese markets combined in 2016, McKinsey predicted.
To put it another way: in seven years, Chinese consumers will account for 44 percent of all luxury sales worldwide, compared with just 12 percent in 2008 and roughly one-third of sales today. And those consumers are getting younger, more mobile and digitally savvy.
“They’re looking for something new, something different, and I think that the most recent polarized performance in soft luxury is highlighting that brands that are able to capture these new aesthetics are significantly advantaged, while other brands that are trying to stick to their proven icons of the past are actually falling behind,” said Luca Solca, managing director and head of luxury goods at Exane BNP Paribas.
Among those leading the pack are Gucci, Balenciaga and Louis Vuitton, while laggards include Salvatore Ferragamo, Burberry and Tod’s, he said.
“There’s no such thing as resting on our past successes, especially with the second-generation Chinese luxury consumer, which is probably far more digitally savvy and also which is keen to get something different from what their parents were buying,” Solca added. “In the past, Chinese luxury consumers wanted to tick the box. They wanted to get the best-known brands, they wanted to buy the icons from each of them. Today, I think, consumers are less interested in history, less interested in perceiving exclusivity because of heritage. They think that exclusivity is more about being trendy: it’s more about having the right brand or the right product.”
Gucci is one brand that has been gaining traction among Chinese Millennials since Alessandro Michele took over as creative director in 2015. “China has been one of the first markets to embrace this new chapter of Gucci’s history,” said Marco Bizzarri, president and chief executive officer of Gucci.
The Italian label has organized a series of exhibitions designed to engage local consumers. At the opening of the “No Longer/Not Yet” show in October 2015 at Shanghai’s Minsheng Art Museum, Michele spoke of his continuing fascination with Asia in general, and the pace of development of China in particular.
“Everybody knows it’s a big market. But I was not thinking about the marketplace. Now Chinese people are really ready to talk the fashion language,” he said.
Gucci followed up with a trilogy of photography exhibitions last year that started in Hong Kong and then traveled to Beijing and Taipei. Next October, it plans to unveil “The Artist Is Present,” a show in Shanghai curated by Italian artist Maurizio Cattelan in collaboration with Michele.
“These physical manifestations have been supported along the way with a compelling digital engagement. This combination of physical and digital experiences has in particularly resonated with Chinese Millennials,” Bizzarri noted.
Indeed, a recent report from Chinese influencer marketing platform Parklu found that Gucci, Chanel, and Dior are leading the way when it comes to generating awareness and engagement on Chinese social media channels. The March report measured how often key opinion leaders, or KOLs, mentioned 20 top luxury brands.
“Social media has tremendous influence on luxury fashion in China as 82 percent of luxury consumers consider themselves heavy social media users. The main platforms influencing luxury customers are WeChat, Weibo, Xiaochongshu (Red) and Douyin,” according to Parklu, an influencer marketing firm.
“Gucci’s social media management stands out with high frequency, contextual posting and quick reactions aimed at creating conversations with online customers,” it said, noting the brand’s dominance among influencers is reflected by data from Baidu, China’s top search engine, and popular messaging app WeChat.
“Gucci joined China’s social media game relatively late, but now sets social media aesthetic standards. Gucci has also been able to connect with China’s youth in a way no other luxury brand has been able to attain,” according to Parklu.
Chanel, meanwhile, caught the attention of luxury fashion bloggers with its spectacular fall ready-to-wear show, for which it transformed the Grand Palais in Paris into a forest. “Chanel’s absolute reach and engagement well outperformed other luxury brands,” Parklu noted.
Bruno Pavlosvky, president of fashion at Chanel, said it plans to open stores in Beijing, Xi’an and Harbin by early next year, which would bring its network of boutiques in China to 14. Bolstering its global retail presence is especially important as the strong euro is prompting some Chinese customers to spend in Asia instead.
“The Chinese are obviously a key nationality for us. It is an important and growing customer group, but we have worked as much on developing our network of stores in China, with several openings in the pipeline, as in other destinations where Chinese customers like to travel,” Pavlovsky said.
“The strength of a brand like Chanel is being present everywhere, and that is the reason we have been working for several years now on the harmonization of prices,” he added. “Our ultimate objective is to be able to offer the same service each time they enter a Chanel boutique, regardless of any currency or border issues.”
Tourism spending in Europe decreased 8 percent year-over-year in April, in line with February and March, according to data from VAT refund provider Premier Tax Free quoted in a UBS research note. Spending fell 4 percent in France and 5 percent in Italy, while the United Kingdom registered a whopping 21 percent drop, it said.
“Following sustained euro appreciation, price differentials have narrowed between Europe and Asia, leading to a repatriation of Asian spend to Japan, Hong Kong and Mainland China,” UBS said. With momentum still strong, it expects luxury spending by Chinese consumers to continue growing by around 14 percent annually.
Ralph Lauren Corp. is among the companies making sure it is well positioned to grab a slice of that market. Its president and ceo, Patrice Louvet, said the U.S. brand is implementing digital initiatives with a shift to more social platforms and a focus on influencers.
For Singles’ Day in China, Ralph Lauren partnered with Chinese model Sui He for a special product launch on Tmall. “This event attracted more than 100 million live views and impressions on TV and social media across China,” Louvet told Wall Street analysts during a conference call about the company’s third-quarter earnings.
Total revenue in Mainland China was up 28 percent in the quarter versus a year ago. Louvet said the company expects to have 60 points of sale there by the end of fiscal 2018, and is focused on implementing a full-price strategy with limited discounting.
To that end, Ralph Lauren prefers the marketplace e-commerce model where it can control its image. “On these sites, we have created digital shop-in-shop environments with a consistent brand experience, tailored product stories and an assortment that is carefully curated by our merchants,” Louvet said.
Fellow U.S. designer Michael Kors traveled to Shanghai last November for an event, centered around its global campaign, The Walk, that allowed each guest to star in their own fashion film. The company said it generated more than 1.6 billion social media impressions and was live-streamed to more than 9.5 million viewers.
Former Salvatore Ferragamo Group ceo Michele Norsa, now industrial partner of the FSI Mid-Market Growth Equity Fund, which invests in Italian midmarket companies, emphasized how physical distribution has also matured in China.
“Initially, luxury brands would form joint ventures with local partners. Now they invest directly on retail,” said Norsa, underscoring the wealth of “alternatives of more and different malls, with a more precise positioning” today.
He trumpeted the quality of malls in the region, which have “overtaken the initial malls that have since closed. They were smaller and the materials, decorations and quality of the locations today are of superior quality in comparison.”
Abercrombie & Fitch Co., home to its core Abercrombie brand and younger sibling Hollister, believes there’s a $500 million opportunity in China over the long haul.
At its recent investor day, ceo Fran Horowitz told WWD the company is moving away from its large legacy locations targeting solely tourist hot spots and heading toward more mall-based locations. The sites still have a tourist component, but with the company focused on quality of sales, being where the local shoppers buy would help to build a more loyal customer base, she said.
One example the company gave was a comparison of sales per square foot at two locations. The Pedder Street site in Hong Kong averaged $550 per square foot before it was closed in early 2017. In comparison, the newer and smaller store at Harbour City, opened in December, does $1,700 per square foot.
In the next two years, Valentino aims to increase its store count in China to 25 from 17. “China is fundamental, and after a year of growth in 2017 and a good start to 2018, we continue to be positive,” said Valentino ceo Stefano Sassi.
“We are seeing an increase in local spending and our goal is to emphasize the brand’s values and characteristics so that they are increasingly clear to Chinese consumers. The brand awareness is high there and the Chinese move depending on what they perceive as cool, but they more and more look at what has inspired the values of the brand and its modernity,” he remarked.
Jonathan Akeroyd, ceo of Versace, said the house was present in all key cities in China with 63 points of sale, and another five scheduled to open by the end of the year. “China is already one of Versace’s most important and profitable markets. It accounts for 25 percent of the total business of the brand,” he said.
Akeroyd and creative director Donatella Versace believe that tailoring product to local preferences is key to conquering the Chinese customer.
“The approach to the market has become more sophisticated, developing each year and each season, meaning that we try and cater to consumers taking into consideration the role that the local culture plays in their decision-making and, therefore, offering them a product that is always more in line with their taste and traditions,” Akeroyd said.
“I can see so many bridges between the Chinese and the Italian culture: the respect for tradition, how they celebrate festivities, the meaning they associate to colors, their long history in fashion, their love for beautiful things,” said Versace. “These are the elements that I take into consideration when I approach the Chinese market: with respect and understanding and by trying to merge the DNA of Versace with their culture.”
Giorgio Armani’s fascination with Asia has long been apparent in his designs. The Italian designer was scheduled to bring his One Night Only event to Shanghai on May 25, but has now postponed the event until next year, citing technical and logistic reasons.
“China has had a big influence on me in terms of creative process — I find its culture rich and inspiring,” he said. “I opened a store in Beijing way back in 1998, long before it was fashionable for any business to come to China. It would be a slow process, but I was convinced that there was a great future for Armani in China, and events have proven me right.”
The designer visited China in 2004 to unveil a megastore in Shanghai comprising a Giorgio Armani boutique, an Emporio Armani store, an Armani Fiori florist and an Armani Dolci chocolate shop. This was followed by a retrospective exhibition of his work at the Shanghai Art Museum in 2006.
“What strikes me today is how the West is now knocking on the door of this great nation. When walking through the streets or through the shopping malls, you are now really seeing a great cross-section of enthusiastic consumers — consumers at every level, which gives me optimism for the future,” he said. “In fact, China continues to be an expanding market and we continue to see it as one of our most important growth opportunities in both the short and long term.”
Salvatore Ferragamo was another early entrant on the Chinese market. Executive chairman Ferruccio Ferragamo recalls visiting the country with his brother Leonardo in the early Nineties.
“At the time, the Chinese were still all dressed alike, all riding bicycles,” he reminisced. “So I asked my brother: ‘But Leonardo, where do you see the Ferragamo consumer here?’ And he responded: ‘Don’t worry, you’ll see, she will arrive.’”
The brand opened its first boutique in 1994 in Shanghai and it has 133 stores in Greater China. In 2013, the group raised its stake in its distribution companies in Greater China from 50 to 75 percent, signaling its confidence in the market.
“The Chinese population has planned its growth with precise deadlines and this is a considerable advantage for investors. It is enough to think how infrastructures will evolve: at the moment there are 50 airports planned on all the territory,” Ferragamo said. “The challenge in this market is to reach the customer also where we are not physically present with our store network and to reach new consumers. So e-commerce is a big opportunity we are working on.”
While brands’ own sites remain the preferred portal for online shopping, used by around 70 percent of Chinese consumers, WeChat comes in second with 42 percent, ahead of Toplife, the luxury channel operated by JD.com, and the Luxury Pavilion, which can be accessed through rival Alibaba’s Tmall and Taobao apps.
“We think WeChat’s decision late last year to allow brands to market their content to the entire WeChat community will continue to push the platform forward,” Exane BNP Paribas said in a recent report titled “The Social Media Boxing Ring: WeChat.”
Italian fashion group Aeffe SpA has made WeChat the official channel for its Moschino, Alberta Ferretti and Philosophy di Lorenzo Serafini brands. The group’s sales in Greater China rose 16.5 percent in 2017.
“Aeffe is increasingly more focused on China, a market that still has significant potential for the group,” said Massimo Ferretti, executive chairman of Aeffe. “We are confident we can sustain a very positive growth trend also for the near future.”
He noted that while China is driving digital innovation, its most popular services remain geographically restricted.
“It will be fundamental to make the different platforms such as WeChat available also in Europe, as well as the online payment systems such as WeChat Pay and research motors such as Baidu that were once used only in China, in light of a population that contributes the most to Asian tourism in Europe,” Ferretti said.