Tapping into China’s growing Affluent consumer group
27 May 2015
London - The boom of China’s upper middle class has brought along a series of economic change and social transformation. By 2022, over 75 percent of China’s urban consumers will make between 60,000 and 229,000 renminbi per year (6,300 to 24,000 Pounds) according to analyst firm McKinsey & Company. With this affluent class set to become China’s largest consumer spending group over the next decade, accounting for 54 percent of urban private consumption local consumption by 2022, luxury brands from across the globe ask how can they tap into this booming consumer group to help counter the nationwide slowdown of sales.
During the ‘Luxury in China’ seminar, hosted by Guanxi.nu, China experts network organisation at Hotel Des Indes, the Hague, several leading experts from different fields came together to try and tackle this issue. Professor Dr.Haico Ebbers, from the Business University of Nyenrode, stressed in his presentation that brands and retailers alike need to be aware of main characteristics of the Chinese affluent consumer in order to satisfy their needs and expectations of a luxury brand. He points out that unlike the burgeoning lower-middle class in China, the affluent class consists of wealthy, younger and sophisticated consumers who are not as easily swayed by the ‘bling-bling’ luxury products as they once were.
Chinese affluent consumers led by emotional connection luxury products and brands
“What we see is that the affluent consumer is focusing less on the functionality of products and focusing much more on the emotional aspects linked to products and the lifestyle and social status.” A recent study case focused on the sales of sparkling water in China found that the affluent class were purchasing sparkling water bottles to accompany their meal in restaurants or cafes because it represented a certain social status and lifestyle. “The affluent consumer is really celebrating the fact that they have moved up the social economic ladder,” he added. “This is how they perceive their purchase of luxury products.”
The shift to emotional purchasing can be linked to the slowdown of sales in China of so-called 'hard’ luxury goods over the past few years, although Elizabeth Flora, editor-in-chief for Jing Daily noted there is still some confusion concerning exactly how the luxury market has been hit by the slowdown. “The slowdown of luxury sales in China does not have just one cause,” she argued, although many cite China’s introduction of the anti-corruption campaign to stop the misuse of government funds and bribery among officials in 2012 as one of its main causes. “It certainly is one factor, but it is not the only one. There are other key causes that have previously been overlooked but are now coming into focus.”
“There is a more rational luxury market emerging. China’s wealthy are prioritising investment in high assets in a wide range of sectors from real estate to fine art, to children’s education. This rationalisation is linked to the ‘anti-bling’ attitude seen by Chinese affluent consumers, who are becoming more interested in accessible luxury brands.” Established luxury fashion labels like Burberry, Chanel and Louis Vuitton have been hit the hardest by the slowdown of sales in China, but other attainable luxury labels such as Michael Kors, Tory Burch and Kate Spade have reportedly fared much better against the slowdown. “These are brands aimed specifically at the affluent consumer market, which is growing significantly. But when we look to the higher end of the luxury spectrum, we are also seeing growth among a wider range of smaller brands as these Chinese consumers seek out brand diversity. Brands like Balenciaga and Philip Lim are seeing significant China growth,” she noted.
Affordable luxury brands and smaller brands popular among China's affluent consumer group
“In addition, Chinese consumers are part of the global revolution that is placing more emphasis on individuality and expression and high craftsmanship over the ‘bling factor,’" added Flora, although’ bling’ is not completely dead in China, just the affluent consumer group appears to be turning away from it. She attributed the opening of department stores such as Galeries Lafayette and Lane Crawford and the rise of online and mobile shopping within China to be part of the cause for the Chinese affluent consumer group desire for unique, bespoke and high-quality fashion labels.
Another big reason behind the slowdown of the luxury market in China can be linked to price difference for luxury brands in China. “Significantly inflated prices within mainland China are driving consumers to shop for luxury goods elsewhere, like Japan or South Korea,” pointed out Flora. Prices for luxury brands can be as much as 80 percent higher in mainland China, which combined with currency changes has led to more affluent consumers travelling abroad to purchase items or purchasing items through ‘daigou’ agencies, bulk-buying groups of Chinese travellers.
Upon their return the ‘daigou’ agencies re-sell their luxury purchases online or in ‘grey’ markets. “This grey market is not good for luxury brands as it unregulated by the brand and can hurt its image.” In an attempt to combat this, luxury labels such as Burberry, Chanel and Patek Philippe recently decided to lower prices in China by as much as 21 percent to encourage consumers to purchase their luxury goods within the local market. Earlier this week the Ministry of China announced that import tariffs for Western-style clothing are set to be reduced to between 7-10 percent and taxes on ankle-high boots and sports shoes to be cut in half 12 percent to help encourage sales, which will undoubtedly help boost sales for luxury apparel in China and decrease demand for grey markets.
Luxury brands should focus on e-commerce to reach China's affluent consumer
However, Flora highlighted luxury brands must not shy away from e-commerce in China if they truly want to combat the grey market and protect their brand name. Thessely Juliet, student assistant Ebbers, stressed importance of having a strong online presence in China to connect to the affluent consumer group. “What better way to address the affluent population than to engage with them through the digital world? The online audience in China is just immense.” The number of online users in China is currently more the twice the population of the US, according to CNN and this growth is expected to continue in the years to come. Juliet highlighted that for luxury brands looking to reach the growing number of affluent consumers, they need to be visible where the consumers are.
“To reach the population beyond tier 1 cities that do not have easy access to brick and mortar stores, luxury brands need to go online. There are only 4 mega cities, therefore all the other cities are tier 2, 3, 4 and 5 cities which also contain valuable potential consumers.” She added that the average age of China’s affluent consumer is much lower in comparison to Western countries (20 to 40 years old) and they are very digitally savvy, searching online first for information before making any purchasing decisions, so having a online presence is key to connecting with this consumer group.
The continual increase in online revenues is another factor why luxury brands should consider moving into e-commerce in China, as mobile shopping and online shopping account for more and more sales each year. “Singles Day, the largest online shopping day in China raised 9.3 billion dollars in 2014,” she explained, whilst in comparison Black Friday and Cyber Monday in the US did not even raise half as much. However, one of the main reasons luxury brands to seek to localise themselves online in China is brand protection. “Chinese consumers are not so familiar with what is real and what is fake, so by giving them a sale point of the brand itself, they can be assured that this is where they will find the authentic product and thus they won’t be searching through other channels.”
Chanel previously revealed plans to move into e-commerce in 2016 and will begin selling its eyewear online later this year, signalling a shift in attitude among luxury brands towards online offerings. “In conclusion, one particular brand is seen as an outlier,” said Juliet. “The reason is that this company takes a holistic approach towards everything digital, from product design to R&D to supply chain to marketing to CRM, everything revolves around digital. And the results of this approach can clearly be seen by the success of this brand."
"A soft conclusion is for luxury brands to adopt this strategy. Although it is difficult and involves many efforts, it is possible” and the future for luxury brands seeking to tap into China’s affluent consumer group.