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China’s luxury goods market: Changing consumer profile opens new potential
China’s luxury goods market is developing tremendously. Gone are the times when the brand label alone determined a product’s success. Today’s Chinese luxury goods buyers no longer yearn for a status symbol; they now want products that indicate fashion and quality. Product quality (74 percent), style (70 percent) and comfort (70 percent) drive Chinese customers’ purchase decisions the most, followed by the overall brand image (69 percent). The visibility of the brand logo used to be the traditional value driver for Chinese buyers of luxury goods. Now it lags far behind and is ranked eighth out of ten alongside the factor price. Luxury goods buyers in China would be willing to spend more – if luxury firms better understood their brands’ value to their Chinese customers. These are the results of the recent Chinese Luxury Goods Buyers Survey*, a short survey among Chinese buyers of Western-brand luxury goods that was conducted by the global strategy and marketing consultancy Simon-Kucher & Partners.
“The Vuittons, Hermès and Guccis active in the Chinese market have to enrich their local strategy,” states Fan Chen, study author and Managing Director of Simon-Kucher & Partners’ Beijing office. “They must enhance their Internet presence to better encourage online purchasing. Although the media says the Chinese luxury market has slowed down in recent years, there’s still significant profit potential waiting to be tapped by multinational luxury goods brands in China – if approached properly.” Simon-Kucher’s short survey covers the typical Western-brand portfolio of luxury goods, including jewelry, watches, bags and luggage, small leather goods, shoes and accessories.
Figure: Despite higher prices in China, there is an untapped willingness to pay for some products/categories (Source: Simon-Kucher's Chinese Luxury Goods Buyers Survey)
The new face of Chinese luxury goods buyers
The favorite product categories on which Chinese luxury goods buyers have spent money in the last two years are (amounts on average) jewelry (CNY 57,300), watches (CNY 48,800), and bags and luggage (CNY 29,700). Their most preferred brands are by far Louis Vuitton (24.3 percent) and Hermès (21.3 percent), with Gucci following in a distant third place (11.8 percent). More and more Chinese luxury goods buyers today are male; men actually spend more money on average than women do. Furthermore, Chinese shoppers for luxury goods are typically loyal to their favorite brands, increasingly attracted by the convenience of shopping online and well informed about price differences between their home country and abroad. For study author Chen it is clear that many luxury firms don’t seem to be aware of this consumer development. “In spite of quickly adjusting to the changing consumption patterns, they still have an insufficient understanding of the preferences, price sensitivity and willingness to pay of the target group,” she reports. The companies’ pricing strategies are still being developed at distant headquarters in the Western hemisphere. Due also to taxes and access costs, luxury products are up to 40 percent more expensive in China than in their home markets.
The power of (perceived) price fairness
It’s therefore not surprising that most respondents of Simon-Kucher’s short survey state that they spend more money on luxury goods abroad than in China. “Many firms are not aware of the fact that the customers’ perceived fairness of luxury prices in China is just as important as the absolute price level,” states Martin Crépy, expert for luxury goods and partner at Simon-Kucher’s Paris office. “Luxury firms need to work with dynamic pricing tools if they want to grow sustainably in a country market.” For 75 percent of the respondents, the higher price is an obstacle to shopping in China, topped only by a lack of product availability (84 percent) due to the deferred product launch in the country. However, as the analysis reveals, despite higher Chinese prices, there’s still an untapped willingness to pay for some products and categories. For example, given a product price of CNY 11,000 as reference point for a luxury bag, 25 percent of the respondents were willing to pay over CNY 24,000 for another luxury bag currently being sold for CNY 17,600. In other words, a 40 percent price increase would have been possible. “The survey results speak a clear language: To optimize their current price strategy, luxury firms need to precisely measure the perception of their brands’ value within their customer segments,” advises Crépy.
Offering online channels and new product categories are key levers
Luxury brands have to carefully analyze the willingness to pay of their changing target group and investigate their needs and expectations. Chinese customers are Internet savvy and increasingly loyal to their favorite luxury brand. “Enriching their online portfolio and adding new product categories to their product range is the key to success for Western-brand luxury firms in China,” comments Chen. A total of 27 percent of survey respondents plan to shop for luxury goods online in the future. Thus, conclude Simon-Kucher’s experts, luxury firms must develop new digital strategies that go beyond a pure brand website and, for example, cooperate with digital media platforms (such as social platforms or video-sharing websites) to increase brands’ exposure and facilitate interactions among potential buyers. In order to profit from the increasing brand loyalty of Chinese luxury goods shoppers, luxury firms should also develop new product categories to widen the standard product portfolio and trigger further purchases. For example, 92 percent of survey respondents would love to see their favorite brand expand into perfumes, and 84 percent would welcome an additional cosmetics product line.
The bottom line is that luxury companies need to work with dynamic pricing tools to monitor competitor prices worldwide, measure their customers’ price sensitivity and tap into the opportunities that online sales and customers’ increasing brand loyalty provide. Only then will the Year of the Horse open up new opportunities for Western luxury brands in China.
A summary of the survey is available upon request.
*Chinese Luxury Goods Buyers Survey: The survey includes the answers of approx. 200 Chinese luxury goods buyers mainly from Beijing and Shanghai with a monthly income ranging from CNY 25,000 to more than CNY 50,000 per household (the latter comprises about one-third of the respondents). Collected in 2013, data were evaluated in terms of spending willingness, key purchasing criteria and shopping preferences.
Fan Chen, Managing Director of Simon-Kucher & Partners’ Beijing office, specializes in the development and implementation of pricing, sales and marketing strategies for multinational firms looking to tap the Chinese market. Martin Crépy, partner at Simon-Kucher, is a luxury goods expert and based in the company’s Paris office.
Simon-Kucher & Partners, Strategy & Marketing Consultants:
Simon-Kucher & Partners is a global consulting firm with 700 professionals in 27 offices worldwide focusing on Smart Profit GrowthSM. Founded in 1985, the company has almost 30 years of experience providing strategy and marketing consulting, and is regarded as the world’s leading pricing advisor.
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