According to True-Luxury Global Consumer Insight, the fifth edition of an annual report by The Boston Consulting Group (BCG) and Altagamma, Chinese consumers already make up 32 percent of the global luxury market- a number predicted to rise to 40 percent by 2024.
The report covered more than 12,000 consumers of luxury goods across ten countries, with a notable focus on Chinese millennial consumers. The study showed that 55 percent of all luxury purchases are now made on a portable device, and for Chinese consumer, that number rises to 77 percent. The pivotal role the Chinese market can play in a luxury brand’s success is no longer a secret – but for many Western brands, knowing how to reach the Chinese market is still an elusive conquest.
The study was presented at this week’s Women in Luxury conference by BCG’s Partner and Managing Director Sarah Willersdorf, who spoke to Jing Daily on what luxury brands should be doing to connect with the Chinese consumer, and what the global luxury industry can learn from China’s intricate e-commerce ecosystem.
Why are Chinese millennial consumers so important to the global luxury market?
The previous Chinese generations were a little bit more in awe of luxury and I think this next generation- in fact, the next couple of generations – are just more sophisticated. So, where Chinese consumers used to just buy what we’d think of as a “true” luxury brand, now the millennial consumer knows what they like. They know all the brands, they know all the niche brands, and so I think their love of fashion and luxury is even greater.
Another important point is that this is the generation of social media and influencers. I just think they have more access to everything. Luxury used to be something their parents would buy if they traveled, or it was when big Western luxury brands had just opened their first couple of stores in China, but now there’s a much greater level of sophistication and choice.
What are some characteristics that BCG has noticed that set the Chinese millennial apart from their Western counterparts?
When I think of the Chinese millennial, I think of everything being accelerated. We say that in the West millennials are online and social, but the Chinese millennial is more online and more social. So I just think they’re much more highly connected.
I also think there’s an even greater excitement in China around fashion and luxury than there is in the Western world. Even though the Chinese consumer is increasingly sophisticated, there’s still a real passion to follow and know what influencers and celebrities are wearing and doing.
I think in some ways this is due to the spectrum of development. China has become a more developed economy very quickly, and become more affluent and urban very quickly. I think all of those things drive excitement around the luxury industry.
How can luxury brands in China keep up to date with their preferences and consumption behaviors?
The most important thing is for brands to have local teams on the ground in China. This is absolutely vital. Brands definitely need to have fluent Mandarin speakers on their teams, but preferably Chinese nationals. You have to have local teams and those teams have to have deep experience in the market because the behavior is so different. I think we don’t talk about it enough, but in terms of the opportunity in China, it’s not enough to send teams over or run it from an office in the West- you have to have things localized. There’s fantastic talent in China.
In your opinion, is it necessary for luxury brands to have an e-commerce presence in China?
My view is that you don’t necessarily have to have your own .com site, but you absolutely have to be present on e-commerce sites and on social media. I think WeChat is critically important, I think that JD.com, VIP.com- they’re all critically important. 100 percent luxury brands have to be on there. I think Tmall hasn’t traditionally been known for luxury but now with some of the partnerships it’s struck up it’s becoming increasingly better positioned for it. Entering China’s e-commerce ecosystem is just crucial.
The accessibility of these sites is so much higher for Western brands now. China is mobile first and social media is so important. If you take Tmall for example, some of the luxury brands that were early to it, like Burberry, are really going to be rewarded for that.
The issue with counterfeits and the grey market is still a huge issue, but I personally think if you’re really trying to avoid that you almost have to stay out of the Chinese market completely. However, I do expect to see significant technology opportunities help us with counterfeit products. I believe that Blockchain technology will be used to solve many of the issues of counterfeit product. I think this will be one of the greatest uses of Blockchain in luxury.
The issue with counterfeits and the grey market [on Chinese e-commerce platforms] is still a huge issue, but if you’re really trying to avoid that you almost have to stay out of the Chinese market completely.
Is working with online influencers/KOLs a must-have now for luxury brands in China?
The influencers have always been very important in Asia. Initially, it was places like Japan and Korea influencing China, but now the Chinese influencers are just as important. They’re certainly responsible for bringing many Western brands back to China.
If you think about Western brands that have had great success in China, it is usually because they’ve had really close and authentic relationships with ambassadors there. They’ll be spending time with the designers, being at every single runway show and creating collaborations with the brand. I think the brands that have done it well have really fallen in love a little bit with the influencers- they don’t just use them, but have a really authentic relationship with them. They are tremendously powerful.
What are BCG’s predictions for next year’s growth in the Chinese luxury market?
We think the overall market is going to grow by four or five percent, but I would definitely expect that the growth in China is higher. Our predictions mean that the Chinese will be driving 70 percent of the growth of luxury, which is tremendous.
Having said that, I think how brands attack that growth is important. We know when we’ve looked at luxury stores in China, there are many brands that I would suggest are overstored, or the stores are in the wrong locations. So actually what you see is a number of brands closing stores, which seems counterintuitive if you’re expecting a lot of growth. But, I think it comes back to this issue of the ecosystem and the Chinese consumer- you need to yes, have a store, but you need to be on social media, you need to be in e-commerce, travel is still very important. All of these things are now even more important than having physical stores.
What kind of role do you see Chinese government playing in the luxury sector?
When the government regulations changed around luxury gifting a few years ago, we obviously saw a big hit in certain categories. I think it’s a double-edged sword in a way because in some ways the government wants to promote growth and spending, but they are still keen to crackdown on certain aspects. I think with everything, the most important thing is that brands have great local partners.
When the rules changed around gifting we spent a lot of time on it, because it had a tremendous impact- especially on watches, jewelry, and fragrance- those kinds of categories. Personally, I think we all had friends who were stopped at the airport and checked for things, I mean it was huge. But now, I feel like most of my clients have felt a bit of a release.
A number of companies who used to think about tiers of cities are actually trying to think about clusters of cities, because of the proximity of some of these places.
What do you see as the major challenges or threats to the growth of the Chinese luxury market?
For Western luxury brands, I think one challenge is there are a huge number of great, local brands. I think there are many local Chinese luxury brands, and Korean and Japanese beauty brands, that will increasingly become more of a threat. I also think store locations is a big challenge. Finding the right location for the right price is very difficult. I think a number of companies who used to think about tiers of cities are actually trying to think about clusters of cities, because of the proximity of some of these places.
I think another interesting challenge is going to be what we see happen with outlets and off-price stores in China. I think we’re seeing more outlets open, and more of these very close to urban centers. I think that’s really interesting in China because lots of brands from the West have actually so far managed to have a more elevated position than they have in their home country, due to being protected from having such a huge off-price business. I think as China has more outlets and off-price open, it will really challenge the purity of luxury brands.