Brands need to keep up with changes in China’s luxury consumption patterns

Consumption at high end enters aphase driven by socio-economic shifts and rise of a new elite

Walk into a Nespresso boutique and you might be greeted by a picture of actor George Clooney, pleasantly smiling over a cup of jet-black espresso coffee.

The poster child of the high-end coffee brand oozes confidence and exclusivity. Customers feel part of his world and buy into the experience as well as the product.

Nespresso is giving coffee its luxury cachet back, after it fell out of luxury and was transformed into an everyday, mass product in the early 20th century.

Coffee was once a delicacy enjoyed by the nobility in the 17th and 18th century European courts. Such is the cycle of luxury, where products can move in and out of being perceived as high-end status symbols or experiences.

The ways in which consumers acquire and use luxury products depend on the social, cultural and economic environment, which affect perceptions of luxury brands.

China is a hotbed of these moving forces. With profound recent socio-economic changes and the rise of a new elite, the face of luxury consumption is changing.

About half of luxury consumers are affluent households that recently acquired their wealth and spend between 12 per cent and 20 per cent of their income – or between 20,000 yuan (HK$25,200) and 60,000 yuan a year – on luxury goods, a recent McKinsey report showed.

And luxury role models, who represent only 1 per cent of luxury consumers, will account for 24 per cent of spending next year, the report said.

Many of them are living in Beijing or Shanghai, with ties overseas. Their social circles include friends with second-generation wealth – so they have had long-term exposure to luxury brands and are sensitive to China’s original values and history and also to Western values.

Chinese customers are evolving from simple luxury takers to tastemakers

Overall, these socio-economic changes are bound to change the nature of Chinese luxury consumption, in terms of the types of product that are associated with luxury and the ways in which luxury can be communicated effectively.

This is not to say that Chinese luxury consumption will not keep a few key specificities. For instance, more than half of all luxury goods are purchased as business or personal gifts, not for the buyer’s own consumption, and this trend is set to remain. Similarly, the Confucian perception that luxury represents a social glue that binds together rather than separates people is here to stay.

Finally, Chinese customers mostly buy luxury goods outside China, in part because of high taxes on luxury items at home.

Other signs, however, suggest that China is entering a new phase of luxury consumption. For instance, the internet has given birth to a hyperconnected generation with more sophisticated consumption patterns and deeper knowledge of luxury products.

In addition, many Chinese have received an education abroad or have contacts with Western culture in their professional lives.

Illustration: Sarene Chan

Also, recent trends suggest Chinese customers’ conspicuous use of luxury items is fading, at least in areas that have experienced sustained growth and social stability over the last 10 years.

This is consistent with research in sociology, psychology and marketing suggesting that when socio-economic factors stabilise luxury consumption shifts from being conspicuous to inconspicuous.

In this later stage of luxury consumption, people consume luxury more parsimoniously and more for its aesthetic value than its status value. In China, this is manifested by increasingly greater attention being paid towards experiential luxury, and decreasing attention to the purely material aspects of luxury.

Overall, Chinese customers are evolving from simple luxury takers to tastemakers.

What are the implications of these changes for luxury brands?

First, they should invest massively in predictive tools that can help them anticipate and estimate quantitative and qualitative changes in luxury consumption.

For instance, watching macro factors related to socio-economic changes and careful monitoring of online conversations about luxury brands can help reliably predict the type of products or the level of conspicuousness most likely to be associated with luxury.

Second, luxury brands should change their management focus and take into account the moving frontiers of the Chinese luxury space. For instance, brands should anticipate and monitor unwanted associations (for instance, links between luxury watches and political scandals).

Third, luxury brands should aim to marry Chinese and Western values.

Some brands have already responded to this challenge. For instance, to turn sales around and anchor Yue Sai, a cosmetics brand acquired by L’Oreal in 2004, as a true Chinese luxury brand, the brand decided to include ingredients borrowed from Chinese traditions and mix them with L’Oreal’s positioning and focus on innovativeness.

Luxury consumption in China is bound to change quantitatively and qualitatively based on moving societal forces, and only the brands equipped to anticipate and manage these changes will take full advantage of the evolving perceptions of luxury.

 

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Bespoke Trend Hits China

Bespoke Trend Hits China

Bespoke clothing shows a refinement and modern elegance that is proving to be extremely appealing among Chinese luxury shoppers. This trend isn’t about showing off, but moving away from in-your-face logos and style.

“Customers are more sophisticated now,” said Ben Cavender, a senior analyst at China Market Research. “They are not just trying to be flashy anymore. They are more likely to buy products that fit their own personal sense of style. They are looking much more closely at the quality of construction craftsmanship the unique story of the brand.”

Milliner Elizabeth Koch has seen the speed with which the bespoke movement has taken China. After making a gallery  appearance in Beijing donning one of her custom-made hats, her business has been booming.

A mere months after setting up shop, her hats have been seen in Harper’s Bazaar, Chinese film, and Dutch parliament. One of her designs was even modeled by film star Shu Qi, photographed by Mario Testino, and featured on the cover of Chinese Vogue.

While bespoke—custom, one-of-a-kind goods— is traditionally thought of in terms of clothing, its scope is much wider. Bespoke can include sports cars, jets, and anything custom-made, reports CNBC.

Though the demand for bespoke goods is high, creating mass amounts of handcrafted merchandise is proving to be a challenge.

Smaller businesses seem more well-equipped to handle the budding trend, while bigger companies are struggling. “The reality for the larger brands is it is tough to do too much customization,” said Cavender. “It’s never going to be a good business. For entrepreneurs it’s a way to distinguish yourself so people will buy you instead of a big brand.”

Automakers like Bufori and Morgan Car Company, which made their move to China in 2012 and 2013, have followed the trend quite successfully. Due to their small-scale operations (they produce roughly 60 cars a year, but sell each for $350,000), they’re able to maneuver their business model around the bespoke movement.

One way some bigger clothing businesses are trying to branch into bespoke is by offering in-store tailoring services. International retailer Hugo Boss, is doing just this.

While larger companies are unable to compete with the craftsmanship of smaller businesses, they may not be out of the game just yet. Their talent may lie not with artisans, but software-controlled machines that are able to customize products to client specifications.

This, of course, creates a whole new topic of debate as to whether or not these products are truly bespoke.

Andrew Stockwell, an analyst with Forrester Research, argues that bigger companies may have to realize they’re not meant to follow this particular trend. “Customization is not conducive to operational scale via eCommerce sales. That said, I think we are in a world — think Dell or Nike — where customers are more empowered and want more personalized solutions. The hard part is to draw the line, ask where customization starts and to quantify it.”

For now, smaller businesses, like Koch’s, seem to have the upper hand.

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LUXURY BRANDS IGNORING ‘HUGE UNMET DEMAND’ FOR E-COMMERCE IN CHINA

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While many luxury brands in China have been hesitant about diving headlong into the country’s e-commerce market due to concerns over infrastructure, quality, and distribution issues, a new report argues that companies who aren’t getting into the market now are missing out on a massive opportunity.

We’ve seen many new statistics and reports on e-commerce in China lately as it grows at rapid numbers, and a study by China business advisory firm Observer Solutions focuses specifically on this market as it relates to luxury. China’s e-luxury market “has exploded since 2011,” rising by 71 percent to 18.9 billion RMB in 2012, according to the report. By 2015, the company believes that this number will expand to 45.3 billion RMB, creating “an unprecedented opportunity awaiting the company that comes out with a winning business model first.”

The report is clear in arguing that luxury brands shouldn’t hesitate to get into the market for several reasons. First of all, if you don’t get your brand online, someone else is certainly going to be selling it on a consumer-to-consumer (C2C) platform like Taobao, says report author and company founder Julia Zhu. “China’s e-luxury market started from C2C online marketplaces and C2C still accounts for over half of the e-luxury transactions in China now,” she told Jing Daily via email. According to her, C2C dominates the luxury market because of “huge unmet demand” for luxury from online consumers, and luxury brands need to “go online now” in order to “win this part of the market back from the unauthorized channels.”

However, brands can’t just expect to jump online and see immediate profits, but must rather understand their customer base in China and come up with smart strategies including having a relevant product offering, tailored customer service, proactive customer communication and engagement, and localized business operations.

Of these issues, one main concern is the fact that 48.3 percent of Chinese consumers are worried about purchasing inauthentic goods online, according to the report. Zhu notes that e-tailers must “provide tailored service to mitigate customer concerns about product authenticity and quality.” These efforts must include informative and high-quality product presentations as well as concern-mitigating customer services including third-party payment, cash-on-delivery options, and easy returns. Customers should also be well aware of the brand’s heritage before they click to make their purchase, as a proactive branding strategy also helps “to raise recognition and trust,” says Zhu.

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Elaborating on the importance of a brand’s online presentation to authenticity perceptions, Zhu states, “Because of the issue of quality and authenticity concerns, website design is actually an essential part to communicate to new customers and tell them how reliable an e-tailor is.”

The report also features several case studies of “existing players,” including Marks & Spencer, Neiman Marcus, VIPShop, and Nihao Media. Regarding Neiman Marcus, which recently downsized its China operations, Zhu states, “Neiman Marcus could do a better job on marketing and branding itself on both traditional media and new media such as Weibo. Take its Weibo account for example, it only has 17,144 followers so far. even though it is a well-known brand in the United States, while another case mentioned in the report, Nihao Media, attracted 983,897 followers within the same period of time.” The retailer may be shaping up, however. “I think its latest discount/price guessing campaign on Weibo is a good one,” says Zhu, “since it sparked significant discussions and retweets.

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Kering Introduces Executive Talent Program in China

china luxury

Finding talent remains a top priority for luxury companies, especially given the severe talent shortage in China.

Luxury conglomerate Kering, a big advocate of talent development, has decided to launch its own executive training program in China to ensure it has a deep pool of high-quality talent.

“The Chinese market has huge potential and is highly competitive,” Kering chairman and chief executive officer François-Henri Pinault said. “Talent shortages and high employee turnover rates are key challenges facing the market. Through the Leading Talent Through Global Perspectives program, we aim to address these challenges by improving the managerial skills, creativity and global vision of our employees, and ultimately deepen our pool of high-quality talent.”

In collaboration with Tsinghua University in Beijing and HEC Business School in Paris, Kering has designed an 18-month program that will provide tailor-made executive education to high-potential managers at Kering and its brands operating in Greater China, including Gucci, Bottega Veneta, Balenciaga, Saint Laurent, Boucheron, Pomellato, and Stella McCartney.

This is Kering’s first training program targeting mid-level managers in China. The goal is to improve managerial skills “to address challenges arising from the changing dynamics of Asian markets,” according to the company.

The program is expected to roll out to other markets, including the US, in the future

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California Malls Woo Shoppers from China’s Lower-Tier Cities

china travel retail

Shopping malls in southern California are going to great lengths to accommodate an important new clientele: tourists from China.

According to the Los Angeles Tourism and Convention Board, Los Angeles had 570,000 Chinese visitors last year — double the number from three years ago and 20 percent more than in 2012. They are also big spenders, with Chinese tourists in California spending an average of $2,472 per person on each trip, according to Visit California.

While Chinese tourists have a history of international shopping, demographics are changing. Many of today’s visitors come from second- or third-tier cities, particularly provincial capitals like Kunming, Xian, and Wuhan. According to the Los Angeles Times, these cities “have driven much of China’s economic expansion in recent years and created new pockets of wealth.” The growing number of people from these cities visiting the United States reflects America’s “deepening business relationship” with China.

“Chinese tourists now realize their significance in the retail world,” said Susan Vance, head of marketing at the Beverly Center, a high-end mall in Southland.

Recognizing the buying power of Chinese consumers, the Beverly Center has calibrated their marketing approach to draw as many tourists from China as possible. The mall has its own account on Weibo, a popular Chinese social media outlet, to alert customers about discounts and new items. The center also hosts visits for Chinese tour guides to familiarize them with the mall before they bring their busloads of potential shoppers.

Escher Werner, a marketing executive at South Coast Plaza in Costa Mesa, has also gone to great lengths to secure a foreign clientele for his shopping center. Ten years ago, he began making trips to China to promote the mall, but in the last few years, he found “an eager reception for information about the mall” in China’s less-developed west and began to pass over the first-tier cities of Shanghai and Beijing.

Several shopping centers in southern California have also hired guides to advise and escort tourists from lower-tier cities through the malls’ numerous retailers. These guides provide tourists with such amenities as Chinese-language mall maps, discount cards, and fashion advice for less experienced shoppers who may be on their first trip abroad.

The LA Times also suggests that the rise of Chinese spending in California “may be the result of shrinking investment opportunities back home, excess foreign currency and prices in the US that are a relative bargain.”

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Luxury Brands Are Stupid to Snub the Internet

Luxury Brands Are Stupid to Snub the Internet

Photograph by David Brandon Geeting for Bloomberg Businessweek

Imagine, if you can, the following Champagne tragedy: You’re wealthy and stylish and have decided to buy a handbag after a tough day at the office. You pour yourself a glass of red wine, flip open your laptop, and head to chanel.com. After clicking around for a few minutes, you’re annoyed to discover that cosmetics are the only thing for sale. Next you visit dior.com, where you can enjoy runway footage, browse product images, and even learn that some of its shoes embody, as the French couture house puts it, “all the modernity of Dior (CDI:FP).” Except you can’t actually buy them using modern technology.

The rich aren’t “all ladies of leisure with infinite time to shop”

These and dozens of other labels illustrate luxury’s dumbest paradox. Brands are happy to run their ownTwitter  accounts and live-stream their runway shows, but how dare they be so base as to sell their wares online? “We don’t like [e-commerce]. I don’t care,” Miuccia Prada told a reporter in 2013. “We think that, for luxury, it’s not right. … Personally, I’m not interested.” With the exception of a few companies, such as Saint Laurent, Gucci, and Burberry , the last of which takes online orders directly after its seasonal presentations, she’s pretty much speaking for the entire industry. Some brands are so snobby about the Internet—like the thriving, LVMH -owned Céline—that not even Barneys New York, a top account in terms of sales, is permitted to put the line on its e-commerce site.

Ninety percent of luxury purchases, which some analysts say is a $300 billion industry, still happen in stores, according to Forrester Research , but that’s skewed by the limits of acquisition placed on most high-end shoppers. The real business failing, says Forrester analyst Sucharita Mulpuru, is that “there are a lot of affluent people who are intimidated or annoyed by shopping at luxury retail stores.” And who can blame them? Mulpuru recently advised a brand whose executives admitted that one way they interact with shoppers is by writing down descriptions of the outfits they wear into the boutique. A computer would never side-eye your ratty T-shirt like that. “A lot of rich people are also busy,” Mulpuru goes on. “They’re not all ladies of leisure with infinite time to shop.”

By staying offline, these labels are losing a percentage of sales to successful multibrand sites such as Net-A-Porter , where $11,500 Valentino coats quickly sell out. Sales at the site rose 55 percent, to £368 million ($613 million), in 2013, according to the Daily Mail. And it competes with department-store sites like Bergdorf Goodman and Barneys, which feature $6,990 Oscar de la Renta dresses and $7,250 Givenchy sweatshirts for men. Credit card encryption and online fulfillment are thoroughly explored territories at this point; they wouldn’t be tough for smaller brick-and-mortar retailers to navigate.

Just ask Tom Ford. On March 24, after years of forbidding photographers at his runway shows for fear that images would land online, the outlandish designer decided luxury need not be so analog. At his new website you’ll find a $2,990 messenger bag clutched against a naked model’s breasts and a $3,080 briefcase covering her bare bum. The only thing the model’s actually wearing is a pair of $1,790 ankle booties. Everything’s for sale.

Unlike other designers who have caved to digital pressure by sacrificially offering up accessories and beauty items online, Ford plans to sell ready-to-wear clothing on the site soon. “We now have 98 retail locations worldwide, and the online store is an extension of them,” the designer said in a statement. His company has “grown to become an almost billion-dollar brand in terms of retail sales,” he added, “and the online store will add a major new avenue for our future growth.” Much of that may be from sales of Web-exclusive perfume which, in another surprise twist, Ford didn’t make the naked girl hold.

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Chinese tourists buying luxury watches show the way for exporters

By Robin Swithinbank

Pedestrians walk past a luxury watch shop in Shanghai on March 29, 2012©AFP

Priced out: exports of Swiss watches to mainland China have fallen on the back of high rates of consumption tax and import duties

Talk of a slowdown in Chinese luxury consumption has been well documented. On the face of it, exports of Swiss watches to China have fallen significantly in recent years. But while the figures are technically accurate, there is mounting evidence that they tell only one side of the story.

When the Fédération de l’Industrie Horlogère Suisse (FH) published its annual report detailing world distribution of Swiss watches in 2013, it confirmed that exports to China were down 12.5 per cent on 2012. But closer analysis of the figures – and the results of a new report into Chinese interest in luxury watches – suggest China is still driving watch industry growth and will continue to lead the way for years to come.

Analysts say exports to mainland China have decreased because Chinese consumers are more aware that domestic prices are pushed sky-high by VAT, import duties and China’s 20 per cent consumption tax on watches costing more than Rmb10,000 ($1,600). Another reason is that Chinese people are travelling more, visiting countries where watches are considerably cheaper.

According to research published in BusinessWeek in January, Chinese outbound tourists made 97m overseas trips in 2013, up from 83m in 2012. The number of passport holders is also rising rapidly. A report published in China Youth Daily last month indicates buying luxury products is “one of the major reasons” Chinese nationals travel abroad.

“You used to be able to sell in China because people didn’t know there was such a price gap,” says Erwan Rambourg, HSBC’s Hong Kong-based global co-head of consumer and retail research.

“Now, you’ll find it very difficult to find a single Chinese consumer who doesn’t know that they should not be buying local, but buying while they’re travelling.”

While exports of Swiss watches to China have gone down, exports to destinations popular with Chinese tourists have risen steeply.

The FH’s report shows exports to the US up 12.8 per cent over the past two years, with the UK increase at 44.5 per cent. Exports to South Korea, considered an upmarket destination for sophisticated Chinese travellers, were up 35.6 per cent over the same period.

“People assume luxury equals China, but it doesn’t – luxury equals Chinese,” says Mr Rambourg. “China accounts for 8-10 per cent of sales through the luxury sector, whereas Chinese account for around 35 per cent.”

The World Watch Report 2014, published yesterday by the Geneva-based strategy and research company Digital Luxury Group (DLG), backs up suggestions that Chinese appetite for luxury watches is rising sharply. The report indicates that 23 per cent of all global searches for luxury watches last year originated in China, an increase of 59 per cent over 2013 and more than in any other territory.

The report also shows a rise in interest of 145 per cent in the ladies’ watch category.

Based on these findings and assuming that crippling Chinese domestic taxes remain at today’s levels, some experts believe the current trend will continue.

“We don’t think the main challenge will be developing the demand for luxury products in China, but boosting local consumption,” says Pablo Mauron, DLG’s general manager for China.

“That said, we remain optimistic for future growth because tier two and three cities are still largely unexploited [compared with China’s tier one cities – usually defined as Beijing, Shanghai, Guangzhou and Shenzhen], and because of the increasing number of Chinese luxury travellers.”

Others feel the disparity between exports and domestic interest may not be long-term. “As in all markets, there can be a lag effect between interest and acquisition or repeat purchase,” says Zahra Kassim-Lakha, Jaeger-LeCoultre’s global head of strategy.

The drop in exports means some brands have overspent in China. Few seem concerned, though – part of their strategy is to drive awareness of products among the travelling elite. It appears to be working.

“We have overspent in China,” says Jean-Marc Pontroué, chief executive of Roger Dubuis, the Geneva haute horlogerie brand. “Our communication budget in China is by far higher in ratio to sales compared to the rest of the world, because we believe we need to be exposing ourselves to the travellers who buy our products when they travel. We don’t consider China a territory, but at least 40 per cent of our standard business is addressed to Chinese.”

Another factor contributing to the decline in exports to China is the impact of President Xi Jinping’s campaign to curb corruption. The gifting of luxury watches in deals is believed to have been sharply reduced since the campaign was introduced in 2012.

“Watches at lower price points aren’t used for gifting”, says Mr Rambourg. “And if you look at the higher-end brands, the risk you take if you offer those is that the person you’re offering them to might not know the brand.”

Juan-Carlos Torres, chief executive of high-end watch brand Vacheron Constantin, confirms this. “We are not a brand used in the corruption business,” he says.

“To understand our brand, you have to have a certain level of knowledge. Most of our Chinese customers are individuals, and if they are gifting, it is to a partner, not as part of a business or political transaction.”

Mr Torres, whose brand has 15 boutiques and 12 further points of sale in China, says the global Chinese community accounts for more than 50 per cent of Vacheron Constantin’s sales. “There’s no slowdown worldwide of Chinese customers,” he says.

According to the World Watch Report, growth in interest in haute horlogerie brands was up 13.16 per cent year on year in China, higher than any other country. For Vacheron Constantin, the increase was 34.59 per cent. Much of this growth can be attributed to the explosion of mobile phones in China.

Baidu, China’s dominant search engine, reports that mobile searches for haute horlogerie brands in 2013 were up 120 per cent.

The report shows the most searched-for haute horlogerie brand on mobile was Patek Philippe. For Thierry Stern, the brand’s chief executive, this is cause for optimism. “There is a very strong interest in haute horlogerie coming from Chinese customers and it is the sign of future long-term market potential,” he says.

DLG’s research suggests the luxury watch industry’s growing reliance on China – or rather Chinese consumers – may not be misjudged.

CLSA, Asia’s leading independent brokerage and investment group, estimates that by 2020 Chinese will make 200m overseas trips a year, double the current figure. Luxury brands will be banking on it.

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Findings: World Watch Report 2014

● Global consumer interest in luxury watches grew 5.7 per cent in 2013.

● China led the way with 23.25 per cent of all search, after a domestic rise of 59.43 per cent year on year.

● The US and the UK came in second and third, with 20.69 per cent and 10.04 per cent of global search respectively.

● Bric markets performed well, with China, Russia and India returning the highest year-on-year increases. Brazil, however, saw a 2.9 per cent drop, which is likely to be a concern going into the year it hosts the World Cup.

● Rolex, Cartier and Omega are the most searched-­for brands in China.

● Interest in women’s watches is led by China (up 145.50 per cent), India (up 27.65 per cent) and Russia (up 11.67 per cent).

– Compiled by Digital Luxury Group, Geneva

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China v the Chinese: Where the real luxury market lies

After two weeks in the mountains of Wyoming, I come home and what do I find? Not only is Mulberry without a CEO (and still without a designer), but all that conventional wisdom about the super-duper high-speed growth of the Chinese luxury market (shock! trauma!) slowing down may have been wrong. Or not wrong, exactly, but slightly misguided.

There was a terrific piece in the FT’s Watch & Jewellery special report over the weekend pointing out that while sales in the mainland may be slowing, sales to Chinese OVERALL (ie, outside China on nice trips that involve shopping) are not. Here is my favourite quote in the story, from Erwan Rambourg, HSBC’s Hong Kong-based global co-head of consumer and retail research:

“People assume luxury equals China, but it doesn’t – luxury equals Chinese. China accounts for 8-10 per cent of sales through the luxury sector, whereas Chinese account for around 35 per cent.”

See where I am going with this? See the picture above, which was taken in Paris?

Meanwhile, Hans-Dietrich Lahrs, CEO of Hugo Boss, told the FT that “15-20 per cent of sales in big cities around the world come from Chinese shoppers”– though China itself accounts for only a third of the 15 per cent of annual sales that come from Asia in total, and he was considering “a new service that would allow Chinese tourists to shop online while overseas and have the items shipped back to China”.

All of which suggests that traditional methods of calculating markets – by sales per geographic region – are increasingly meaningless in a luxury market where consumers 1) travel and 2) are very good at searching the web to find out where they should buy things to get the best price, and then going to the product. Especially when brands themselves invest in flagship stores in cities as much as marketing vehicles as actual sales vectors (this is especially the case in countries such as Brazil, where a store is effectively an ad to seduce consumers into buying stuff outside the country, or China, as per above).

There’s a reason the Savile Row association has been lobbying the UK government to relax Chinese visa restrictions – they fear loss of sales to travelling Chinese tourists –and there’s no question that much of Bond Street foot traffic is not native business. There’s a reason so many luxury brands now employ Chinese speakers in their flagships in London and Paris and New York. So given that, is it really accurate, to call it, for example, the “UK market”, when much of that market is made up of non-UK citizens? Is it fair to say Chinese are buying less in China if they are buying more abroad? I wonder.

Indeed, it seems to me (with that nice perspective vacation brings) that thataway distortion and confusion lies; the capex/return ratio is not quite as direct as it used to be. It may look more like the etail/return ratio, where information is gathered online and sales made in store, or vice versa.

How you express that in a quarterly report, of course, is another question.

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5 MUST-KNOW FACTS ABOUT THE HABITS OF CHINA’S LUXURY E-COMMERCE SHOPPERS

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Everyone knows that China’s e-commerce market has exploded in recent years, becoming the second largest in the world and hosting the world’s single largest e-tail holiday every November 11. While this certainly has major implications for every retail sector, navigating the e-commerce market in China has been especially tricky for luxury brands, which have traditionally relied more heavily on in-store experience than other types of goods.

In order to shed some more light on what China’s e-commerce boom means for luxury, a new report by consulting firm KPMG in association with online flash sale site Glamour Sales and social community Mogujie surveyed 10,200 Chinese luxury e-commerce consumers on their motivations for purchase, preferred online shopping platforms, greatest concerns, and more.

According to the report, luxury brands are reluctant about delving heavily into Chinese e-commerce despite great potential in the market. “Only five of the top 60 brands operate their own online sites,” said Glamour Sales CEO Thibault Villet. “They have been late with their online strategy because they have focused on expanding their bricks and mortar network in China. Secondly, they did not anticipate how quickly Chinese consumers would shift to online purchasing.”

Below, we’ve listed five of the most useful and interesting facts featured in the report about the habits of China’s online luxury consumers.

They’re most motivated by price

Just because online luxury shoppers are buying high-end goods, it doesn’t mean they think they’re splurging. In fact, a lower price was one reason 74 percent of respondents said they bought luxury online, and price was the most common product information sought online, with 79 percent of users searching for it (the importance of online searches for luxury prices was also found in a recent Baidu study). Meanwhile, the fact that it’s less time-consuming than brick-and-mortar came in second at 55 percent. Buying American and European brands came in next at just under 50 percent, and notably, “uniqueness” came in at 33 percent, showing the market potential for niche e-tailers.

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Their biggest worry is still fakes, but they also just want to try things on

The massive proliferation of fakes in China on not only Taobao, but also sometimes established e-commerce sites, means that authenticity is the top concern among consumers. This worries 78 percent of them, followed by the unavailability of typical brick-and-mortar amenities such as the option to try on products, find the right size, and see what they’re getting in person. This is actually good news for high-end luxury e-tailers, which, thanks to high price points, have the opportunity to offer special concierge services to allow couriers to wait for the client to try on the item. This extra effort is already being embraced by some luxury e-commerce sites, such as ShangPin.

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They use multiple devices for online shopping

“A key trend is the rise of mobile shopping; for us it is currently 22 percent of our sales (excluding tablets),” said Villet of Glamour Sales’ experience with mobile customers. Furthermore, he says that, “about 50 percent of our business is on non-PC platforms.” According to the report, more than 50 percent of consumers surveyed said they’d used a smartphone for luxury e-shopping, while more than 30 percent used a tablet. The rise of mobile shopping is also being driven more by Chinese women than by men—59 percent of women use smartphones for online purchasing, compared to 38 percent for men. The use of mobile devices is due in large part to Chinese consumers’ busy lifestyles, with 74 percent saying they use their smartphone for luxury shopping “on the go.”

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Endorsements by those they trust are more important than those by celebrities

When it comes to the most important place for learning about luxury products, social media reviews came in as the top information channel and were followed closely by friends’ recommendations and word-of-mouth. As you can see from the chart below, celebrities and key opinion leaders (KOLs) are also still important, but rank far below endorsements from consumers’ more trusted members of their network.  

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Their payment methods are rapidly evolving 

While cash-on-delivery (COD) used to be the most important payment methods for Chinese consumers, it has now been superseded by a plethora of new technologies. The most important of these is online payment systems, although credit card payments are also quickly becoming more important. Meanwhile, mobile payments are toward the bottom of the list now, but the landscape is always changing, and Villet predicts that WeChat’s new payment system will change that in 2014.

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E-Commerce / Tech
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China’s Luxury Boom Moves to the Web

A shopper looked at bags at a store in Hong Kong.

 

Bloomberg News

China’s luxury boom is going online.

As the overall sector struggles amid a government crackdown on ostentatious spending and gift-giving, the urge to splurge online is growing strong, according to a study by consulting firm KPMG.

KPMG found in a survey of 10,200 online consumers in China that the respondents spent an average of 1,397 yuan (US$229) on their most recent purchase of a “luxury or premium” item, with one in six saying they spent more than 2,000 yuan on that purchase. The researchers didn’t define “luxury or premium,” letting survey respondents interpret the label themselves.

Almost three-quarters of survey respondents said they preferred to shop online because they could land a better deal, while 55% said they preferred it because it’s less time-consuming. Another 47% said it guarantees authentic American or European origin of goods.

Chinese consumers outspent American shoppers online last year for the first time, and by 2015, the country’s online shopping market is projected to reach $540 billion, or 7.5% of all retail transactions in the country, the consulting firm said in its report.

Cosmetics were the most popular items bought online, with 53% of respondents saying they bought products in that category. Women’s shoes and women’s clothes ranked second and third.

Click to enlarge

“Cosmetics do a lot of business with customers in cities [where] they don’t have stores,” said Nick Debnam, Asia-Pacific chairman of consumer markets at KPMG China. He added that Chinese consumers are more connected to social networks than Western buyers, and more likely to seek fashion and buying advice from friends or blogs.

Most of the luxury purchases are made on third-party sites like Alibaba-owned Tmall and Taobao. That’s partly because Western luxury brands have been slow to sell directly to consumers online in China, fearing that it will debase their label and that customers won’t get the full brand experience if they’re not in a physical store, the KPMG researchers said. Brands have also said cited the high investment costs of building a logistics network for delivery as a deterrent to opening online sales portals.

Some companies, like Gucci, have entered China’s online luxury market by teaming up with existing Web-based companies such as Italy’s Yoox SpAYOOX.MI -1.19%, which in 2010 was the first foreign company to launch luxury sales online in China.

Neiman Marcus Group Inc. announced in 2012 a partnership with Glamour Sales Holdings, a Chinese site that operates flash sales, and said it planned to build warehouses across China so it could reach even buyers in the country’s hinterland. But last year, Neiman said it would scale back those plans and instead ship its goods directly from the U.S., citing the broader pullback in the luxury market as the primary reason.
Still, KPMG consultants say the online marketplace is one that is just too big for brands to ignore for long. For one, Mr. Debnam said, selling online could help smaller, lesser-known brands introduce their products to Chinese consumers who are increasingly searching for “niche products, particularly for brands that are not widely distributed.”

He predicts that more Western brands will build platforms for e-commerce within the next two years. “The brands are reluctant, but the consumers are embracing online.”

–Jason Chow, with contributions from Laurie Burkitt. Follow Jason on Twitter@jjasonchow. Follow Laurie on Twitter @lburkitt.

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