As tastes evolve, the world’s high-end brands are racing to adapt to win market share in the world’s second largest economy
Until recently, wealthy Chinese were known for preferring designer brands with prominent logos, to prove they had the money to afford them. But now they are increasingly shunning flashiness and overt displays of wealth. “I even see people removing the label from the inside of their jacket as a way of making it more anonymous,” said Jing Ulrich, managing director and vice president of Asia-Pacific at JP Morgan, and one of Asia’s most respected bankers.
This is symptomatic of a burgeoning generation of Chinese consumers who are turning from the heavily-logoed towards the more discreet. This newfound sensitivity stems from many factors, from a desire to differentiate from the nouveau riche, to the country’s recent curbs on political corruption. And as tastes evolve, the world’s high-end brands are racing to adapt to win market share in the world’s second largest economy.
“In the early days many (Chinese consumers) assumed that the more expensive the item is, the better the quality,” said Ulrich, speaking at last week’s International New York Times South East Asia Luxury Conference held in Singapore. “But the Chinese consumer is now demanding, knowledgeable, savvy, sophisticated and also very price-conscious. There is sensitivity around appearing too ostentatious. Brands must be aware of this.”
Increasingly many are. Brands including Louis Vuitton, Gucci, Tod’s, Hermès and Anya Hindmarch are investing more in the bespoke parts of their offering, allowing customers to personalise their purchase by choosing their style, colour, fabric and look, and moving away from the off-the-shelf monogram. Scarcity, quality and craftsmanship are this season’s hottest trends as tastes mature.
Nicola Ko, senior luxury analyst at London-based Ledbury Research, said: “The Chinese have skipped over the stage where they want to fit into society by having what everyone else has, to wanting to express their own individual style. They are increasingly buying from smaller, niche brands, and we see luxury giants moving towards a brand elevation strategy for long-term growth – less logos, less canvas, more leather and precious skins.”
Kelvin Wu is a prime example. The Hong Kong-based private equity founder of AID Partners, who earlier this year bought the Asian division of troubled British music retailer HMV, feels most comfortable wearing a low-key timepiece. Wu, who moved to Hong Kong from the Mainland as a child, has a collection of around 20 vintage and luxury watches. He keeps most in a safe and only wears his huge diamond-studded Cartier Santos 100 XL on very special occasions. The watch he wears daily is a simple silver-faced Milus Snow Star with a leather strap, a remake of a US Navy design of which there are only 5,000 made. “It is very subtle and casual and I got it from the owner, so it is a nice story, and I love it.” he said.
Global luxury brands in China have been badly hit by the government’s anti-corruption campaign initiated last July. According to consultant Bain & Co, luxury retail growth in China dropped from 30 percent in 2011 (including Hong Kong, Macau and Taiwan) to just 7 percent in 2012, underlining the sudden slowdown in Chinese luxury consumption mainly down to shrinking corporate and political gifts.
This has severely impacted many brands, said Nader Mousavizadeh, a partner and co-founder of Macro Advisory Partners also speaking at the conference. “The very high end of the luxury market has been affected by the political anti-corruption campaign, in terms of people going to expensive restaurants, buying high-end spirits and being able to buy expensive gifts,” he said. Gifting can constitute up to 30 percent of revenue of some brands, and since the crackdown this segment has all but disappeared.
But other parts of the market will expand to make up for the shortfall and it is these areas that brands must seek to tap. “Self-reward and self-giving will increase,” said Ulrich. “China is a nation fully of young, well-educated and aspirational consumers who want to reward themselves for working hard – and soon this segment will replace that which is lost in gifting,” she added. Indeed according to Wealth-X data, China’s richest are the youngest in the world, with its average billionaire only 53 years-old versus the global average of 62. They are also the most entrepreneurial, with 90 percent having made their own fortunes, the highest of any country, according to this month’s Wealth-X and UBS Billionaire Census.
The other challenge for high-end brands in China is location. As a vast nation of 1.3 billion of which only 52 percent are city dwellers, brands must choose their city wisely. First, second and third tier cities may be better suited to different collections in terms of style, taste, climate and price range. Unlike many European countries were wealth is more fragmented, in China, 75 percent of the country’s ultra wealthy inhabit the top ten cities, according to Wealth-X. The four top tier cities, Beijing, Shanghai, Shenzhen and Guangzhou, account for a greater share of China’s UHNW individuals than ever before, according to the Wealth-X and UBS World Ultra Wealth Report. So brands must do their homework.
“So many luxury goods companies have expanded rapidly in China, some have up to 70 outlets,” advised Ulrich. “You have to think how much you want to penetrate China’s hinterland. If you expand too fast your brand loses exclusivity. But if you don’t expand fast enough your competitors may overtake you.”
Tax is another idiosyncrasy. There are three levels of additional taxes on luxury goods: VAT, import tax and luxury goods tax. This can mean up to a 60 percent premium on a handbag bought in Shanghai over one bought in Paris, for example. As a result, Chinese consumers are increasingly shopping abroad. Last year 83 million Chinese travelled overseas, a number predicted to reach 100 million this year, mainly in the US, Europe and Australia – making it the world’s largest outbound tourism pool, said Ulrich. “Chinese people spend more abroad on luxury goods than they do at home, and this is set to grow,” she said. They will also spend more through e-commerce and online technology, particularly in the younger affluent segments.
No doubt there is a golden opportunity for those brands that can get ahead. China already accounts for around a third of the world’s US$294 billion luxury market, according to Bain & Co, and with Chinese urbanisation predicted to rise from 52 percent to around 80 percent, this will only grow.
So what can brands do to differentiate? Ermenegildo Zegna, chief executive of luxury retailer Zegna Group, said at the conference that one of the biggest challenges in China is building a new customer base as tastes evolve. “What is key is for brands to first establish as many aficionados as possible, before opening up lots of stores in a country. Brands need to plan ahead.” He pointed to the example of Zegna’s expansion in India, “I think we’ve been too quick and too many cities outside Bombay…it didn’t work out.”
“My belief is, master the major cities, become an established brand and then move. But take it step-by-step.” he advised.
Wise words for a golden opportunity.