Luxury in China. Not Worth Traveling For?

Sunday, January 29, 2012 18:32

One of the most spoken of markets in China is that of luxury. China is the #1 buyer all things luxury right now, and every day I pass by Shanghai’s Lambo store, and see two new colors in the window, confirms that. LV has three flagship stores in Shanghai.. as does Apple.. as does Ferrari.

Yet, in this weekends FT piece Luxury Brands Long to Bond With China’s Millionaires it seems that the market has not reached its full potential (globally):

Chinese shoppers have become a fixture of the luxury retail scene in the US and Europe, drawn by prices that can be up to 50 per cent lower than tax-elevated levels at home. But many upscale brands have yet to bond with the truly wealthy – China’s million millionaires.

“It’s like they’re dancing with each other but sometimes going past each other,” says Christine Lu, co-founder and chief executive of Affinity China

[..] Even when luxury brands get the basics of hiring Mandarin speakers and accepting the China UnionPay credit card, Ms Lu says that misunderstandings with the wealthy can still arise.

Western luxury retailers like to ingratiate themselves by building “unique relationships” that depend on employees learning about customers’ lives and anticipating their needs.

When reading the article, what struck me the most was that there was a belief that the Chinese consumers should be more inclined to spend the money on luxury outside China.  A natural conclusion on some level as historically (particularly with the Japanese and Koreans), this was true, and at the same time the cost of buying luxury products can be 30-50% more in China

A barrier that does not seem to be bothering Chinese consumers tot he point they are unwilling to spend large sums of money at the right time of year:

Aspirational luxury retailer Coach (NYSE:COH) may get a solid lift in sales as Chinese New Year, or Lunar New Year, nears. China is the largest market for Coach outside U.S., and with the Chinese luxury spending expected to increase significantly in the week leading to January 23rd

So, what is with the mixed messages?  How can it be that, even with the Chinese being the undisputed king of luxury buyers, there are still brands (and events) in the US saying that the market has yet to ripen for them?

A few thoughts based on conversations I have recently had with two luxury executives (whose brands shall not be mentioned).

Early on in the luxury game, when LV and others were building massive stores on Nanjing West Road, the theory went that these would be showrooms. That, because luxury products were subject to luxury taxes (resulting in the 30-50% increased retail price), buyers would go to Nanjing Road, see what the brands had to offer, build their shopping list, and then head to HK (or some other destination) to make their purchases.  And this did happen for a while.  Buyers still flock to HK on group trips, and undoubtedly there are also groups (of a higher income bracket) headed to Paris, London, and New York on shopping trips as well.

But something else happened as well.  These stores started to make money.  A LOT of money… 20 million RMB a month kind of money..  In one conversation I was told by an executive that he had a client who would regularly spend north of 1 million RMB in his store, and one day while in the store this executive had a chat with the buyer to understand why he did not fly out of country to make the purchases.  After all, 30-50% savings would seem attractive to most buyers right?  Wrong.  For this buyer, for every day out of China was seen as a loss. He was someone who did not have time, or interest in a vacation, and to spend 250,000RMB on a watch was “his vacation”.  Money, and the ability to save money, was not a concern for him.  So, already brands were learning that while there was certainly a market in Chinese travelers, the market in China was itself (even with the luxury tax in place) one that was not as expected.  IT was not going to be a place where brands should look to advertise for the sale, but should be seen as the place to make the sale itself.  Particularly as Chinese in China’s second and third tier cities, who were under even more travel restrictions, would travel to Shanghai and Beijing regularly to make their purchases.

Second to that, when it comes to selling to “travelers” brands are also having to adjust their strategy as well.  That, while the Japanese tourists may have gone to LA, NYC, and London to buy up everything they could, the Chinese are a bit more picky.  Particularly as they have flagships in their backyard.  In another conversation I had, it was clear to the executive (through his discussions with his target market of professional females) that when they went to Paris, London, and NYC, they had much more specific shopping needs and were often going to find the luxury gems that they could not get anywhere else.  In essence, they were going to find the items that would put them ahead of their friends. The special/ limited edition items that, regardless of price, could not be found in China at all.  These were the consumers that he was looking to attract, not those on tours, because they were more mature in their tastes, knew what they wanted, and would spend 3-4 x more in his shop than anyone on the traditional buying tour. A group that Christine Lu seems to be more interested in herself.

For me, where this is interesting, is simply the fact that the Chinese consumer is on some level rewriting the rules.  The speed by which wealth has been created, and across all provinces, has had a tremendous impact on how people spend.. and while the Asian consumer of old may have readily taken a trip out of country to go on buying trips, for the Chinese the conditions are different.  Getting out of country for many is a difficult and time consuming process sometimes (visa approvals), while for others it is time spent away from their cash cow.

There is little doubt with those that I have spoken with that the “Chinese” luxury consumer is a force to be reckoned with, and will grow rapidly for the next 3-5 years, but has shown that it will not play by traditional thinking.  They are not the Japanese of old who would line up 2 hours before a GUCCI store would open on Rodeo drive, and this group is far more likely to make the bulk of their purchases in country when accessible and for the everyday use.

So, when brands are trying to position themselves (globally) to the Chinese consumer, they need to keep this in mind… that, if a Chinese consumer is going to fly half way around the world to enter a store, there better be a pot of gold at the end of the rainbow.

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