Luxury retailing in China – A ‘once in a generation’ shakeup

Even before the pandemic, the luxury retail market in China was in a state of expansive growth and rapid transformation. Increasing digitalisation, greater inclusivity, and the enthusiastic participation of a new generation of luxury shoppers have all combined to consolidate China’s place as the biggest and most innovative luxury market in the world.

The pandemic has only served to accelerate these trends, and they show no signs of slowing down even as the world recovers from COVID-19. China’s luxury retail market is now more localised, competitive, inclusive and youth-focused than ever before, forcing every brand to be bold in its design, messaging, pricing and engagement strategies if it hopes to retain the interest of its audience, and, by extension, its market share.

To guide us through the recent development and future direction of luxury consumption in China, we invite three industrial experts to analyse the market from different perspectives.

Yajin Wang is an Associate Professor of Marketing at CEIBS and an expert in branding strategy, luxury brands, customer insights and consumer analysis.

Anne Cai is the VP of Human Resources and Corporate Communications for Moët Hennessy Diageo China. She joined LVMH Greater China in 2011 as Learning & Development Director, before moving internally to MHD in 2018. Anne is a current member of the CEIBS Global EMBA 2021 cohort.

Hans-Peter Bouvard is the General Manager of Rolex Beijing and has been with the brand for over 10 years. He is a CEIBS Global EMBA 2006 alumni.

Enter the pandemic – A wholesale localisation of China’s luxury market

A major new report entitled A New Generation of Chinese Consumers Reshaping the Market released this year by Tencent Market Insights (TMI) and the Boston Consulting Group (BCG) indicates how vast the Chinese luxury market is. According to the report, the market in the Chinese mainland is predicted to have grown by 23-25% in 2021. If this proves to be the case, it will represent a revenue jump of 100 billion RMB, taking its overall size to an astonishing 520 billion RMB.

Our observers all agree that even though China was already the most important single market for this industry in early 2020, the pandemic has been a major accelerant in this regard.

Hans-Peter Bouvard: Our industry felt the impact of the pandemic almost immediately. Since the early 2010s, Chinese consumers have started to travel more widely and frequently, buying abroad and bringing products home. When the borders closed, it also closed this shopping avenue to consumers, along with the practice of daigou (a form of surrogate shopping when overseas shoppers buy luxury products abroad and bring them to China). So, the roughly 30% of Chinese luxury demand (varying across different segments) that was previously being supplied abroad suddenly became localised, within mere months. Right now, the market is almost entirely local.

This sudden localisation continues to affect the market in different ways. Specifically, brands are under pressure to continue to quickly scale up supply networks to satisfy rising local demand, but without compromising on product quality. This remains a challenge when global supply and logistics networks are still being impacted by the COVID-19 pandemic. Looking ahead, leading brands are considering how best to create new products more quickly to satisfy the market. One factor is uppermost in their minds when forming new designs and supporting strategies – their customers are getting younger.

A New generation of luxury shoppers

It is not just the ‘where’ and ‘how’ luxury goods are sold in China that is changing, the ‘who’ is also undergoing a significant shift. The latest TMI/BCG report suggests that consumers in China entering their 30s will be the driving force behind the market’s growth, and that people aged 21-30 now account for 50% of total luxury consumers in China, contributing 46% of all luxury sales.

Professor Yajin Wang explains why younger consumers are more numerous and influential in the Chinese luxury market today:

Prof. Wang: Younger consumers, those in their late 20s to mid-30s, earn good salaries, but China’s real estate conditions make it increasingly difficult for them to buy a house. Additionally, more young people are delaying getting married and having children. This means that they have lots of disposable income, but very few financial responsibilities. This is translating into an attitude of self-reward, where they feel comfortable spending on themselves and indulging in luxury purchases.

Not only are younger consumers more comfortable with splashing out on luxury goods, it is easier for them to do so today. Brands have been working hard in recent years to narrow the price gap between the Chinese mainland and major luxury market hubs with lighter taxation, like Hong Kong and Singapore. Again, this is due to the sheer size and influence of the Chinese consumer base, prompting luxury brands to avoid overreliance on duty-free hubs for sales, and to subsequently bolster their physical presence in China. This can be seen in the ongoing trend of the flurry of brands’ flagship stores and prime retail spaces popping up in malls across the country.

a group of women smiling with shopping bags

No longer priced out of the market, younger shoppers are engaging with luxury consumption at previously unthinkable levels of confidence and consumer spend. Leading brands have been quick to capitalise on this, opening up the market to younger consumers in new and innovative ways.

Prof. Wang: Younger shoppers are happy to spend on themselves, and luxury brands are eager to accommodate them. This shift in consumer demographics is prompting a series of important trends not only in design and marketing of luxury products, but also in financing. Today, even a pair of sneakers from a luxury brand comes with a wide range of flexible payment options. If you want, for example, a 5000 RMB pair of sneakers from Gucci, you might pay 500 RMB now and the rest monthly. The need to include younger consumers is causing brands to compete and innovate in ways they may never previously have considered.

Tailoring the market to younger tastes

Younger shoppers have already shaken up the luxury goods market in China, and their influence is here to stay. There is now a greater hunger not just for access to the market, but also for greater choice, and wider representation of different styles and fashion statements. In short, there is a hunger for novelty, and younger Chinese consumers are happy to bounce around different brands in order to get it. In the recent BCG/TMI report, only 40% of surveyed respondents claimed to feel any sense of loyalty to specific brands. 80% have tried new brands during the past two years.

Satisfying this hunger for novelty is a task that is being tackled across many different aspects of luxury brands’ operations. Anne Cai explains how and why:

Anne Cai: Luxury consumers are getting younger and more aspirational, and this is a trend that pre-dates the pandemic. Our response has been the introduction of a ‘younger’ design process; we embed more fashionable, on-trend designs in our products and packaging. It applies to our stores too; everything from the façade to the layout is approached from this perspective. It’s a business-wide mindset, it influences how we speak to our audience, the channels we use, the experiences we craft. We even hire more Gen-Z young professionals to bring that energy into our approach and better engage with the mentality of young consumers.

Across the market, our observers see lots of brands experimenting with different youth-led aesthetics and design cultures. Many are moving away from the ‘classic’ high-class look, and are embracing emerging design concepts drawn from punk culture, street culture, hip-hop culture – anything that taps into the trends and concepts that speak to younger consumers. Another 2021 report, the 8th Edition of True-Luxury Global Consumers Insights from BCG and Altagama, suggests that Chinese consumers are increasingly preferring ‘extrovert attributes’ in their brands. Boldness is the new look, by all accounts.

However, while the design influence and spending power of younger consumers is strong and growing, it is not all-pervasive. Our observers note that many brands are not rushing to embrace any new design ethos, and are remaining conservative in their design, outlook and communications. This is also a deliberate strategy, as it suggests that the products of these brands – and the iconic look of the brand itself – are timeless. Even as everything changes so quickly around us, these brands sell the idea of permanence and reliability, a classic luxury feel that never goes out of style.

Still, the influence of younger consumers is a trend that may yet touch on every segment of the luxury industry. The youthful desire to push boundaries, seek new looks and experiences, and make bold fashion statements has already prompted major changes in design and marketing approaches.

Prof. Wang: Who would have thought that sneakers could become luxury products? Or ripped jeans? These were originally just associated with sports and blue-collar consumers, now they are embraced by the most prominent global luxury fashion brands. Nothing is ‘taboo’ in luxury design anymore, and that’s how young people like it.

Going digital – No longer a value-add, now a necessity

Prof. Wang: Luxury purchasing has always been primarily about excellent experience. Consumers want exclusivity, they want to feel special when they buy these products. They want to see and ‘feel’ the goods, and be seen purchasing them. The brands that figure out how to replicate this experience digitally are the ones well positioned for the future.

Our three observers all agree that physical, in-store shopping will remain the central sales avenue for the luxury market for the foreseeable future. However, they also agree that a digital presence, tailored to customer preferences and innovative in nature, is essential for any luxury brand in China.

Hans-Peter Bouvard: Maintaining a viable digital presence in China goes well beyond just e-commerce. The customer journey today is so much more digital in nature than 5-10 years ago. Today, the purchase intention often starts with online search, or from peer recommendations online. This makes it essential to be present online, to be part of the conversation on social media, and to use your digital presence to educate your customers about the history, culture and craftsmanship of your products. Successfully connecting the digital journey to the bricks and mortar stores grows confidence in the brand, and it leads your customers to the purchasing experience that they want. Deeper digitalisation of the luxury market is inevitable, it’s just a question of how far different brands will go and in what timeframes.

In terms of sales, digital has a solid and expanding foothold in China’s luxury market. Online channels are predicted to hit 22% market share by the end of 2021. This demonstrates the growing comfort level of Chinese consumers to make even substantial luxury purchases online. Even the more conservative luxury brands are now launching T-Mall stores, dedicated online sales channels and mini programmes in WeChat. Previously, the conventional thinking was that consumers would be wary of spending tens of thousands of RMB online, without seeing the actual, tangible product, but now leading brands have been busily reinforcing the image of trustworthiness of their digital sales channels, while also improving the enjoyment and overall ‘wow’ factor of online luxury shopping.

Anne Cai: Omnichannel is essential for building brand desirability. It’s an exciting time to be blending online and offline experiences. We now have online VIP shopping sessions with dedicated shopping assistants. Even offline, in our physical stores, we create online shopping experiences and visual aids. This blending is essential, as it allows our customers to enjoy the best of both while always maintaining the consistency of the shopping experience across all channels. It’s also a great time to be more experimental. For example, some brands of the LVMH group are trialling the creation of purely digital IP that customers can apply to their online game avatars and other digital personas. This is a new experimental phase for us, but it’s very exciting and it highlights the many opportunities to innovate digitally.

The pushing of digital boundaries in luxury shopping in China is partially due to the spectre of the physical restrictions imposed during the early phases of the pandemic. In the event of future lockdowns, brands want to be able to engage more meaningfully with their customers online, hopefully avoiding drastic drops in sales figures. However, the acceleration of the industry’s digitalisation is also decided by the nature of Chinese consumers themselves.

Prof. Wang: Luxury brands in China were more experimental in creating and refining digital touchpoints than the rest of the world even before the pandemic. They are constantly being pushed to innovate, because Chinese consumers are the pioneers of digitisation. They are more tech-savvy, particularly in mobile, than their counterparts almost anywhere else. The US and Europe have been much slower to adapt to mobile payments, shoppable livestreaming, and all manner of digital channels and approaches. The pandemic was a catalyst for HQs of luxury brands, most of which are in North America and Europe, to sit up and take more notice of what is happening in China. At CEIBS, we’re getting more requests from China or Asia Pacific regional headquarters of luxury brands, to set up training sessions that will help showcase their digitalisation experiences to the main HQ back in North America and Europe. This shows that these main HQs are listening and interested. They want to hear not just from their colleagues here, but also from experts and academics. They want to understand China’s luxury digitalisation journey.

Looking ahead – What’s next for luxury in China?

To finish our overview of China’s luxury retail market, we asked each of our interviewees to highlight specific key challenges and opportunities that they think brands will face in the near future.

Anne Cai: One of our main considerations for the future is understanding the crucial trend of ‘China pride.’ How do we see ourselves as global influencers, while trying to culturally connect with Chinese consumers? On the one hand, we look at them as ‘global Chinese consumers,’ totally at ease buying luxury products wherever they are in the world. And, once things open up again, they may choose to keep shopping here in China, or they may fly to Paris, or they may do both. On the other hand, we must understand the growing sense of China pride, and how it influences their relationship with luxury shopping. Most luxury brands were not conceived here, so how do we culturally connect with the Chinese consumer and appeal to this sense of cultural pride? This is simultaneously one of our biggest challenges and greatest opportunities.

Hans-Peter Bouvard: Luxury brands must address the China market in a humble, cautious but consistent way. It’s a market that thrives on innovation, and consumption habits adapt very quickly to new realities. The pandemic has proved that. To be successful in the long term, brands must be willing to adapt not only their product offering but their whole mindset. You don’t have to drop everything that made your brand successful to pursue new trends, but you do have to understand those trends and legitimately engage with them. Sustainability is one key consideration; as a brand you must proactively embrace sustainability and be genuine when displaying your green credentials. This is just good business and increasingly it is what consumers are demanding.

Prof. Wang: How will brands balance the seemingly contradictory elements of inclusivity and exclusivity that are both essential to their business models? Luxury brands are being forced to be more inclusive – widening product designs and segments for youth audiences, embracing more competitive pricing, more communication channels – because that is where the market is. However, making luxury products for everybody will inevitably hurt their perceived exclusivity. Overcoming this paradox in a manner that is clear, consistent and relevant to the target audience will be luxury brands’ biggest challenge – and opportunity – going forward.

So, against a backdrop of increasing technological and design innovation, and greater engagement with younger consumers over more communication channels, China’s luxury market is currently in a state of highly experimental flux. While there is not an even pace of innovation and change occurring across the different luxury segments, the need to adapt is being felt by all. Pushed by the pioneering nature of Chinese consumers, and the ever-present possibility of further world-shaking events like the pandemic, luxury brands are experiencing a once in a generation shakeup of everything from design processes, to supply chain management, marketing strategies and even the whole distribution channels.

The changes that have been accelerated by the pandemic are not likely to be reversed. The ‘new normal’ state of China’s luxury retail industry is a predominantly localised consumer market, one with a growing youth influence and a sophisticated aptitude for digital engagement across all touchpoints and channels. This makes it a more imposing and challenging market than ever, but one offering greater rewards than anywhere else in the world to luxury brands who can get it right.

Writer:

Tom Murray

Editor:

Marcel Austin-Martin, Michael Thede and Effy HE

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