Traffic at Louis Vuitton stores in the US and Europe usually picks up during the December holiday season. But in China, “we’re busy pretty much all the time,” said Chen Xueding, an assistant at a massive Louis Vuitton store in downtown Shanghai.
The store is not alone: Competition is fast heating up in China’s luxury goods market. Burberry has over 50 stores in China and around 100 in the pipeline for the next five years. Prada plans to open 50 new stores in the market over the next three years. The list of luxury stores that are expanding in China seems to go on forever.
Luxury goods companies are widely looking to China to offset negligible growth in Western markets. McKinsey, a consultancy, reckons that China’s luxury goods market will grow by 18% a year to reach US$27 billion in 2015, commanding about one-fifth of the global market. Bain, another consultancy, estimates that the country’s consumers may already make up a larger share than that, if you include their spending abroad.
But even so, the current lineup of luxury brands cannot rest on its laurels. Consumer tastes are changing quickly and becoming more diverse. To retain or build market share among China’s increasingly sophisticated shoppers, luxury companies have been forced to ramp up their investments in brand equity.
China’s luxury goods market is unique in many respects, one of which is its consumers. They are young: Whereas only slightly more than one-quarter of Western luxury goods buyers are under 35, a staggering three-quarters of Chinese are. Compared with the West, Chinese consumers are also disproportionately male, accounting for about 45% of sales.
Part of the reason for this trend is that Chinese men have a fondness for handbags, as both a status symbol and a practical way to transport large amounts of currency in a cash-based economy. Male buyers of Louis Vuitton handbags in China outnumber the fairer sex by seven to three. Coach, meanwhile, says men make up about 45% of its consumers in China – compared to just 7% in the US.
Some Chinese buyers also spend considerably more of their income on luxury goods than their peers in the West. McKinsey notes that many consumers in the upper-middle class spend up to a staggering 40% of their income on luxury goods – a claim buttressed by countless anecdotes of young urbanites spending a month or more of their salary on a new accessory.
These demographics and demands have favored a handful of companies with both male appeal and a head start in China: brands like Louis Vuitton, Dunhill and Coach in handbags, Armani, Gucci, Burberry and Emenegildo Zegna in menswear, Omega in watches and Cartier in jewelry.
However, a new class of consumers is emerging that could alter this landscape. Though newly-rich first-time buyers will continue to make up the majority of consumers in coming years (Bain estimates they will account for two-thirds of the market), brands must also appeal to a growing class of “old money.” In China, this is a very relative term, including customers who have had their wealth for a decade or more and tend to have higher standards for quality.
“How do you protect the brand identity [as well as cater to] much less sophisticated customers? You need to adapt a bit,” said Kevin Chong, Shanghai-based manager at Bain.
“It’s a tricky balance – adapt too much and you lose that strong brand identity and story.”
One strategy for capturing this new class of discerning buyers is to improve the buying experience. Radha Chadha, a Hong Kong-based luxury brand consultant, said that while most new money shoppers are focused solely on acquiring the product, old money customers tend to pay more attention to the overall buying experience.
“These stores are almost like a physical advertisement, in the sense that you can go, see the brand and experience it,” Chadha said. “How large the store is, how well it’s done up, how the products are displayed and how the sales staff behave become a physical demonstration of the brand.”
With that in mind, some companies have been severely curtailing distribution via licensed third-party retailers. Such distributors can be lucrative and expand product reach quickly – especially in China – but brands cannot ensure a pleasant buying experience. One industry analyst points to Polo Ralph Lauren as an example of a firm that expanded too fast via an acquisition, eventually causing its reputation to suffer.
In fact, even organic store expansion is slowing in China. Part of this is because, as Bain noted, companies are looking to redirect resources from launching new stores to beefing up existing locations in order to foster a well-funded, carefully controlled buying experience. Better to have a few excellent stores, the thinking goes, than to have many mediocre ones.
This is particularly true for the brands which came early to China and already have decent reach. The biggest among these are Louis Vuitton, which is pursuing a “big store strategy” in China to concentrate its resources on a few key outlets, and Ermenegildo Zegna, which is looking to renovate many of its 75 stores in China to increase floor space and boost foot traffic.
Another reason for slower store expansion is property constraints. Aaron Fischer, the Hong Kong-based head of consumer research at CLSA, said the lack of prime locations is the biggest bottleneck to growth. “If you’re a Prada or Gucci you want to be right next to Louis Vuitton,” he said. “You don’t want to be four doors away or five doors away … The importance of getting good real estate cannot be overestimated.”
Labor shortages are also a constant drag, especially in second- and third-tier locations. Michel Phan, Shanghai-based associate professor of luxury marketing at EMLYON Business School, pointed out that each new luxury store opening requires about 20 employees, not including the added logistics, marketing and merchandising personnel. With luxury companies each opening an average of three to five new stores in China every year, experienced retail employees are in very short supply.
Targeting the message
Of course, companies looking to capture both old and new consumers need to make considerable investment into brand equity. Though this can be done by launching traditional marketing campaigns or the industry favorite of sponsoring charitable events, the recent fad in China has been for foreign luxury goods firms to launch initial public offerings in Hong Kong.
Prada, an Italian luxury clothes maker, listed in June, alongside Samsonite, a premium US luggage maker, and L’Occitane, a French body products company. Coach is planning an IPO soon, and Burberry, Ducati, Aston Martin, Graff Diamonds and Inditex (the parent company of Zara) have all indicated varying degrees of interest in listing.
These IPOs raise fresh capital, but many companies are more focused on increasing brand awareness through the free media coverage they receive. Such an unconventional approach has been criticized as cost-inefficient in some quarters, but it is popular because it specifically targets China’s business and social elite.
Such exercises in building brand equity are likely to become more important as consumers become more sophisticated and as growth climbs down from its recent highs. The market “has been running at 50-100% [growth] over the last 18 months, depending on the brand,” said Fischer of CLSA. “But as it slows down to something more reasonable over the next few years, we expect the top brands – like Hermes, Chanel, Louis Vuitton, Gucci and Prada – to take a lot more market share.”
Louis Vuitton’s Shanghai stores may be bustling for some time to come.