Luxury brands in ChinaA study about why the Chinese buy luxury products and the marketers’ role in producing those

offerings

Suranga Sarukkali

ANC ID#: 1093

MKT 330 - Consumer Behavior

Mr. Bruno Silva

29th Wednesday of February 2012

Executive Summery

This report written on the marketing executives’ perspective, explains as to why Chinese

consumers purchase Luxury or branded goods and services. This further explains the marketers’

role in luxury or branded products and services offerings and how we can help the consumer

select such offerings. This report contains primary research done by TNS Corporation in

Australia and KPMG Forde Rhodes and Thornton Hong Kong as to why the Chinese consumer

consumes luxury or branded products and services. In that, we explain how newly empowered

women and the young Chinese consumers are the largest segment of luxury or branded product

and services consumers after the traditional elite which include former and current government

servants and communist party members. It is also noted that the Chinese are more and more

inclined to western formats of shopping such as malls and department stores from the more

common mom and papa shops and rationed coupons the Chinese used to use in acquiring the

products and services they required. China had come a long way from riding home after work on

a cow to purchasing some of the most advanced and luxurious automobiles such as Audis to

Lamborghinis and from wearing denim trousers to wearing Giorgio Armani to work every day.

Most of the Chinese consumers have low level brand awareness and they do not have a brand

loyalty also. This is used by the sales staff as a powerful tool for marketing their products.

Luxury brands are investing large sum of money in marketing not just to promote marketing but

also to educate the Chinese consumers about luxury and why they spends a premium for

products offered by luxury brands.

Contents

1. Introduction

2. TNS Findings

3. Why the Chinese consumer buy luxury products

3.1.1. Traditional business privilege groups

3.1.2. New Luxury Shopper

3.1.3. Empowered women

3.1.4. Little emperors

4. Marketing Strategies for Luxury brands

4.1.1. Marketing

Introduction

China has experienced a continuous increase in consumer purchasing power from the year 1990

to date. One major reason for these improvements are getting international super markets,

departmental stores and mass retailers paving the way to luxury retailers in the country.

Accordingly luxury branded companies such as Louis Vuition, Bally , Gucci and Ferrgamo

arrived to Chinese market.(1) But now with the development of consumer buying power and the

reduction of Chinese government’s intervention foreign luxury brands face pressure to

strengthen their commitment to the mainland or risk losing ground to their rivals.

Luxury is a concept constantly evolving and subjective. It is not easy to define. But more often

the word luxury is used to define an inessential but desirable item or a state or extreme comfort

or indulgence. Since the customers have a unique set of characteristics including premium

quality, recognizability, craftsmanship, exclusivity and reputation consumers are willing to pay

the significant price differences .(2). Luxury brands are not only define a standard of excellence

but act as a social code indicating access to the rare, exclusive and desirable.(3). This makes the

luxury market a particularly interesting one because it represents consumption at it most pleasure

seeking apparently irrational – purchasing for the individual pleasure it provides despite the

financial cost.

Most of the luxury brands that are currently in operation is China are European origin and span

across various retail sectors such as fashion apparel designers accessories, foot wares, perfumes

and cosmetics, automobiles, liquor and jewelry.

In this report I profile the patterns of luxury consumption in China and explore some of the

trends and challenges facing luxury brands, including the complexities of valuations and

classifications which can important tax and regulatory implications. Further this report includes

excellent primary researches done by TNS, which highlights the attitudes towards luxury brands

vary within these huge and diverse countries.

In October 2006 TNS surveyed more than 830 consumers in China regarding their attitudes and

spending their desirability towards luxury brands. Respondents were identified by ages, places of

houses. Age gaps of respondents were between 20 to 45 and residing in capital or cities, earning

a minimum of RMB 36,000 per annum. Nearly two third were married and at least 77% were

educated in colleges or in universities.

Findings from TNS;

(Refer Appendices 1 through 10)

a) Why the Chinese consumer buy luxury products

Urban population in China are migrated from other remote areas and they are generally wealthier

than the others. They have become emergence of new luxury customers in China. These set of

people comprises with middle ahed from business executives and white color employees to the

lower educated and actors, actresses which are comparatively rich.

b) Traditional business privilege groups

Traditional luxury shoppers are typically males and above 35 years. They are well influenced

people hold senior positions in state sector and private sector. These set of people more advance

than other luxury shoppers in China. Their taste is more sophisticated and well advance when

compare with the other shoppers.(30) while other buyers are new comers to the luxury products.

They are mainly towards for value for money and are choosing to not only treat themselves but

also their family.(31).

c) New Luxury Shopper

Modern luxury shoppers represent vast range of deferent categories of customers which includes

entrepreneurs, business men and celebrities. Most of them are newly rich people and most of

them are the first generation in their families who could afford luxury products. They are

younger than the traditional luxury shoppers. According to the most recent surveys most of them

are considerably younger than those in the US and Europe aged between 40s and 70s. Although

younger does not mean richer, this segment is unlikely other Chinese segments willing to spend

greater part of their income on luxury goods than those are in US or Europe. These set of people

not much concerned about savings. They prefer to buy more expensive items they can afford to

theirlifestyle.(32) They are quite deferent from their parents. These educated consumers are able

to tell the differentiate fakes and real designs even if the garments manufactured in China.(33).

d) Empowered women

Up to most recent past 90% of luxury spenders in China are dictated men. But now most of the

Chinese women have become economic independents (34) due to their earnings in various

segments. Modern female luxury shopper includes the business women the personality and

newly independent rich wife.(35).Move to more women purchasing luxury goods consistent with

global trends known by the luxury institute.(37). New surveys have proven that this is due to the

achievements of independent power and economic power too.

e) Little emperors

Most brand consciousness consumers in China are little emperors. This generation is particularly

evident in the urban areas where the policy was most strictly enforced. Deference between these

children with the west is that they typically have six sources of disposable income with parent

and grand parents all contributing to meet this children needs. Surveys shows that half a typical

urban Chinese family’s disposable income is spent on or by its youngest member.(36).

Marketing Strategies for Luxury brands

For certain luxury brands China has already outstripped Japan and even Hong Kong as the

largest single market in Asia Pacific region.(37). Growing presence of luxury brands in China is

bringing with it greater competition. China’s busiest streets such as Nanjin Road in Shanghai are

witnessing fierce competition among world luxury brands. Though some says that China’s

market is becoming saturated (38) for the time beign the environment is still a positive one for

potential entrants.

a) Marketing

Most of the Chinese consumers has a low level brand awareness and they do not have a brand

loyalty also. This is used by the sales staff as a powerful tool for marketing their products.

Luxury brands are investing large sum of money in marketing not just to promote marketing but

also to educate the Chinese consumers about luxury and why they spent a premium for products

offered by luxury brands. Brand building is enhancing in large scale in China. Lot mass Medias

are encouraging this brand image building. Sometimes even this is done by word of mouth also.

It is a chance to experience a so called “luxury Style” and to see products that are not available in

the stores as yet. Most of the instances business people may entertain the window shopers also as

the believe that in near future these middle class people will see their disposable income rise.

(39).

Although relatively small, Hangzhou is a comparatively wealthy city and attracts shoppers from

all over Zhejiang, one of China’s most prosperous provinces. This is city is very attractive for the

tourists and believed that at least 3o million of tourists visits from all over the world in each year.

Due to this economic growth is increased 15 to 20 percent over the last two three years.

According to Hangzhou Statistic Bureau , Hangzhou’s total economic output in 2003 grew 15

percent to USD 1,558.The individual prosperity of Hangzhou can be noticed even on streets,

where Jaguars and BMWs are becoming more common compared with Shanhai where such

vehicles are rarely noticed outside the showrooms.

Hangzhounese are known to be very fashion-conscious, but also fairly conservative, and thus

easily lured by international labels.The Lane Crawford department store is also a main venue for

luxury retail, with brands such as Gucci, Versace and Burberry. The city generated retail sales of

USD 09 billion in 2003, up 4 percent from 20 Hangzhou Tower is the city’s main venue for

luxury retail, although it now faces competition from Euro Street and the adjacent Lane

Crawford store.Hangzhounese are exceptional because they are among the few Chinese who

spend more on fashion than on food.It opened in 1998, featuring only domestic brands until

Dunhill was added in 19 A Louis Vuitton flagship store opened soon after in 20 Hangzhou

Tower consistently ranks among the most profitable department stores in China.These days,

Hangzhou Tower hosts around 40 luxury brands including Dior, Cartier, Ferragamo, Escada,

Zegna, Burberry, Hugo Boss, Chanel, Hermès and Armani.International luxury brands that have

chosen to open stores in the area are enjoying a steady stream of shoppers.It sees foot traffic of

30,000 to 40,000 people a day during the week, a number that jumps to 50,000 on weekends and

holidays.But legal progressiveness is only a small part of the region’s appeal.A key attraction to

Hangzhou is that it is among the first places in China to allow direct foreign ownership of

businesses.Most customers are upperlevel executives at banks and private businesses, as well as

the government, with the majority in their thirties and forties.In 2004 alone, Hangzhou Tower

recorded total sales of USD 217 million. (Refer appendices 10 through 11)

References

Note: Dear Bruno, this isn’t in the common American Psychology Association referencing style. It’s what I found to be more appropriate instead. Also note, the articles and such listed below are all retrieved on the 26th of February 2012. The Consumer Behavior text book was also referred many times for theories and guidance although it is not included in the official references list.

1 “Luxe biz takes off in Chinese market”, Footwear News, Vol 61 (17), 2005

2 “The mass marketing of luxury”, Business Horizons, Vol 41 (6), 1998

3 Kapferer, J.N.: Reinventing the Brand, 2001

29 “The Gucci killers", Fast Company, Vol 102 2006

30 “Luxury’s Chinese puzzle”, Women’s Wear Daily, Vol 189 (126) 2005

31 “Luxury foreign brands make inroads”, China Daily, 14 November 2004

32 “High stakes for high-end goods”, China Daily (North American ed.), 27 January 2005

33 “Decoding China’s luxury market“, Women’s Wear Daily, Vol 191 (104) 2006

34 “Retailers eye untapped market”, The Australian, 16 April 2005

35 The Luxury Institute; www.luxuryinstitute.com

36 “The emperors’ new designer clothes“, Bangkok Post Business, 18 January 2006

37 “High stakes for high-end goods”, China Daily (North American ed.), 27 January 2005

38 “China’s retail market saturated“, The Financial Times, 28 April 2006

39 “China set to become luxury hub”, Shanghai Daily, 20 May 2006

40 “Luxury cars target China’s new rich”, Peoples Daily, June 2004

41 “Luxury’s new empire”, The Economist, Vol 371 (8380) 2004

42 Consumer Goods & Retailing: Country Report: China, 2004

Appendices

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2.

3.

4.

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6.

7.

8.

9.

10.

Map of China and its main cities

11.A stylish city: The story of HangzhouAlthough relatively small, Hangzhou is a disproportionately wealthy city, andattracts shoppers from all over Zhejiang, one of China’s most prosperousprovinces. Tourism is also Hangzhou’s primary industry, attracting about 30million visitors from all over the world every year. As such, Hangzhou haswitnessed an economic growth rate of 15 to 20 percent over the last two tothree years. And, according to the Hangzhou Statistics Bureau, Hangzhou’stotal economic output in 2003 grew 15 percent to USD 23.26 billion, orUSD 3,930 per capita, and average disposable income was USD 1,558. Thearea’s affluence stems in part from its proximity to, and cultural affinity with,Shanghai. The individual prosperity of Hangzhou can be seen on its streets,where Jaguars and BMWs are becoming more common, compared withShanghai where such items are rarely seen outside of showrooms.A key attraction to Hangzhou is that it is among the first places in China toallow direct foreign ownership of businesses. But legal progressiveness isonly a small part of the region’s appeal. International luxury brands that havechosen to open stores in the area are enjoying a steady stream of shoppers.Hangzhounese are known to be very fashion-conscious, but also fairlyconservative, and thus easily lured by international labels. Hangzhounese areexceptional because they are among the few Chinese who spend more onfashion than on food. The city generated retail sales of USD 7.09 billion in 2003,up 12.4 percent from 2002.Hangzhou Tower is the city’s main venue for luxury retail, although it nowfaces competition from Euro Street and the adjacent Lane Crawford store.It opened in 1998, featuring only domestic brands until Dunhill was added in1999. A Louis Vuitton flagship store opened soon after in 2001. Hangzhou Towerconsistently ranks among the most profitable department stores in China. Itsees foot traffic of 30,000 to 40,000 people a day during the week, a numberthat jumps to 50,000 on weekends and holidays. Most customers are upperlevelexecutives at banks and private businesses, as well as the government,with the majority in their thirties and forties. In 2004 alone, Hangzhou Towerrecorded total sales of USD 217 million. These days, Hangzhou Tower hostsaround 40 luxury brands including Dior, Cartier, Ferragamo, Escada, Zegna,Burberry, Hugo Boss, Chanel, Hermès and Armani. The Lane Crawforddepartment store is also a main venue for luxury retail, with brands such asGucci, Versace and Burberry.Source: Movius 2005