Should travel retailers be worried by the latest Chinese luxury spending trends?

CHINA. The PRC government’s strategic plans to return the luxury spending of their citizens to their own backyard seem to be working. A just-released study called What’s Powering China’s Market for Luxury Goods suggests that Chinese consumers made 27% of their luxury purchases in China in 2018, up from 23% in 2015.

But that share is going to rise significantly according to report author, Bruno Lannes, a Bain & Company Partner based in Shanghai and a member of the firm’s Retail and Consumer Products practices. He said: “We anticipate this share will increase to 50% by 2025.”

How repatriated spending is set to grow among Chinese luxury goods spenders.

The good news for travel retailers is that the Chinese continue to increase their total share of the global luxury goods pie. It has moved from just 1% in 2000 to 33% in 2018 – although the rate of increase of that share is now slowing and could stagnate in the coming decade.

According to Bain, the key factors driving repatriated spending are the PRC government’s reduction in import duties – which makes duty free and overseas prices less attractive; and stricter controls over grey markets, for example daigou shoppers. These efforts, combined with a move by brands to narrow the price gap with international markets, have led more Chinese consumers to make their luxury purchases in China, said Bain “instead of travelling to previous bargain locales such as Hong Kong, Seoul, Tokyo and cities in Europe”.

A strong quartet

Other engines driving the strong demand for luxury goods in China (20% growth rates were recorded in both 2017 and 2018) were a focus on Millennials; increased digitalisation; and China’s expanding middle class.

“Chinese consumers aged 23 to 38 are willing to spend on luxury brands, and are financially able to do so,” stated Lannes in the report. “Moreover, these young consumers are well informed about luxury and eager to embrace innovative trends, such as the convergence of high fashion and sportswear.”

The Chinese share of luxury spending has increased hugely over the years but is is now stabilising.

Millennials are a key market for luxury sportswear products like Balenciaga’s Triple S sneaker, or accessories co-created by Louis Vuitton and Supreme, a fashion brand with roots in skateboarding.

Lannes added:”Unlike older generations, Millennials are heavily influenced by what they consider to be cool than by brand names or product pricing. They value newness more than discounts. They rely on social media and freely share their opinions online.”

As with all age groups, Millennial Chinese women buy more luxury goods than men. Cosmetics grew by more than 25% in 2018, for example, while watches, generally a male category, grew by less than 10%.

Digital: high growth but low share

The digitalization trend is more complex because it covers both e-commerce and consumer engagement through digital platforms. Bain said: “There has been much progress in terms of engaging customers, but little progress on the e-commerce front (despite plenty of activity).”

Online luxury sales increased by 27% in 2018 to reach 10% of total luxury sales, but this growth is still driven by cosmetics. Online penetration in other categories remains low.

Online sales are increasing fast, but its share of the luxury market is still quite low.

Selling luxury online is still in a development phase and a work-in-progress. Bain has identified four types of online channels in the PRC domestic luxury market: brand-owned channels like Hermes.com.cn; cooperator channels like Tmall flagship stores and WeChat commerce; aggregators such as JD.com’s Toplife and Tmall’s Luxury Pavilion; and finally, luxury vertical sites such as Secoo and Mei.com which can move goods at a discount.

The final engine in the quartet is the middle class. These consumers will represent an estimated 65% of all Chinese households by 2027 according to research conducted by Bain & Company for the World Economic Forum.

With all the signs pointing to a continuing rise in average per-capita income among China’s urban population, the PRC will continue churning out first-time buyers of luxury goods for many years to come.

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