Seizing domestic travel spend will be key but brands must also improve their clienteling, create exciting events to make local retail more attractive and ignite demand in lower-tier cities.
With demand trapped in the mainland, brands must seize domestic travel spend, improve their clienteling in lower-tier cities and create exciting events to make local retail more attractive.
February 25, 2021 13:00Before the Covid-19 pandemic halted international travel for Chinese consumers, Yvonne Ching shopped mainly when she travelled the world for work or leisure. But a halt in her previously busy international travel schedule hasn’t stopped her shopping for luxury goods.
“I feel like I have definitely been shopping more this year; my friends have as well,” said Shanghai-based Ching, who is also a fashion influencer (known locally as a Key Opinion Leader, or KOL). “In the malls, I’ve noticed there is way more traffic than there used to be, the malls are packed on the weekends.”
Urbane and fashionable women like Ching, from China’s top-tier cities, are the ones international luxury brands are most used to serving, and they’ve been central to booming local sales since the worst of the country’s coronavirus outbreak passed last spring. But they are only one part of a complex and layered puzzle that needs to be decoded in order for luxury brands to unlock the opportunity of Chinese clients reshoring their purchases. headtopics.com
With sales to Chinese people accounting for one third of revenues and more than two-thirds of the industry’s growth before the pandemic, it’s difficult to overstate how important it is to recapture consumers who previously shopped overseas.The job is far from over: luxury sales in mainland China rose by 45 percent last year, according to consultancy Bain, but while China was the best performing country, sales to Chinese people worldwide actually fell by 30 to 35 percent, compared with just a 10 to 15 percent drop for European consumers.
With China’s luxury consumption trapped within the mainland again this year, and possibly for longer, it’s critical for brands to identify potential customers, establish direct relationships with them, and understand what drives their purchasing decisions.
A shopper outside a Prada store in Chengdu. Shutterstock.“There is just so much wealth within China and different layers of consumers, different ages, different careers, different wealth levels, city tiers and regions. There are a lot of layers to luxury consumption in China and during Covid, that has really come to the surface,” explained Amrita Banta, managing director at Agility Research & Strategy.
“A lot of new luxury consumers have come into play in China post-Covid, it’s not only the classic consumers that you would expect,” she added.Reaching the Tier-Three BusinessmanThere has been a lot of buzz about China’s new generation of consumers, the Post-90s and Post-00s demographics between the ages of 20 and 30 with significant disposable income thanks to the wealth acquired by their parents. headtopics.com
Data backs up the growth in younger consumers spending on luxury with research from Tencent and BCG showing the average age of luxury consumers in China is 28-years-old — a full decade younger than the average age of those in most other parts of the world.
Understandably, luxury brands have pulled out all the stops in trying to appeal to this demographic, embracing their favoured social media platforms (such as Bilibili and Douyin) and innovations (such as livestreamed e-commerce) and joining forces with their favourite celebrities (Jackson Yee, Wang Yibo, Cai Xukun) for brand ambassadorships.
But there is another luxury consumer profile in China that is far less heralded than the Gen Z kind.Banta describes the typical profile of this group as being 40-something businessmen from second-tier and third-tier cities, who have seen their wealth increase dramatically along with China’s economic rise in recent years.
In the fourth-tier cities, the male consumer of luxury goods becomes more prominent and the products they buy are different as well.“This strongly growing source of luxury consumers … buy for their wives and children, actually also quite a lot for themselves and gifts for business associates … they like to buy luxury and make that statement to show off their wealth,” she explained. headtopics.com
Zhang Tianbing, Deloitte Asia Pacific Consumer Products & Retail Sector Leader, says that in lower tier cities, it’s really men who are leading the way when it comes to growth in luxury consumption – bucking the idea of Chinese luxury consumers primarily being in the Yvonne Ching mould of affluent, first-tier women.
“In the fourth-tier cities, the male consumer of luxury goods becomes more prominent and the products they buy are different as well,” he said, pointing to shoes, watches and electronics as key categories for these consumers.In some ways, this new generation of lower tier consumers can be thought of in a similar vein to the first wave of Chinese luxury consumers, with attributes including a focus on big brands and logos playing a larger role in decision-making.
For brands who are used to having these newly minted millionaires and their families come to them on tours of Europe and the US, reaching them back in China is a key challenge. New stores in lower-tier cities can help — as will upgrading and freshening the offering of flagships in first-tier hubs. Cities such as Shanghai, Beijing and Chengdu are likely to remain heavily-touristed destinations for lower tier consumers unable to travel internationally for the foreseeable future.
Understanding Daigou’s New EraLong thought of as a thorn in the luxury industry’s side, the daigou seller’s grey market has long been fuelled by tax rebates and price differences for luxury products, which have historically been much more expensive in China than in other markets.
Since daigou’s share of the market has declined in recent years and international travel is now at a near standstill, one might expect it to be over for good. Not so: like luxury spending in general, the daigou market is rapidly reshoring, with resellers taking advantage of lower prices on the duty free island of Hainan to cater to value-seeking Chinese customers on the mainland.
Total sales of duty-free goods in Hainan reached 27.48 billion yuan ($4.26 billion) in 2020, a year-on-year increase of 103.7 percent, with the number of individual shopping trips increasing by 19.2 percent to 4.48 million, according to the General Administration of Customs.
Though many sales in Hainan are being made to traveling Chinese consumers starved of international beach-side destinations for their holidays, the re-shored daigou trade is also responsible for a significant share.According to a Re-Hub survey of daigou goods and transactions on Chinese marketplaces conducted in 2020, the biggest luxury brands dominated, with Louis Vuitton, Chanel, and Gucci accounting for 44 percent of the luxury handbag market on Taobao. Louis Vuitton bags alone represent 24 percent of the daigou market for luxury bags, the study said.
[Some] daigou consumers are more mature and sophisticated and [not driven by price at all]”Still, daigou has been evolving. Re-hub’s Chief Client Officer, Yoyo Liang, estimates that as much as a third of daigou consumption today is driven by demand for unique and limited-edition products, even if they are priced higher than they would be in a Chinese store.
“There is a pre-conception in the market that the price-sensitive consumer is still the dominant one but [another segment] of these daigou consumers are more mature and sophisticated and [not driven by price at all],” she said.The resilience of daigou as clients become more sophisticated and as the price gap between China and other markets has narrowed could point to the fact that convenience, selection, and salesmanship all play a role in the secondary market — not just price. Personal shoppers foster relationships and dialogue with their client communities — and luxury brands will need to surpass those service levels if they want to recapture daigou clients locally.
Which Brands Are Winning and WhyUnsurprisingly, the biggest and most iconic brands have been most adept at capitalising on the trapped Chinese luxury consumption. Hermès, Louis Vuitton, Dior and Prada have all done well with their high-priced leather goods offerings, in particular, followed by ready-to-wear collections leading to explosive mainland China growth in the second half of 2020.
Hermès was a notable winner in China. Asia (excluding Japan) was the brand’s only region to grow for the full year, with sales rising 14.4 percent. Sales in the region accelerated in the fourth quarter, jumping by 47.4 percent.LVMH reported fourth-quarter growth of 21 percent in Asia (excluding Japan), as rapid growth at its Louis Vuitton and Dior labels helped offset difficulties in its luxury beverage division and DFS travel retail chain.
“The gap between the big iconic names and the smaller brands has definitely increased post-Covid. The demand for the classic, iconic brands and within these brands, their iconic signature classic product lines is obvious,” Banta said.These brands, Banta adds, have the advantage of attracting the new luxury and entry-level luxury consumers whose first foray into luxury is usually via its biggest names. But they also have a history with established local luxury consumers who are now going to the next level by investing in higher-priced limited-edition products, or more expensive categories, such as watches or jewellery.
This being said, after decades of selling to many Chinese consumers in a somewhat anonymous way as they pass through international tourist hubs or purchase via daigou agents, even the biggest brands are possibly missing important segments of their Chinese clientele.
If you don’t have the client relationship you’re dead in the water.Sales assistants in Hong Kong or Paris can be protective of their hard-won list of mainland Chinese VICs (very important clients), and remain reluctant to help transfer those relationships to local teams more than a year into the pandemic.
“If you don’t have the client relationship you’re dead in the water,” Zornitza Stefanova said, founder of the clienteling and distance sales system BSPK.Luxury brands should be empowering local salespeople not just to reach out to VICs, but also to reactivate less-frequent clients via personalised messages on WeChat, which has comprehensive and powerful CRM (customer relationship management) functions built into its infrastructure.
Expanding Visibility Across ChinaOn the agenda for bigger luxury brands in China this year will be larger retail footprints, in order to better reach consumers outside of established luxury retail centres.“There are many, many cities in China where luxury brands are looking to open because they realise the depth [of] the opportunity that offers,” Banta said.
Some smaller houses are also managing to recapture Chinese consumers with new stores in China, like Maison Margiela, which recently added high-profile locations in Shanghai (in Nanjing West Road’s Reel Mall) and Chengdu (in the Sino-Ocean Taikoo Li centre).
It’s no fluke that Maison Margiela proved a bright spot on parent company OTB’s earnings last year, with brand sales increasing 20 percent in 2020 even as the group as a whole logged a 14 percent drop.In another high-profile example, Burberry last year inaugurated its first so-called “social store” in Shenzhen, with games and in-store experiences tied to shoppers’ WeChat accounts.
In addition to retail upgrades, splashy events might be key to bringing out Chinese clients locally for the first time. At a recent press conference, Kering CEO and chairman François-Henri Pinault indicated that Gucci is planning around 600 store events in China this year in a bid to reignite momentum there. Integrating social media “moments” with store events, and incentivising people to connect with the brand online, can help turn those visitors into an audience for future growth.
Luxury brands will only be able to get Chinese consumers back into store, in China, if they make those stores more available and attractive to them, understand the complex consumer demographics of local luxury markets at city level and form meaningful relationships with people where they live.
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