China takes luxury lead

10 March 2011

BEIJING: The Chinese luxury goods sector is set to become the world's largest by 2015, as rising affluence, urbanisation and increasing competition stimulate demand.

McKinsey surveys 46,000 Chinese consumers each year, and combined these figures with a poll of 1,500 luxury buyers in 2010, alongside modelling data.

The consultancy reported industry returns reached $12bn (€8.6bn; £7.4bn) last year, and should hit $27bn by 2015, at which point the country is expected to surpass Japan as the biggest outlet for premium products.

On this date, 20% of global luxury revenues could be drawn from the world's most population.

The 13m upper middle class Chinese households, earning between 100,000 yuan ($15,213) and 200,000 yuan a year, represent the greatest growth opportunity.

This group currently yields approximately 12% of purchases, a total due to strike 22% among the 76m homes falling into such a demographic in 2015.

Some 36% of Chinese shoppers bought exclusive offerings last year, compared with 25% in 2008, indicating a move towards "personal indulgence".

Over 30% of individuals also traded up in 2010, as did just 6% of people in Japan.

Elsewhere, 20% of respondents in China increased their outlay on select "experiences" like massages and spas, and 13% heightened expenditure on top-grade handbags, apparel and similar items.

Foreign travel, prior purchases, rising digital literacy and intensifying competition have all boosted sophistication and knowledge on the part of customers, McKinsey added.

Half of the specialist luxury panel were able to name more than three high-end ready-to-wear brands, a figure standing at 23% in 2008.

As a correlative of this trend, attitudes are now less deferential, with a majority of category consumers checking product specifications and prices online, declining to 13% of all urban residents.

The fact two-thirds of buyers have journeyed outside China has equally raised awareness of how expensive it is to obtain luxury offerings abroad, allowing easier comparisons.

In demonstration of the potential impact of such a shift, 66% of participants knew prices were typically around 20% higher in China than Hong Kong, a rating coming in at 40% in 2008.

Counterfeiting remains a major problem, but only 12% of individuals are now prepared to acquire fake jewellery, measured against 31% two years ago.

Urbanisation is one enormous factor aiding market development, and the number of cities containing shoppers spending more than 500m yuan annually on luxury goods should climb from 30 to 60 in the next five years.

Sales in Qingdao and Wuxi are projected to triple during this period, thus approaching the contemporary totals lodged by Hangzhou and Nanjing, two of the most mature outlets.

The 36 premier metropolitan centres in China will deliver 74% of growth to 2015, when they could hold a collective 76% share.

Shanghai and Beijing - two "megacities" - are responsible for 21% of sales, and were pegged to capture 19% of growth from 2010 to 2015.

Nine markets - Chongqing, Dongguan, Foshan, Guangzhou, Hangzhou, Nanjing, Shenzhen, Tianjin and Wenzhou - account for a third of current consumption, and will generate 27% of growth going forward.

Another 620 emerging cities should provide 26% of sales by the latter date, contributing 22% of the category's expansion.

"Although China's luxury customers appreciate the value of international brands, they also desire new product designs, labels or sub-brands that reflect China's rich culture and historical heritage," said Joe Ngai, a McKinsey partner in Hong Kong.

"This is still a fairly new phenomenon, however, particularly in the luxury segment, and means a higher degree of local product tailoring than most luxury brands are accustomed to."

Data sourced from McKinsey; additional content by Warc staff