Chinese luxury market set for further growth

09 March 2010

BEIJING: The luxury market is set to continue to flourish in China over the next few years, according to research from McKinsey.

The company has been monitoring the behaviour of some 30,000 consumers in 58 cities across the world's most populous nation since 2005.

"The last decade has seen remarkable changes in China – those relating to consumer evolution, infrastructure development, income levels and consumption patterns, to name a few," said Vinay Dixit, its senior director of Asia consumer centers.

By 2015, it is predicted that the Asian economy will be the fourth largest in the world in terms of the number of wealthy households it contains.

This group is defined as residences earning at least 250,000 yuan ($36,623; €26,806; £24,184) a year, which, in purchasing power parity terms, translates to an annual income of $67,000 in the US.

Consumers in this bracket are typically 20 years younger than their counterparts in America and Japan, a trend that is expected to remain a feature of the landscape for the next decade.

"In general, Chinese wealthy consumers place a significantly higher level of trust on foreign brands compared to those in the lower income brackets," Dixit added.

However, high net-worth individuals in China also generally display divergent profiles and preferences both in different regions of the country, and within major Tier 1 cities like Shanghai and Beijing.

As such, the seven luxury segments identified by the company – which include "luxuriant", "demanding", "flashy" and "down to earth" – exhibit varying levels of favourability when considering foreign products.

"In this kind of scenario, there would be some opportunities to local brands to position themselves for luxury consumption," Dixit argued. 

"Having said this, it is usually an arduous task to build the heritage, product excellence and service standards that would provide confidence to the wealthy consumers to actually start considering them in their purchases."

Looking forward, McKinsey has forecast that three-quarters of newly-prosperous households will be situated outside Tier 1 markets in the future.

More specifically, Dixit suggested a "city-cluster" model is replacing a "city-tier" approach, as many behaviours now spread within a 250–300km radius of key urban centres, irrespective of their status.

"This has significant implications in both 'where to play' and 'how to play' decisions of the companies," he added. 

"It provides significant clues towards ... geographic areas that companies could prioritise in their launch and expansion plans on one hand, as well as on how to customise their go-to-market strategies in these chosen geographies on the other."

Data sourced from Seeking Alpha/McKinsey; additional content by Warc staff