04 Déc Secure Digitalization: an opportunity to seize the potential of the changing luxury market in China
Image source: http://red-luxury.com/trends/showroomers-make-up-24-percent-of-chinas-shoppers-as-smartphone-shopping-rises
China, significant drop in luxury sales growth
The overall growth of the global market for personal luxury goods is expected to be4-6 percent this year[i] compared to a 6.5 percent growth in 2013[ii]. Regionally, figures range from a projected 2014 decline up to 6 percent in Russia, a growth up to 4 percent in Europe and China, 5 percent in APAC, 6 percent in USA and a major increase of 11 percent in Japani. The Chinese case is particularly surprising with a luxury sales growth expected to significantly drop from 20%ii in 2012 to 2-4% this year.
How can we explain such a growth slowdown in China?
The most common reasons given are:
- The price variations with other countries enhancing retail tourismi: the same luxury item can cost up to 51% more in China than in the US and 71% more than in France, according to China’s Ministry of Commerceiii. This difference is due to higher taxes and logistical costs. Wealthy Chinese consumers, who travel farther and more[iii], prefer to do their luxury shopping abroad to pay less but also to avoid counterfeits. 97m Chinese tourists travelled abroad in 2013 with a 28% increase in spending in the first three quarters of 2013iii.
- The maturation of the marketiii: the market maturity comes along with the emerging individualism[iv] of Chinese who are moving from a showy display of wealth to greater sophistication. Chinese luxury consumers want to differentiate themselves from their peers and are looking for more exclusive but less visible branding.
- The implementation of official anti-corruption measures to stop tremendous spending and gift giving[v]: gift giving to authorities to get a favor is a popular practice in China representing around 5 percent of the global luxury goods market in China[vi]. Anti-corruption measures are being taken to eradicate this habit e.g. the banning of advertising encouraging luxury gifts to authorities.
China, the luxury market has not disappeared, it has just changed
Looking at the main reasons for the growth decline, it is clear now that the luxury market in China has not disappeared but is just changing its pattern, bringing new challenges for luxury brands. In fact, China’s absolute demand for luxury remains strong with Chinese luxury spending estimated tobe more than 30 percent of global luxury purchases this yeari.
The market potential is there and expected to be maintained. In fact, Chinese private consumption and personal disposable income in nominal terms are forecast to grow more than fivefold by 2030iii.
But how luxury brands could successfully seize the potential of the changing luxury market in China?
Digitalization: an opportunity to unveil the market potential
Luxury Chinese consumers spend more and more time on Internet and increasingly use their mobile phone. Several studies confirm this statement:
- China had 632 million Internet users at the end of June, an increase of 14.4 million since the end of December, according to a semiannual report published on Monday by the official China Internet Network Information Center, which is known as CNNIC[vii].
- More Chinese people are gaining access to the Internet with mobile devices than with personal computersix (83.4 vs 80.9 percent).
- Amongst the key findings of a survey conducted by KPMG, 70 percent of luxury consumers in China use their desktop everyday in order to purchase items or search for information on luxury products, while 60 percent said they use their smartphones every day for this[viii].
- Bain reports that 73% of consumers use the Internet to research luxury purchasesiii.
- Henry Tan, CEO of Hong Kong-listed Luen Thai Holdings Ltd, cited a Morgan Stanley report showing that e-commerce is projected to become a US$2.17 trillion industry by 2018, with China accounting for half of that[ix].
- Last year saw China overtake the US as the world’s largest e-commerce market, with sales estimated at US$309bn. E-commerce is centered in cities where most of the wealthy live, and growth rates are higher. eMarketer expects e-commerce sales in China to grow by almost 64% in 2014iii.
The digitalization of the Chinese society changes consumers’ behaviours to an anywhere, anytime and multi-channel mentality. This environment creates a great opportunity for luxury brands to have multiple touch points with its consumers and to create personal relationships with them.
Therefore, having a good digital strategy could help luxury brands to canalize the retail tourists, acquire new consumers by bringing some costs down and offer more exclusivity to luxury Chinese consumers who aspire to greater differentiation.
Security, still a must in China
Digitalization does not come without challenges. Security and confidence will always be pre-requisites to fully leverage its potential and especially in China. In fact, 78 percent of luxury consumers in China highlighted concerns about the authenticity of products bought online...viii
And their fear does not come from nowhere: According to a report recently released by the UN Office on Drugs and Crime entitled “Transnational Organized Crime in East Asia and the Pacific,” from 2008 to 2010 almost 70% of all counterfeits seized globally come from China[x].
Therefore, it is important for luxury brands to create a secure digital environment by strongly authenticate their products and connect them in a secure way to the digital ecosystem.
The joint survey, titled – China’s Connected Consumers – analyses responses from 10,200 luxury consumers in China on their online spending patterns.