March 8, 2010
Luxury goods makers find growth in China.
“Fashion fades, only style remains the same,” says Jasper Liu, 26, summarizing his approach to shopping by quoting Coco Chanel.
Liu, a self-described “Shanghai Hipster,” represents the nouveau riche of China. He reads English literature, watches European movies, drinks fine champagne and is a loyal patron of luxury retailers, namely Lanvin and Yves Saint Laurent.
The affection is mutual: Fashion houses with global ambitions are courting Chinese consumers like Jasper, eager to learn how they spend, why they spend and just how much they’re willing to spend.
The answer: quite a lot if the quality and label are right. In a recent study by retail consulting firm Pao Principle, the average Chinese luxury consumer will spend roughly 11% of her income on luxury handbags alone. The group’s favorite brands, in order of preference: Louis Vuitton, Gucci, Coach, Chanel and Prada.
Over the past year Patti Pao, the founder of Pao Principle, has collected data on the mainland’s elite consumers: amassing a panel of 356 individuals who have purchased a luxury handbag, watch or fine jewelry piece in the last twelve months. Her snapshots of their habits create a portrait of a misunderstood luxury consumer who is highly educated and highly motivated to identify products that will complement his or her individuality and rising power.
For Pao the project was critical to her business. After the collapse of Lehman Brothers in 2008, her retail clients fled, “I said, what would it take for you to hire us back, and they basically said, ‘The U.S. is dead, Europe is dead, Japan is dead and we’re putting all our resources in either the Middle East or in China. If you can help us … we’d be happy to speak with you again.’” The mature markets may not be “dead,” but numbers confirm that momentum is indeed swinging: According to an October 2009 Bain & Company report, the U.S. luxury market likely fell 16% that year, Europe was off 8%— but China, which is described as the “new real frontier of luxury,” rose an estimated 12%.
And according to the Luxury Institute’s latest report on the high-end market (released in September 2009) 33% of respondents said they plan to spend less on handbags this year. “Even the wealthiest of consumers are now living within their means, which will have a somber, dampening effect on the market,” says Luxury Institute’s CEO, Milton Pedraza.
“U.S. consumers who are making $150,000 or more, spend about $3,000 a year on handbags, which is a pittance compared to the Chinese.” For comparison, 90% of Pao’s panelists who had purchased a handbag in the past 12 months are planning or considering the purchase of another luxury bag in the next six months.
For Western companies China can be a difficult market to crack due to its language barrier and inherently private culture. In a nation still challenged by censorship issues, Pao says people are generally hesitant to share personal and honest information. But Pao, a Chinese-American whose parents are from Nanjing, says her ties to mainland China gave her a natural advantage. “All of our correspondence was done in Mandarin. We leveraged our network of friends and families, so that we were able to hand select and hand screen a panel…who because we knew them or were tied to them in some way shape or form would tell us the truth.”
That panel is highly educated and has serious spending power: 70% graduated from college, with many holding advanced degrees: 80% own a own home; and nearly 90% bought a luxury handbag in the last 12 months. The average annual salary of a panelist is 125,000 yuan, or $18,382–which may seem low compared with U.S. wages, but is more than triple the average salary in Shanghai, which is 39,000 yuan or $5,735, and goes a lot further in China. Many of the panelists are young, college graduates from wealthy families who recently entered the work force. While their means seem modest compared to luxury buyers in the U.S., Pao found that many outspend their Western counterparts, dollar for dollar. Of the 311 panelists who bought a handbag in the last 12 months, the average purchase price per bag was $1,000 and the average panelist bought two bags, according to Pao’s data.
China’s lust for luxury may seem a pure power play, a competition to amass the greatest number of logos, but Pao says it has become more nuanced than that. As Chinese consumers become more sophisticated and savvy, they’re using fashion to differentiate themselves and project a personal statement. Twenty years ago people bought luxury goods because it signified how successful they were: “Literally, you were judged by the clothes that you wore on your back,” she says. “The trend is shifting, because in the 1970s China enacted the one-child policy,” Pao says. “Now China has a population of very wealthy households. [Their] children are cosseted, coveted, pampered … they’re self-centered and they’re spoiled,” says Pao. “It’s just how they describe themselves.”
As a result the country has moved away from a group-think mentality to a more individual-centered mindset. Luxury products that offer an opportunity for differentiation, such as limited editions, are highly sought after by her panelists, including “Shanghai Hipster” Liu. He admits China’s consumers are more brand-oriented but says that only “unsophisticated luxury shoppers would select luxuries with visible logos to show off their new ‘conquest.’ ”
Pao’s report concludes that the country’s wealthy consumers and its aspirational class are willing to spend money (while scrimping and saving if necessary) to buy the finest goods, but they are more discerning than ever. Pao warns that China can no longer be used as a dumping ground for excess inventory and says designers will have to create limited editions exclusively for the market.
The Chinese consumer understands that “after 2009 they’re going to be the number one consumer of luxury goods in the world,” Pao says. “And they’re expecting acknowledgment for that.”