The Business of Luxury By Tim Jackson
This year’s FT Business of Luxury Summit shed new light on the Chinese market and the digital directions influencing the industry…
A key theme emerging across the conference was disruption, which has occurred in luxury markets in part due to a weak euro and its associated impact on global pricing and demand.
Martin Wolf, associate editor and chief economics commentator of The Financial Times, offered insights into the global macro-economic outlook, based on the latest forecasts from the Organisation for Economic Co-operation and Development (OECD): “Yet again, the US is very disappointing, with [forecast] growth of only 2% this year, which is well below what people had been expecting. The Eurozone is in recovery at 1.4%, Japan at 0.7% and global growth at 2.1%. It’s a
very weak year.” Wolf noted that inflation remains extraordinarily low, with no economy expected to hit its inflation target. However, the Eurozone is enjoying a year of growth. “If everything goes well, according to my calculations, Eurozone GDP next year should be more or less where it was before
the crisis began, so it’s almost a lost decade, but nonetheless there is growth,” Wolf said.
Commenting on the state of the BRIC economies (Brazil, Russia, India and China), Wolf predicted that China would be the largest global economy in the long term, but added that India was set to be very significant, too: “We have underplayed India. It’s quite difficult to imagine a world in which India isn’t the fastest growing major economy over the next generation. It has some very attractive characteristics.” Wolf stressed that China is still in development: “Relatively, China still remains quite a poor country. It’s a middle income country with a GDP per head of only a quarter of the US. But it would still seem to have a lot of potential.”
Nathalie Remy, a partner at global management consulting firm McKinsey, explored the impact of the digital and mobile revolution on luxury sales.
Remy observed that luxury consumers are much more “mobile digital” than the rest of the population: “95% of luxury consumers in the world are smartphone-equipped. That’s 100% in most big cities. As a comparison, in the US, the smartphone penetration is only 60% in the total population. Some 80% of luxury consumers use social media at least once a month and two out of three weekly, and they are very active users: 65% of them are posting pictures, comments and reviews at least once a month.”
The implication for brands is that the power is shifting to consumers. Remy noted that the Instagram content posted by consumers with the hashtag of a brand, compared with what brands post on their official Instagram accounts, is 10,000:1 for each piece of content. McKinsey research also revealed that 68% of luxury sales today are influenced by a brand’s digital presence, meaning that online represents a growth driver beyond pure e-commerce.
Online Sales Growth
The share of online as a channel in luxury sales is growing. The UK is leading, with 11% of luxury sales now online, compared with 6% across the US, France and China. Remy predicts that this average will triple to 18% by 2025, creating an online luxury market valued at $70bn, effectively the thirdlargest market after the US and China. On average, luxury consumers go through nine brand touchpoints before making a purchase. This number varies from six in the UK to 13 in China, reflecting different levels of maturity in the market and consumer needs. The top five touchpoints include, in order of importance, city store, word-of-mouth referral, online search results, the brand’s sales paper and the brand’s website. All of these touchpoints must work together in an integrated way.
Martin Bartle, global communications and e-commerce director at British lingerie retailer Agent Provocateur, noted that while e-commerce accounts for 20% of the company’s business, overall sales growth is driven by the rollout of physical stores. “When we turn up in Hong Kong, we are totally new to that market: we have to establish ourselves. It’s about customer experience. Agent Provocateur is a very immersive experience and once you’ve experienced that, you’re going to be moved. Our wealthiest, most global customers are the most likely to be shopping in both channels.”
LUXURY IN CHINA: NEW DIRECTIONS
The Chinese luxury market has changed dramatically over the past year. Before the anti-corruption campaign began in the country, 65% of global watch sales were to Chinese consumers, but that figure has now dropped to 25%, noted Jamil Anderlini, Beijing bureau chief at The Financial Times. The country’s luxury consumers are becoming more demanding, as they seek out greater discounts and highly detailed product information.
Last year, 107 million Chinese travelled abroad. David Tang, founder of international brand Shanghai Tang, observed that fewer Chinese are buying at home. “In today’s China, you will see all the big-name brands in all the cities. The question is: are the Chinese mainlanders still buying? My contention is definitely much less and it’s going to be even less. The main problem is that there are three taxes on luxury goods: VAT at 17%, import duty of 25-65% and consumption tax at 30%. So anything you see in China is bound to be at least 50-100% more than what it would be from the country of origin.”
Rising Middle Class
Tang highlighted the growing importance of China’s middle class, defined as those who earn $30,000 per year: “[These consumers] are aged between 25 and 40 – much younger than the demographics of the Western world. But there were 78 million of them [families] last year. Times three one-child families, you are talking about 228 million people. Within five years, that will go beyond 310 million. What this means is that the consumer will be younger, more energetic and thoroughly conversant with the internet. They all know about the prices – they have conversion tables.”
Tang confirmed the importance of discounts for Chinese consumers: “If you go to the Shanghai FreeTrade Zone, which opened a few months ago, you can buy a BMW or an Audi at a discount of 25% (parallel imports from Dubai or South Africa)….So there will be many more people wanting to buy things at a discount. This idea of discount is what matters. If you want to succeed in China in retail in the immediate future, you will have to contend with the new consumer, who is much younger and much more conscious about prices.”
One result of the anti-corruption clampdown is that consumers are buying for themselves. “Now people are buying for themselves, they are becoming more demanding,” said Stefano Canali, general manager at Italian luxury clothing company Canali. “They want to know everything about the brands, and they want to know whether the product they are buying is worth the money. They are becoming curious about every single detail. So we still need to have stores in China, which have Chinese staff who are knowledgeable and well-trained to explain the reason why [they should buy].”
Jiang Shan, chief executive of Prowon Consulting, which advises on dealing with the superwealthy in China, noted a slowdown in luxury retailing in China: “If you go to Plaza 66, the first luxury shoppingmall in Shanghai, it is very quiet. On the ground floor, there are people in Louis Vuitton, there are a few in Dior, there’s nobody in the other shops sometimes and there are a lot in Chanel. I think the honeymoon good times for luxury brands in China have gone, and I don’t know when they are coming back.”
Shan puts shifting consumption patterns down to changing tastes. The first generation of luxury shoppers is looking for something new and different from the big luxury brands, he said. “They give up the Louis Vuitton bags and they come back to some Chinese designers. They don’t need the brands to show their tastes any more.” Shan also indicated that the second generation, the sons and daughters, don’t follow their parents’ original preferences for large global brands, but instead prefer ‘avant-garde’ brands such as Rick Owens and Stella McCartney. “There are tonnes of brands they can choose from to be different from their parents.”
Shan added that very wealthy Chinese consumers have some spending priorities that are not seen in the West, including hiring fortune tellers. “There are a few super-rich families who I feel are getting back to the older Chinese traditions. The fortune teller is an interesting phenomenon. Wealthy consumers have their own private jet and they always have their fortune teller with them.” The influence is far-reaching, affecting business decisions and even changing personal names. “I was shocked to see they believe them so much and they spend millions to change the name of a property deal or even their daughter if she cannot find a nice boyfriend,” Shan said.
IN CONCLUSION – FUTURE INSIGHTS
“If you want to succeed in China in retail in the immediate future….you will have to contend with the new consumer, who is much younger and much more conscious about prices. They want discounts,” warns Shanghai Tang founder David Tang. Also, as a result of the anti-corruption clampdown, China’s
consumers are buying for themselves and want more information about the brands and products they are buying. Retailers should satisfy their demands by providing in-depth knowledge.
First published by Stylus Media Group.