Research
Moving target

China’s luxury consumers are becoming more sophisticated and their spending patterns are changing, according to research by McKinsey. Leonor Stanton analyses the findings

By Leonor Stanton | Published in Spa Business 2013 issue 3


China. Without doubt one of the biggest emerging markets for spas. The growth is fuelled by its rapid rising economy and unprecedented consumer spending on high-end goods. With a compound annual growth rate (CAGR) of 27 per cent between 2008-2012, the Chinese market for luxury brands is now the largest in the world and is expected to continue on an upward trajectory until 2015.

Despite this robust outlook, consumer buying patterns are extremely changeable. A recent report by McKinsey – Luxury Without Borders: China’s New Class of Shoppers Take on the World – identifies significant challenges facing luxury brands including “the globalisation of Chinese luxury shopping, the rising sophistication of the country’s consumers, and the changing ways in which those consumers make purchases”.

While the report isn’t directly focused on spas, it outlines some interesting parallels for any operator in the luxury business.

Market Size
Based on “interviews with over 1,000 luxury shoppers in 14 cities, extensive data analysis and conversations with industry leaders”, McKinsey forecasts that Chinese consumers will generate 34 per cent of demand for global luxury goods, totalling CNY726bn (US$118.2bn, €90.2bn, £77.5bn) by 2015. Luxury goods include ready to wear fashion, shoes, handbags, watches and fine jewellery. Growth is expected to slow to 12-16 per cent CAGR between 2012-2015 – partly due to the economic slowdown in China and concerns over gifting to government officials. Yet the outlook is still positive as a result of:
* the rising number of those with disposable incomes above CNY1m (US$162,500, €124,200, £106,750). McKinsey forecasts that the number of very wealthy people will grow at over 20 per cent annually between 2012-2015. While only accounting for 0.4 per cent of China’s population, this segment is intended to generate 28 per cent of demand for luxury goods in 2015;
* new entrants to the market such as the rising and aspiring middle classes;
* relatively high levels of financial confidence;
* women now account for three fifths of luxury purchases and are a fast growing segment;
* individual gifting is “embedded in Chinese society… seen as a way of nurturing relationships – so it’s not about to diminish in importance anytime soon”, even in the face of increasing concerns about gifting to government officials; and
* changing lifestyles – more socialising among the wealthy provides them with opportunities to wear their luxury purchases

Challenges in china
Given the positive background, there are the obstacles facing luxury brands in China.

Market Splintering – even consumers with just a few years’ experience of buying luxury goods now want “low-key and understated goods to ones that are emblazoned with popular logos”. But new entrants still prefer “widely-recognisable brands that show off their status”. This presents a dilemma as trying to satisfy all markets “risks diluting their brands’ cachet”. This is a particular problem as 49 per cent of tenured shoppers, who’ve been purchasing luxury goods for over 10 years, “like to discover new brands before others, compared with only 31 per cent of new entrants”. Brands face the danger that as new entrants become customers, the “loyalty of more tenured consumers may weaken… as they seek to differentiate themselves… with a smaller, niche product… and new entrants may even follow [suit] leaving the once-fashionable brand abandoned by both ends of the market.”

McKinsey advise brands to “focus on the core and build on heritage… highlighting the skill of craftsmen… the length of history… Brands shouldn’t completely avoid expanding into new categories, rather they should do so in a way that enhances their key narrative.”

Pricing – should be “based on a strategy that’s coherent with the branding, merchandising and the global image”. McKinsey advises that in general “iconic categories and products that never go on sale should be kept distinct from those that might”. Promotions should also be limited to VIPs it believes.

Consistency – outbound tourism by Chinese residents is predicted to grow from 57 million trips in 2010 to 94 million by 2015. As a result, an increasing number of luxury purchases are now made abroad. In 2010, 65 per cent of shoppers purchased luxury goods in mainland China only. By 2012 this had declined to 38 per cent. Macau, Hong Kong and increasingly Europe are the key shopping destinations overseas.

However, brand consistency is difficult to achieve in different jurisdictions. China imposes taxes ranging from 20-70 per cent on imported luxury goods, leading to wide ranging retail price disparities. This can lead to price differentials on say, a handbag, of up to 40 per cent. While some luxury operators have recently reacted by increasing prices only outside Asia, and certain government officials have expressed the willingness in time to reduce import duties, “the price gap is unlikely to disappear… any reduction in taxes is almost certain to be gradual”.

In addition to price consistency, operators are also “obliged to maintain consistency of excellence in their retail establishments around the world… with the importance of the in-store experience for Chinese luxury consumers becoming ever more evident”.

In-store experience – the growing frequency of buying on impulse or after only a short consideration propels the in-store experience into a priority. McKinsey found that over half of survey respondents cited some aspect of the in-store experience as important in their purchase decision and “the longer consumers shop for luxury, the more they care about the stores they patronise”.

Operators have responded by increasing the size of outlets, in some cases significantly – “for some brands, a three to five-fold expansion of space in the average outlet since 2007”. Given annual rent and wage rises, this is an expensive investment.

McKinsey advises that “striking the right balance between store numbers and quality” is becoming increasingly important. “It’s advisable to… ensure that sites are prominent and stores globally consistent in terms of look and feel. Expanding selectively in a few untapped lower-tier cities may be desirable”. The researchers believe that opening outlets in non-exclusive locations “can hurt brand image”. Brands should also focus on airport duty-free outlets as the Chinese travel to more overseas destinations.

CRM and pampering to the ultra-wealthy – in the pursuit of customers, McKinsey suggest luxury brands “should fit their CRM programmes to surprise and impress their customers with personalised and exclusive offerings… starting small, with a few initiatives offering high-impact pampering, is often the best way to go”. The researchers found that ultra-wealthy consumers seek a VIP, individualised shopping experience – private rooms or floors and dedicated (Chinese speaking) salespeople. “In China, some brands have flown their best customers on all-expense-paid trips to enjoy fashion shows, art shows, and cruises; for VVIPs, these excursions can involve destinations as far away as Paris”. McKinsey also suggest “customising brand and product portfolios, using limited-edition offerings to create an aura of exclusivity… Super-rich Chinese consumers love, and count upon, ‘over-the-top’ VIP treatment”.

Embracing the online opportunity – while online purchases in the luxury sector in China are still in their infancy, “and not about to displace in-store shopping anytime in the foreseeable future”, this channel should not be ignored according to the researchers. Three-quarters of respondents to the survey cited worries about counterfeiting as a reason for not buying online. As elsewhere, consumers are increasingly using the internet to gain information – price comparisons, viewing editorial comments by other users. Those who did buy online reported price savings on websites such as Taobao.com and ihaveu.com. Official manufacturer’s websites only derived 4 per cent of online purchases. McKinsey advises “tailoring e-commerce operations to be ready if and when the channel takes off… through password-protected websites for select groups of registered customers” in order to confront fears of counterfeiting and payment security.

Implementing these strategies is unlikely to be cheap or easy, but essential to keep-up with the ever-changing sophistication of the largest luxury consuming market globally.

Luxury 2.0
Interestingly, a May 2013 study by global business consulting firm Bain & Company confirms many of the McKinsey findings. Luxury Goods Worldwide Market Study, Spring 2013 Update, which analyses the market and financial performance of more than 230 of the world’s leading luxury goods companies, reports that the key for winning in the luxury market over the next 10-15 years is “to get ready for Luxury 2.0, where success will be defined by a relentless focus on three luxury goods management principles”. Those principles are:
1. Superior customer service;
2. Flawless retail management; and
3. People excellence

“We’re entering a new phase in the evolution of the luxury market”, says Claudia D’Arpizio, a Bain partner in Milan and lead author of the study. “More markets, more segments, and more diversity of tastes all combine to create more variables to solve when pursuing the right strategy for growth.”

A consistent, quality in-store experience is becoming increasingly important Credit: shutterstock.com/merzzie
Customer dilemma – tenured consumers want understated luxury, while new customers want widely-recognisable brands that show off their status Credit: shutterstock.com/TonyV3112
 


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SELECTED ISSUE
Spa Business
2013 issue 3

View issue contents

Leisure Management - Moving target

Research

Moving target


China’s luxury consumers are becoming more sophisticated and their spending patterns are changing, according to research by McKinsey. Leonor Stanton analyses the findings

Leonor Stanton
Chinese consumers will generate 34 per cent of demand for luxury goods worldwide, totalling US$118.2bn, by 2015 shutterstock.com/TonyV3112
A consistent, quality in-store experience is becoming increasingly important shutterstock.com/merzzie
Customer dilemma – tenured consumers want understated luxury, while new customers want widely-recognisable brands that show off their status shutterstock.com/TonyV3112

China. Without doubt one of the biggest emerging markets for spas. The growth is fuelled by its rapid rising economy and unprecedented consumer spending on high-end goods. With a compound annual growth rate (CAGR) of 27 per cent between 2008-2012, the Chinese market for luxury brands is now the largest in the world and is expected to continue on an upward trajectory until 2015.

Despite this robust outlook, consumer buying patterns are extremely changeable. A recent report by McKinsey – Luxury Without Borders: China’s New Class of Shoppers Take on the World – identifies significant challenges facing luxury brands including “the globalisation of Chinese luxury shopping, the rising sophistication of the country’s consumers, and the changing ways in which those consumers make purchases”.

While the report isn’t directly focused on spas, it outlines some interesting parallels for any operator in the luxury business.

Market Size
Based on “interviews with over 1,000 luxury shoppers in 14 cities, extensive data analysis and conversations with industry leaders”, McKinsey forecasts that Chinese consumers will generate 34 per cent of demand for global luxury goods, totalling CNY726bn (US$118.2bn, €90.2bn, £77.5bn) by 2015. Luxury goods include ready to wear fashion, shoes, handbags, watches and fine jewellery. Growth is expected to slow to 12-16 per cent CAGR between 2012-2015 – partly due to the economic slowdown in China and concerns over gifting to government officials. Yet the outlook is still positive as a result of:
* the rising number of those with disposable incomes above CNY1m (US$162,500, €124,200, £106,750). McKinsey forecasts that the number of very wealthy people will grow at over 20 per cent annually between 2012-2015. While only accounting for 0.4 per cent of China’s population, this segment is intended to generate 28 per cent of demand for luxury goods in 2015;
* new entrants to the market such as the rising and aspiring middle classes;
* relatively high levels of financial confidence;
* women now account for three fifths of luxury purchases and are a fast growing segment;
* individual gifting is “embedded in Chinese society… seen as a way of nurturing relationships – so it’s not about to diminish in importance anytime soon”, even in the face of increasing concerns about gifting to government officials; and
* changing lifestyles – more socialising among the wealthy provides them with opportunities to wear their luxury purchases

Challenges in china
Given the positive background, there are the obstacles facing luxury brands in China.

Market Splintering – even consumers with just a few years’ experience of buying luxury goods now want “low-key and understated goods to ones that are emblazoned with popular logos”. But new entrants still prefer “widely-recognisable brands that show off their status”. This presents a dilemma as trying to satisfy all markets “risks diluting their brands’ cachet”. This is a particular problem as 49 per cent of tenured shoppers, who’ve been purchasing luxury goods for over 10 years, “like to discover new brands before others, compared with only 31 per cent of new entrants”. Brands face the danger that as new entrants become customers, the “loyalty of more tenured consumers may weaken… as they seek to differentiate themselves… with a smaller, niche product… and new entrants may even follow [suit] leaving the once-fashionable brand abandoned by both ends of the market.”

McKinsey advise brands to “focus on the core and build on heritage… highlighting the skill of craftsmen… the length of history… Brands shouldn’t completely avoid expanding into new categories, rather they should do so in a way that enhances their key narrative.”

Pricing – should be “based on a strategy that’s coherent with the branding, merchandising and the global image”. McKinsey advises that in general “iconic categories and products that never go on sale should be kept distinct from those that might”. Promotions should also be limited to VIPs it believes.

Consistency – outbound tourism by Chinese residents is predicted to grow from 57 million trips in 2010 to 94 million by 2015. As a result, an increasing number of luxury purchases are now made abroad. In 2010, 65 per cent of shoppers purchased luxury goods in mainland China only. By 2012 this had declined to 38 per cent. Macau, Hong Kong and increasingly Europe are the key shopping destinations overseas.

However, brand consistency is difficult to achieve in different jurisdictions. China imposes taxes ranging from 20-70 per cent on imported luxury goods, leading to wide ranging retail price disparities. This can lead to price differentials on say, a handbag, of up to 40 per cent. While some luxury operators have recently reacted by increasing prices only outside Asia, and certain government officials have expressed the willingness in time to reduce import duties, “the price gap is unlikely to disappear… any reduction in taxes is almost certain to be gradual”.

In addition to price consistency, operators are also “obliged to maintain consistency of excellence in their retail establishments around the world… with the importance of the in-store experience for Chinese luxury consumers becoming ever more evident”.

In-store experience – the growing frequency of buying on impulse or after only a short consideration propels the in-store experience into a priority. McKinsey found that over half of survey respondents cited some aspect of the in-store experience as important in their purchase decision and “the longer consumers shop for luxury, the more they care about the stores they patronise”.

Operators have responded by increasing the size of outlets, in some cases significantly – “for some brands, a three to five-fold expansion of space in the average outlet since 2007”. Given annual rent and wage rises, this is an expensive investment.

McKinsey advises that “striking the right balance between store numbers and quality” is becoming increasingly important. “It’s advisable to… ensure that sites are prominent and stores globally consistent in terms of look and feel. Expanding selectively in a few untapped lower-tier cities may be desirable”. The researchers believe that opening outlets in non-exclusive locations “can hurt brand image”. Brands should also focus on airport duty-free outlets as the Chinese travel to more overseas destinations.

CRM and pampering to the ultra-wealthy – in the pursuit of customers, McKinsey suggest luxury brands “should fit their CRM programmes to surprise and impress their customers with personalised and exclusive offerings… starting small, with a few initiatives offering high-impact pampering, is often the best way to go”. The researchers found that ultra-wealthy consumers seek a VIP, individualised shopping experience – private rooms or floors and dedicated (Chinese speaking) salespeople. “In China, some brands have flown their best customers on all-expense-paid trips to enjoy fashion shows, art shows, and cruises; for VVIPs, these excursions can involve destinations as far away as Paris”. McKinsey also suggest “customising brand and product portfolios, using limited-edition offerings to create an aura of exclusivity… Super-rich Chinese consumers love, and count upon, ‘over-the-top’ VIP treatment”.

Embracing the online opportunity – while online purchases in the luxury sector in China are still in their infancy, “and not about to displace in-store shopping anytime in the foreseeable future”, this channel should not be ignored according to the researchers. Three-quarters of respondents to the survey cited worries about counterfeiting as a reason for not buying online. As elsewhere, consumers are increasingly using the internet to gain information – price comparisons, viewing editorial comments by other users. Those who did buy online reported price savings on websites such as Taobao.com and ihaveu.com. Official manufacturer’s websites only derived 4 per cent of online purchases. McKinsey advises “tailoring e-commerce operations to be ready if and when the channel takes off… through password-protected websites for select groups of registered customers” in order to confront fears of counterfeiting and payment security.

Implementing these strategies is unlikely to be cheap or easy, but essential to keep-up with the ever-changing sophistication of the largest luxury consuming market globally.

Luxury 2.0
Interestingly, a May 2013 study by global business consulting firm Bain & Company confirms many of the McKinsey findings. Luxury Goods Worldwide Market Study, Spring 2013 Update, which analyses the market and financial performance of more than 230 of the world’s leading luxury goods companies, reports that the key for winning in the luxury market over the next 10-15 years is “to get ready for Luxury 2.0, where success will be defined by a relentless focus on three luxury goods management principles”. Those principles are:
1. Superior customer service;
2. Flawless retail management; and
3. People excellence

“We’re entering a new phase in the evolution of the luxury market”, says Claudia D’Arpizio, a Bain partner in Milan and lead author of the study. “More markets, more segments, and more diversity of tastes all combine to create more variables to solve when pursuing the right strategy for growth.”


Originally published in Spa Business 2013 issue 3

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