Luxury Lab | China: The Biggest Opportunity for Luxury Brands in a Generation

NEW YORK, United States — Making economic predictions isn’t easy these days, what with key indicators slumping one day and then bouncing back the next. But even as the global economy keeps market observers and analysts on their toes, there is one thing that everyone seems to agree on: the pre-eminence of the Chinese economy.

Last month, the Chinese government announced that it was depegging its currency from the US dollar, allowing the Yuan to appreciate within a defined band, slowly abandoning the exports-led growth strategy which has made Chinese goods cheaper in the global market in recent years. But now, as Western economies stop and start, the Chinese government is looking to sustain its growth by stimulating demand at home. Last week the IMF made projections that China’s growth rate will slow somewhat next year from over 9.9 percent in 2010, to 9.6 percent in 2011.

But still, for luxury goods companies, China offers the biggest opportunity for luxury brands in a generation.

According to the latest research from luxury thinktank L2, based at New York University, founder Scott Galloway said in an interview with Bloomberg TV, “when you look at the sheer size of incremental revenue that the Chinese market offers, especially online, you could hit singles in every market, but as long as you connect with the ball in China, your shareholders are going to be just fine.”

Percent of Luxury Consumers under 45 | Source: NYU Stern

Percent of Luxury Consumers under 45 | Source: NYU Stern

The numbers are staggering. Galloway and his team report that 840 million people will be online in China three years from now, which means there will be more people online in China than the US, Europe and Japan combined. More than 80 percent of Chinese luxury consumers will be under the age of 45, a digitally savvy, voracious online consumer.

“You couple that kind of growth online with the fact that you have a younger more digitally native consumer, and you have the largest channel anywhere…for luxury goods, the online channel in China might be the biggest market worldwide in five to ten years,” says Galloway, with a luxury market growing at 15 percent per year.

For further information on L2′s China Digital IQ research, you can download the full report or register a free webinar from L2 to be held this Wednesday, 14 July at 10am Eastern time, 3pm London time.

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  1. I believe the source for those stats above (in the image in the post) are from the from 2008 Wealthy Chinese Consumer Survey (McKinsey) via the NYU Stern report.

    I think omitting the explicit fine print from the source reports is a little misleading, they are vital to understanding the information. Specifically I think there is a big difference in what is defined here as Wealthy and what we consider Luxury.

    According to the report a wealthy household (in an urban environment) is one whose income is more than 250,000 RMB (roughly 25,000 GBP)

    The equivalent earnings (US and Japan) are PPP adjusted, which works for cheap local products and services, but I believe it cannot be used when comparing purchase power on fixed price Luxury goods regardless of local economy. The cost of local products or services will define how much disposable income is available but will not make imported Luxury goods any cheaper.

    With a monthly income of 20,000RMB (£2000) pre-tax, is this really enough to be classed a Luxury consumer? You could be a wealthy consumer by local standards but not Luxury consumer by international standards?

    According to the same 2008 Wealthy Chinese consumer survey, wealthy consumers spend 31 percent of their disposable income on apparel/shoes and accessories. After tax and expensive urban housing is this really that much?

    Combine this with a growing inflation rate in the Chinese economy pushing up local products and services, disposable income could diminish resulting in less spending per household.

    I would be much more interested in real measured figures on disposable income in Chinas wealthy population. I think this would present a much clearer representation of the potential amount of Luxury consumers.

  2. Hello,

    At this context of opportunity , how are the Chinese luxury consumers willing to go for small and unknown, however more exclusive , brand names ?
    In our case , a fine jewelry brand from Brazil , .

  3. I think Alistair Allan has a very valid point.
    The definition of “luxury customer” is vital for the definition of market sizing. The real luxury customers- the person who will drop a $2000 for a bag or a blouse- will be a smaller market than identified.
    Most likely luxury companies will see their cheaper lines such as a Red Valentino or Moschino Cheap and Chic versus a full fledged line or adjust their prices. The latter will never happen as it will be pure cannibalization and arbitrage opportunities for luxury shoppers.

    I wonder if globalization will dictate pricing eventually.

    Divya from Philadelphia, PA, United States
  4. Alistair/Divya:

    Great comments and thoughts. The 80% statistic is from the 2008 McKinsey Report as is cited in the report.

    We spend a lot of time debating the meaning of the term “luxury” and who makes up the consumer set for luxury goods. As our study encompassed entry level luxury goods such as beauty & skincare brands and alcohol brands I think it is fair to assume that those with 20,000 RMB are purchasing and evangelizing these brands. Further more establishing equity with this consumer base (whether through cheaper products – such as Chanel and Makeup) or entry level lines (such as Moschino Cheap & Chic mentioned by Divya) provides opportunities for brands to develop relationships with consumers and potentially sell more “traditional” luxury goods in the $2,000 dollar range down the line.

    One of the things clear from our research that regardless of purchasing power, the Chinese love traditional brands. Brands like Givenchy and YSL receive huge buzz on SNS and BBS sites despite their size and retail footprint.

  5. The exciting opportunity for the luxury industry in China is to nurture a new generation of consumers who have a strong desire to consume and be validated by luxury their holdings. The art of this relationship between the emerging wealthy chinese population and the luxury industry is to be focused on maintaining a mystique and quality of a luxury offering while still providing access . I’m very excited for the wealthy Chinese digital generation and it’s support for the global luxury industry ; it will be the most important region in the global luxury market for many brands. Cheray Unman , Chairman & CEO Venture Bank

  6. Where is the shopping experience

    SAM from Beijing, Beijing, China