China enters new luxury market era

Middle classes set to drive consumer spending on expensive goods as e-commerce clicks into place

If you want to get some idea just how important China has become as a luxury consumer market you don't have to go further than the recent Beijing auto show.

What started out as a low-key event in 1990 has grown into the biggest and most important stage for the world's auto makers, especially those at the luxury end where models are tailored to China's affluent.

Wander the streets of Beijing and Shanghai and you are sure to see BMWs, Mercedes-Benzes, Porsches, and Ferraris - just about any top-end auto brand that comes to mind.

By 2020, China is expected to be the world's biggest luxury auto market, according to Dan Ammann, president of United States auto giant General Motors, who shares this view with many of his competitors in North America and Europe.

The explosive growth of China's emerging middle class has brought with it sweeping economic change and social transformation and will continue to do so, says global consulting firm McKinsey & Company.

By 2022, it estimates that more than 75 percent of China's urban consumers will be earning 60,000 to 229,000 yuan ($9,600 to $36,600) a year.

McKinsey says that in purchasing-power-parity terms that range is between the average income of Brazil and Italy.

In 2000, just 4 percent of urban Chinese households were within that range.

Analysts say the middle class and upper middle class will be the principal engines of consumer spending in the decade ahead.

More than a third of the money spent around the world on high-end bags, shoes, watches, jewelry, and ready-to-wear clothing now comes from Chinese consumers either domestically or abroad when they travel.

Within the next year, Chinese tourists could be spending as much as $194 billion annually in Europe, the US, Asia and other vacation spots, according to Morgan Stanley in a research note on luxury companies.

Chinese travelers are already the world's biggest spenders, according to the United Nations World Tourism Organization.

The UN group says that by next year the number of Chinese travelling abroad will exceed 100 million, although some analysts say that may happen this year.

Earlier this year The Economist said: "How much China spends is striking. Even more so is the way it spends".

China is now one of the world's most sophisticated consumer markets, heavily skewed toward expensive goods, the publication said.

"Local property barons are now building half the world's new shopping malls in China, many of them in smaller cities, because even punters without big incomes are becoming big shoppers," it added.

For luxury brands, China has been a natural magnet over the last decade or more, especially as home markets in Europe and North America hemorrhaged in the wake of the global financial crisis.

However, the 20 to 30 percent growth many of the brands enjoyed has fallen significantly in the last couple of years.

Bruno Lannes, a partner with management consulting firm Bain & Co, says he expects China's luxury market to grow at around 2 percent this year.

"(And that is) much the same as last year," says Lannes, who is also Bain & Co's head of consumer goods and retail practice in Greater China.

He says growth last year was around 2 percent compared with 7 percent in 2012.

"The government's policy on frugality and anti-gifting has impacted on the sector, especially watches and menswear," he says.

Another factor is the growing number of Chinese who are now buying many of their luxury goods overseas. China's tax and tariff policy makes most luxury brands more expensive.

Bloomberg recently said: "Many of these travelers buy Western or designer goods abroad because import duties and other taxes add up to 60 percent of their prices in China, compared with cities like London, Paris or Hong Kong."

Lannes says overseas purchases by Chinese last year grew by 67 percent.

According to Bain & Co's latest survey on China's luxury market, Chinese travelers now account for 29 percent of global luxury spending.

"Chinese consumers, especially women, are becoming more sophisticated and informed about brands," Lannes says.

Nick Debnam, Asia-Pacific chairman for consumer markets with KPMG China, says China is experiencing a slowdown in the luxury market but is not going backwards or in decline.

"True, you are not seeing the 20 to 30 percent annual growth rates in luxury sales you saw a few years back," he says. "This year most brands will be struggling to see 10 percent growth. But even so, in a market as big as China that is still very good.

"I don't see luxury brands turning their backs on China," he adds. "It's just not the magic place it was two years ago."

Debnam believes it is "too early" to speculate on whether the market has matured or not, adding that "it has more to do with the economy more than anything else".

"When you look at China's demographics, most predictions are that the middle class will continue to grow and it is the middle class who are driving the luxury story. And it is not going to go away at least not in the foreseeable future.

"Despite the economic slowdown, people will still become wealthy and they will continue to spend more driving luxury consumption," Debnam says.

Much of that consumption will be driven by consumers buying online.

In 2012, Chinese shoppers spent $213 billion online, just slightly less than the $225 billion tally in the US, according to Bloomberg.

"The Chinese online retailing market has grown at a scorching 71 percent compound annual growth rate since 2009, about five times as fast as its American counterpart," according to a forecast by Bain & Co.

By 2015, Bain sees the Chinese market reaching $541 billion.

Debnam from KPMG says "this is an area luxury brands have been hesitant to embrace," adding that many high-end companies are concerned that online retail undermines their brand.

Debnam says in the US it is common for people to order three sizes and send back the two that don't suit.

"This hasn't happened in China yet but now the logistics are in place and costs quite reasonable, so it might just take hold," he says.

With fast-growing numbers of consumers spending online in a well-connected country, Debnam is confident China's luxury market will continue to grow.

"They don't have the legacy of traditional media channels leapfrogging straight into digital - they are more likely to be engaged or involved in social networking. So it is only logical that they will move to buying online," he explains.

Debnam says China today is experiencing the emergence of a growing middle-class consumer base and a growing retail market that will only get bigger on the back of a strong uptake of e-commerce.

"Talk to foreign luxury brands and how they perceive e-commerce in China," Debnam says. "They will tell you that five years ago they would not look at going online because it was not what they were about today it is a different story.

"Social media commentary, in terms of which brands are popular and which are not, has really taken off. Social media in China can build or take down a brand overnight and that is the reality," he concludes.

karlwilson@chinadailyapac.com

(China Daily European Weekly 05/09/2014 page7)