In China’s tier one and two cities it seems that there is a luxury mall on every street. In Shanghai, for example, the growth and expansion seems endless; on the 20 minute drive from my home to the office I pass three new mall developments – each of them plastered with huge billboards advertising the new luxury stores that are soon to open.
Nevertheless, according to market reports, the growth in demand for luxury products is actually slowing. So is the market going to become the number one in the world, overtaking Japan as people expect, or are we about to see a bumpy landing?
According to the consulting company Bain, the market for luxury goods in China grew by 233 per cent between 2007 and last year. This astonishing rate of growth couldn’t last forever, but apart from this natural slowdown, let’s take a look at some of the other factors that may be at work.
Without a doubt the crackdown by the new leaders on gift-giving is playing a part. The ban on government agencies buying luxury goods came into effect in October of last year and resulted in luxury sales slowing in the December quarter.
Traditionally, officials often bought luxury goods, such as watches and bags, as ‘gifts’ for other officials or business contacts to help smooth deals and improve relationships. Of course the real effect of this is impossible to gauge, but one client confessed that the policy was having a big effect on sales in her boutiques across China.
However, it is estimated that less than 25 per cent of luxury spending last year was spent on ‘gifts’, so other factors must also be considered.
The average age of luxury consumers in China is much younger than that in Europe or America. While in London, the luxury consumer tends to be at least 40 years old and wealthy, in China consumers tend to be younger and willing to spend much more of their disposable income on luxury goods.
This does offer grounds to suggest that growth ought to be robust for many years (if a brand can catch someone young, they can keep them for life), but the youthful market in China also holds some potential problems.
First, the Chinese consumer is rapidly maturing – shoppers in Beijing and Shanghai are now truly global consumers and are therefore shifting away from ‘logo’ and high profile signs of luxury spending.
Instead, more and more, they are embracing uniqueness and understatement in luxury items.
Second, these young urban consumers are increasingly experienced in luxury shopping in other markets. Therefore brands are being forced to offer the same consumer experience to Chinese consumers as they do elsewhere.
Luxury brands need to embrace this new consumer or risk losing more and more sales to shopping tourism.
A final factor behind some Western brands reporting a growth slowdown is the increased competition in the Chinese market. As China’s First Lady Peng Liyuan is proving, there are some very hip local luxury brands, often more subtle and individual experiences than their Western rivals.
Additionally, bridge luxury brands -- brands that sit between ‘luxury’ and ‘the high street’ in China are expanding more quickly aided in part by an emerging middle class and a growing online fashion community.
So there are definitely growth opportunities, but brands are going to have to be a little savvier to find them.
For consumers in China though, the loosening of the luxury brand’s traditional grip on the market is exciting, with more choice than ever before.
Jonathan Edwards is a Partner at Antal International China (Shanghai), an executive search firm.