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Looking at Luxury in a Post-Pandemic China

Summary

Navigating the Chinese market had been challenging for international luxury fashion brands even before the pandemic, but shifting consumer trends in the world’s largest luxury goods market now threatens the bottom line for major brands worldwide. To remain competitive, luxury brands must identify the challenges within the market and restructure their China strategies around the culturally-charged consumer market.

As the pockets of China’s upper class deepen and the size of its middle class grows, so does the world’s largest luxury goods market. In 2019, Chinese consumers accounted for 90% of industry growth in the global personal luxury goods market, leading growth models to project Chinese consumers to account for nearly 50% of all luxury goods by 2025. For now, however, prolonged social distancing and mandatory quarantine measures due to the pandemic have sent shockwaves through the cash-strapped global luxury fashion industry.

While the explosive Chinese market has set the tone for the personal luxury goods market over recent years, the current global economic climate has left prospects for the once-strong industry uncertain. Regardless, some companies have still managed to hedge short-term losses while preparing for a long-term recovery. For example, Lululemon capitalized on a renewed consumer push towards healthy living to see 70% year-on-year sales growth in Q1 and Q2 of 2020. By reallocating marketing expenditures and capitalizing on market trends driven by social distancing and quarantine requirements, it is still possible to look to the future of China’s luxury market with an optimistic eye.

China’s Urban Affluence Boosts Luxury Sales

A 2019 report placed young Chinese consumers firmly as the largest drivers of luxury fashion boutiques worldwide. Chinese luxury market spending was forecasted to almost double from CN¥770 billion (~US$115 billion) in 2019 to CN¥1227 billion (US$183 billion) by 2025, and 70% of buyers were described as digitally savvy millennials bridging two categories: “Luxury Newcomers,” the brand-conscious nouveaux-riche, and “Status Surfers,” the relatively affluent trend-watchers. The rise of both luxury consumption by wealthy millennials and disposable incomes across China, combined with successful partnerships with conspicuous Chinese celebrities like Kris Wu (“B.M.” 2017) and Jackson Wang (“Fendiman” 2018), led to a string of hit and miss marketing campaigns by international fashion companies aimed at grabbing market share of an increasingly individualistic Chinese generation.

Though global brands were successful in connecting recognizable faces to foreign brands through celebrity endorsement campaigns, consumers were ultimately more interested in the service and exclusivity of the luxury goods buying process. 90% of Chinese consumers at the time of the report expressed a preference for an in-person consumer experience, suggesting that, while the connection to social icons brought them to the door, it was the personalization, hospitality, and high-level attentiveness of well-trained salespeople that helped guide them to the sales counter with big-ticket goods.

Just one year earlier, the young affluent Chinese demographic represented one third of personal luxury goods sales worldwide. Interestingly, only 9% of personal luxury goods sales were domestic to China. In other words, although Chinese consumers represented a massive market worldwide, only a fraction of their purchases were made within China – a phenomenon largely due to vacation shopping that allows savvy consumers to avoid hundreds of dollars in taxes and import fees on luxury goods. In what has been seen as an effort to migrate luxury shopping from Hong Kong – which brags zero sales tax and VAT – to the mainland, the Chinese government has increased the domestic limits on duty free shopping. This coincides with massively reduced Chinese taxes on domestic businesses to fight COVID-19 effects on the economy, which has caused the Chinese market to shift inward at a faster pace than originally predicted and boosted domestic purchases of luxury goods.

Emerging Trends in Chinese Luxury Buying

The experience of top luxury brands during the post-pandemic recovery points to the emergence of three trends in the Chinese market. The first trend is an affinity for an omnichannel online experience. Lockdown lifestyle has seen a growth in social media usage as well as increased interaction with omnichannel marketing by the average Chinese consumer. For example, Levi-Strauss & Co. reported a conversion rate that was seven times higher when it appealed to customers more vigorously through online channels. Secondly, there is a growing desire for a more palatable brand image, especially where health and fitness or ecological consequences are concerned. Longer periods inside have forced a rise in Chinese attentiveness to health and wellness and green sustainability among other aspects of a brand’s story and image, with about 65% of Chinese consumers saying they spend more time considering product safety and environmental sustainability. Finally, there is a growing preference for buying domestic as opposed to abroad. Many international luxury brands have seen domestic sales growth, with brands like Hermes and Moët Hennessy Louis Vuitton (LVMH) reporting near 100% year-over-year increases for e-commerce transactions within China.

Build an Omnichannel & Online Presence

While a full recovery to pre-pandemic numbers is not expected for several years in the luxury goods industry, the pandemic’s impact on luxury brands comes with a silver lining: companies have been given a chance to reassess their long-term strategies. If European and US fashion brands hope to not only regain but exceed former figures, they might consider the rapidly shifting market trends going forward.

Chinese consumers are increasingly tech-oriented, and this characteristic has only intensified due to the convenience of online shopping during the pandemic. They are also increasingly disloyal to brands without an online presence, with 18% of retail shoppers having switched away from previously preferred brands to those with an online or mobile app-based store – 47% of whom do not intend to switch back. While this seems to imply consumers have altered their preferences since lockdown policies were put into place, some brands have encouraged this change in behavior by providing customized and exclusive customer experiences via Chinese social media platforms like WeChat, Weibo, and Little Red Book (xiǎohóngshū).

Luxury brands will need to follow suit. To win the 70-80% of consumers who say they will spend at least as much as pre-COVID levels once the pandemic subsides, 10% of which fall into the category of “revenge spenders,” brands should consider partnering with online retailers like Tmall’s Luxury Soho, which allows luxury goods companies to sell off unsold inventory at a discounted rate. An omnichannel presence not entirely focused on sales will allow for the ability to curry favor with consumers – an increasingly popular method is to work with key opinion leaders (KOLs) or live streaming influencers who Chinese consumers tend to trust more than corporations.

Develop a Localized Brand Image

Crafting a coherent brand image with cultural sensitivity and an ecological footprint in mind will be paramount to recovering a strong consumer base and building good faith with new shoppers. Over recent years, luxury fashion companies from Coach to Dulce and Gabbana have stepped on the toes of Mainland consumers, leading to lost deals with A-list Chinese celebrities, cancelled fashion shows, and most importantly, forfeited consumer goodwill. Cultural misunderstandings and misinterpretations of sensitive Chinese socio-political sentiment has left a bad taste in the mouths of Chinese consumers.

Conversely, brands would benefit from investing time and effort into sourcing strong, qualified talent within China and empower local employees to structure localized marketing and sales campaigns within the market. Some experts have recommended removing China from the APAC blanket and running it as an entirely separate territory. When more than 33% of revenues (and growing) are generated by this single monolithic group of consumers and bears starkly unique retail values, designating China as its own region may be necessary to stay agile while navigating the turbulent waters of the Chinese market.

Bain predicts a large increase in domestic spending over the next five years, and with local fashion giants like Li-Ning, Erdos, and Bosideng waiting in the wings, international fashion brands could meet the same fate of the iPhone in the Chinese market – collapsing from 44% of smartphone market share in April 2017 to 19% in April 2020 due to fiercer competition from local brands like Huawei, Oppo, and Vivo – if they are not careful.

Luxury brands would also do well to continue their streak of getting fit and going green. The fashion industry alone accounts for 10% of global carbon emissions and severely impacts the environment with its unsustainable pelt hunting practices and chemical waste creation from dyes and synthetics manufacturing. These are issues that luxury brands have recognized and are working to shore up, albeit quietly. As Chinese consumers place an increasing emphasis on their personal health as well as environmentally responsible operations, luxury brands that can voice their support for both personal wellness and environmental health will find a voice that resonates with the hearts and minds of Chinese consumers whose sentiments have changed alongside the tide of COVID-19.

Address the New Environment with a Long-Term Mindset

Developing a more agile long-term dedicated China strategy focused on supply chains, operational risk management, and free flow of internal communication will be paramount to maintaining a secure foothold in the expanding market. Amid the fallout of the pandemic, companies have discovered the fragility of overexposed supply chains. Supply chains, like all other aspects of business, need to be continuously re-evaluated and conceived with contingency plans in mind. Supported by their personal successes in managing the fallout in the beginning of the pandemic, Craig Smith of Marriott and Clarence Mak of Mars Wrigley also recommend the development of a crisis management team. While most focus on “what they [see] in their backyard,” having a team of individuals to monitor the markets in which a brand operates will allow for swifter action in unexpected situations. Finally, to take a page from the Northwell Health System’s COVID communication book, a de-siloed workflow and communication network within a company will enable a more fluid structure and quicker relay of information from one arm to another. For international luxury brands, communication can spell the difference between decision and disaster.

Looking Forward

When preparing to address their prospects in China’s post-pandemic luxury goods market, it is imperative to consider the shifting consumer landscape. There are a few clear cut trends that have been heightened by the pandemic and are likely to redefine the recipe for success over the foreseeable future: increased exposure to a largely millennial and tech-savvy consumer base, a focus on personal health and environmental sustainability, and a stronger call for cultural sensitivity by global brands. With these trends in mind, luxury brands will need to re-evaluate their China strategy to remain competitive in the growing Chinese luxury market.

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