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The Chinese demand for luxury goods is immense. It is creating a unique, dynamic and rich digital luxury retailing environment. This report looks at the growth of the global and Chinese markets for luxury goods. We estimate the size of the Chinese online luxury goods market. We then discuss what is responsible for creating China’s over-sized online luxury market, and the motivations of different customer segments. This report will be of use to those interested in the luxury goods markets, Chinese retail and digital marketers generally.
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matthunter.com DIGITAL ◊ PRODUCT DEVELOPMENT ◊ STRATEGY
All third party information featured in the presentation slides remains the intellectual property of their respective originators. All use of information is done under the fair use copyright principal, and I do not assert any claim of copyright for any quotation, statistic, fact, figure, data or any other content that has been sourced from the public domain. Whilst efforts are made to ensure accuracy, no warranties can be given. I do assert a claim of copyright for my domains, matthunter.com, my site design, slide design, database design, look and feel, and my logo (“the cube”). The core material in this work is shared under a creative commons licence [attribution 3.0 unported (CC by 3.0)]. Readers are free to share (copy, redistribute, transmit) and remix (adapt the work), including for commercial use; but must properly attribute the original work to me. Such attribution should not suggest that I make any endorsement of the user or their derived use of my material. Further viewing of this presentation indicates your understanding of and consent to these conditions. Image Acknowledgments: Front cover: ChinaLuxuryNetwork.com Introduction: FT Tilt
Important Notice
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Agenda
• China and the global market for luxury goods
• Role of the internet in Chinese luxury consumption
• Driving forces behind online growth
• Online luxury goods customer segments
• Future trends
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Globally the luxury goods market is thriving. China has emerged as a major driving force behind this vitality. In recent years, Chinese luxury goods purchases have surged.
The domestic market is growing rapidly, as young, rich elites are reaching out to embrace finer fashions. The markets of Greater China continue to boom. And Chinese travelling abroad are becoming the leading consumers in major fashion destinations.
Chinese consumers are fast becoming central to the global luxury goods industry
A Chinese Obsession?
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The market for luxury goods is seeing exceptional growth globally
Source: Bain & Company
Worldwide Luxury Goods Market by Area
0
50
100
150
€200B
Luxury Spending
2009
Americas
Europe
Asia-Pacific
Other
Japan
150
2010
171
2011E
191
9%
13%
26%
5%
13%
09-11
CAGR
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As China’s domestic economy has surged, demand for luxury goods has grown rapidly. Areas such as Shanghai’s bund abound with high-end stores for luxury brands of all descriptions.
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China’s domestic market has grown twice as fast as the global market
Note: 2011 estimate as per Bain; 2012 revenues estimated at 18% YOY growth from 2011 as per McKinsey forecast Source: Bain & Company (China Luxury Market Study 2011); McKinsey & Company (McKinsey Insights China)
• China’s luxury goods market doubled in size between 2009 and 2012
• Extensive growth: luxury goods becoming more widely available -In 2011, China saw almost as many new
openings of luxury retailer branches as Europe and the USA combined
-Luxury retailers have pushed out from the major (“tier 1”) cities to begin colonisation of tier 2 and tier 3 cities
-66% of YOY growth comes from new customers
• Intensive growth: luxury consumers spending ever more on luxury goods -33% of growth comes from existing customers
increasing purchases
-Small high-end clientele developing heavy purchasing habit
-Significant aspirant middle-class now spending above Western norms
0
5
10
15
€20B
Chinese Personal
Luxury Goods Spending
2009
7
2010
10
2011
13
2012E
15
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Consequently, Mainland China’s luxury goods market became the 5th largest in the world in 2010
Source: Bain & Company; China Luxury Market Study 2011
Personal Luxury Goods Market –
Ranking by In-Country Spending (2010)
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However on a global scale, Chinese luxury purchases are even more significant
China €12.9B
Taiwan €3.9B
HK €5.8B
Macao €0.8B
Luxury goods purchases in Chinese societies total €26.6B
S’pore €3.2B
Chinese Mainland consumers spend > €6B in Euro markets
Paris €4.3B
Milan €2.0B
Note: Data based on 2010 revenues Source: Bain & Company; China Luxury Market Study 2011
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50% of luxury goods purchased in Milan and Paris are bought by visiting Chinese
Note: Data based on 2010 revenues Source: Bain & Company; China Luxury Market Study 2011
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Chinese consumers are fast becoming the main driving force of global luxury
25% Including purchases in Mainland China, Taiwan, Hong Kong, Macau & purchases by Mainland Chinese when travelling
abroad, Chinese consumers drive
of all global luxury purchases
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Agenda
• China and the global market for luxury goods
• Role of the internet in Chinese luxury consumption
• Driving forces behind online growth
• Online luxury goods customer segments
• Future trends
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Chinese consumers are more reliant on the Internet than other nationalities to…
-…discover luxury brands -…research products -…and complete their purchases
And consequently, the internet accounts for an unusually large share of total purchases
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The in-store experience is still the most important factor in determining purchases
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However, the internet is the next most important influence in persuading Chinese to buy luxury goods
Note: Derived from regression of whether consumers purchased products from a luxury brand with whether they experienced a certain touch point and how the information was received (positively or negatively). Internet specific responses scaled to 100%. Survey products include RTW, Bags, Shoes, Jewellery & Watches. Based on a survey of 2,422 consumers. NB: McKinsey survey therefore largely assumes correlation is causation Source: McKinsey & Company; McKinsey Insights China (2010)
Purchase influencers
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Amongst internet interactions, paid advertising and social reviews are of near equal importance in persuading shoppers to buy
Note: Derived from regression of whether consumers purchased products from a luxury brand with whether they experienced a certain touch point and how the information was received (positively or negatively). Internet specific responses scaled to 100%. Survey products include RTW, Bags, Shoes, Jewellery & Watches. Based on a survey of 2,422 consumers. NB: McKinsey survey therefore largely assumes correlation is causation Source: McKinsey & Company; McKinsey Insights China (2010)
Purchase influencers: Internet only
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When researching, social media is the channel most commonly used to obtain information on luxury goods
“Which channels of the Internet do you normally
get information on luxury goods from?”
Note: Social Media includes: SNS, Weibo (Chinese Twitter-style micro-blogs) and Blogs Source: Bain & Company; China Luxury Market Study 2011
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Although China has a vigorous and well established fashion press…
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…Online fashion bloggers are even more influential
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Chinese consumers’ opinions on luxury brands are heavily shaped by fashion blogs
Consumers who say their opinions on luxury
goods and brands are shaped by fashion blogs
Source: Altagamma
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After researching online, Chinese luxury consumers are exceptionally likely to make purchases online
% of Luxury Consumers Making Purchases Online
Source: Altagamma
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As a result, the online share of luxury spending is far higher in China than elsewhere
% of Luxury Consumers Making Purchases Online
Note: China online figures understate sales by excluding direct retail by major brands 2012 Figures include linear extrapolation based on YOY growth rates from 2010-2011 Source: Data from Bain & Company (Global total, Global online, China total); iResearch (China online)
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These figures imply China has the world’s leading online luxury goods market
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What does this really tell us?
• 13% online penetration vs. 3% online penetration as a global average is a tremendous difference
• Given the uncertainty in measurement and differences in categorisation of “luxury” it’s possible the true figure is significantly lower
However, we can reasonably conclude that the online market is significantly more important in China than in
established markets
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Agenda
• China and the global market for luxury goods
• Role of the internet in Chinese luxury consumption
• Driving forces behind online growth
• Online luxury goods customer segments
• Future trends
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Unique factors have led to accelerated development of China’s online market
• Luxury brands are rapidly increasing their store footprint across China. However, this development has lagged growth in domestic demand and in many cases Chinese stores fail to match the range and experience offered by overseas stores. Underserved Chinese customers have turned to the internet to fulfil their needs.
• Online behaviour varies by customer type. An unusually young, rich elite uses the internet as a tool of convenience to order luxuries as simply as ordering commodities. Fashion fanatics develop sizeable online followings from eager aspirants. And a growing core market turns to the web to flaunt their latest purchases, much as a peacock fans its feathers.
• Collectively these factors make the online environment exceptionally important as a researching and purchasing medium for Chinese luxury shoppers
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A relatively undeveloped network of stores has contributed to the growth of online
• Luxury brands have accelerated store roll-outs across Mainland China in recent years, with China receiving as many store openings in 2011 as the US and Europe combined
• However, surveys suggest this roll-out is long overdue and that many luxury retailers are failing to provide an adequate level of service in their Chinese stores… -45% of Chinese who travel abroad to purchase
luxury goods do so because they find the service and shopping experience superior
-69% say they find more variety when shopping overseas
• For customers unimpressed with store service or located in un-served towns, online has grown in prominence
Source: World Luxury Association 2012
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Wealthy Chinese are younger than their counter-parts in developed economies
China’s average millionaire is 39 years old
The average American millionaire is 64 years old
With youth comes a deeper affection for internet shopping
Source: Li & Fung
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Agenda
• China and the global market for luxury goods
• Role of the internet in Chinese luxury consumption
• Driving forces behind online growth
• Online luxury goods customer segments
• Future trends
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We can obtain a picture of China’s online shoppers by combining several studies
• A number of reports from leading consultancies and agencies have provided customer segmentation and demographic information on China’s luxury shoppers:
-Hurun Wealth Report: Demographics on China’s emerging elite
-McKinsey China Insights: Buying habits examining the share of income spent on luxury goods
-Group M – CIC Internet Word of Mouth Social Media & Luxury Study: Online behaviours of a range of groups
• Each of these reports uses different methodologies and has a different focus making them imperfectly compatible – however, combining aspects of these studies allows us to sketch a more robust picture of online luxury consumer behaviour
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McKinsey categorise luxury archetypes based on annual luxury spending and share of income spent on luxury
McKinsey’s original figures for annual spending, household proportions and share of total consumption are not internally consistent; and imply a different total market size. Information should not be used for market-sizing. Source: McKinsey Insights China (2010)
0
50
100
RMB150K
Annual luxury spending
Luxury
Role
Models
150
Fashion
Fanatics
70
Core
Luxury
Buyers
45
Middle
Class
Aspirants
20
0
10
20
30
40
50%
Percentage of annual incomespent on luxury goods
Luxury
Role
Models
11
Fashion
Fanatics
42
Core
Luxury
Buyers
18
Middle
Class
Aspirants
8
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Luxury role models
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Luxury Role Models are likely to be a driving force of online purchasing
Image Credit: Lifeisnothingwithoutstyle.com;Source: Hurun Wealth Report; Group M; China Daily, iResearch, McKinsey & Company
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Fashion Fanatics
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“Fashion fanatics” are likely to be online opinion leaders
Source: Group M/CIC, McKinsey
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Core Luxury Buyers
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“Core Luxury Buyers” are likely to shop offline but broadcast purchases online
Source: Group M/CIC, McKinsey
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Middle Class Aspirants
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“Middle Class Aspirants” are more likely to search for discounted goods
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Summarising: these four groups likely have very different behaviours online
• Luxury role models • Likely to purchase online
• Price insensitive
• Range and service focused
• Fashion fanatics • Online opinion leaders
• Weak likelihood to purchase online due to love of shopping experience
• Style focused
• Core luxury buyers • Shai-sharers and online researchers
• Influenced strongly by fashion fanatics and moderately by peers
• Unlikely to buy online
• Middle class aspirants • Uncertain of purchases
• Heavily reliant on online research
• Likely to buy online only via off-price channel
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Agenda
• China and the global market for luxury goods
• Role of the internet in Chinese luxury consumption
• Driving forces behind online growth
• Online luxury goods customer segments
• Future trends
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Brands need a digital vision of luxury
The digital space is becoming crowded. A surge of private equity and venture capital investment has led to a number of high profile third party retailers attempting to address China’s digital luxury consumers. Full-price and off-price offerings abound.
Active online followings have the potential to benefit brands. But luxury brands face the challenge of managing their relationship with a highly engaged digital population, whilst maintaining an aura of exclusivity. Employing common buzz-based digital techniques pioneered by FMCG brands will run counter to overall values.
The over-riding challenge is to deliver a distinctive, high quality service that differentiates the excellent from the good. Those that discover how to do this using bits and bytes rather than leather and gold will lead the coming era.
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Beyond exclusivity To re-create the sensation of luxury in a digital setting we must first appreciate the essence of luxury
To many, luxury means “rarity”
But in a digital world, rarity is artificial: abundance is a CTRL+V away
So brands and designers must find a deeper appreciation of luxury to convey
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In the seams of a fine coat or the workings of a fine watch, the sensation of craftsmanship and excellence become palpable
But in the digital world, the scope for differentiation through quality is limited. Flawless operation is a prerequisite for even the humblest of websites; and flamboyant technical genius is often perceived as an intrusion or barrier.
Beyond craftsmanship
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Perhaps…
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The essence of luxury lies in emotion and storytelling
Beyond rarity and craftsmanship, the value of luxury goods stems from an emotional power
If… luxury goods are an embodiment of fantasy in consumable art
Then perhaps ownership buys… the freedom to redesign our self image; to borrow the manna of a designer or craftsman; to absorb the physical characteristics of fine leather or metal
In the digital space where the physical becomes imperceptible, the promise of luxury goods must be established through a different narrative – stories and experiences that lend us the same ability to dream or elevate ourselves
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The luxury brand of the future is the digital storyteller
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matthunter.com DIGITAL ◊ PRODUCT DEVELOPMENT ◊ STRATEGY
Email: [email protected] LinkedIn: http://cn.linkedin.com/in/digitaldirector
Matt Hunter is a digital marketing specialist with 8 years
experience. He previously worked at management consultancy
Bain & Company in London, Johannesburg and Sydney before
heading digital marketing and product development at
Confused.com, a successful UK internet business.
He specialises in digital marketing, product development and
strategy.
He holds an MA in Economics & Management from the University
of Oxford, an MSc in Strategic Information Systems from Cardiff
University and is currently completing the MIT-Tsinghua MBA in
Beijing, China.
<< Available for opportunities in digital marketing, tech start-ups or
PE/VC funds; and roles with Asian exposure. >>
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Appendix: Combining estimates from Bain & Company and iResearch suggests ~13% penetration
• China online figures understate sales by excluding direct retail by major brands. 2012 Figures include linear extrapolation based on YOY growth rates from 2010-2011. Data from Bain & Company (Global total, Global online, China total); iResearch (China online)
2010 2011 2012
China 9.6 12.9 15.2
China Online 0.8 1.4 2.0
China Online % 8.6% 10.8% 13.1%
ROW 163.4 178.1 185.1
ROW Online 3.7 4.2 5.5
ROW Online % 2.2% 2.4% 3.0%
© 2012 Matt Hunter
matthunter.com