BCG - The Boston Consulting Group

China Is Expected to Become the World’s Largest Luxury Market in the Next Five to Seven Years Says a New Report by The Boston Consulting Group

The Enduring Health of China’s Luxury Market Makes It an Oasis of Hope for Global Companies, but Competition Will Become More Intense in a Post-Land-Rush Era

BEIJING, January 21, 2010—China has suffered far less than other countries in the global downturn, and its luxury market offers tremendous opportunities in a recession-battered world,  according to a new report by The Boston Consulting Group (BCG).

The report, titled China’s Luxury Market in a Post-Land-Rush Era, shows that although Chinese consumers may continue to be somewhat cautious in their spending, they still aspire to luxury brands. In a BCG survey of 2,550 Chinese consumers conducted in early 2009, 26 percent of participants said that they planned to spend more on luxury in 2009 than they did in 2008. Therefore, it will be increasingly important for companies to understand the best way to approach this dynamic market.

As China’s wealth has spread from the largest coastal cities to smaller cities inland, luxury stores have followed in a land rush for space. More than half of all sales outlets for luxury goods in China have opened in just the past three years. But not all growth has been well planned. “Only a few executives we spoke with had a clear picture of where their competitors were located and how consumers differed from one city to another,” noted Hubert Hsu, coauthor of the report and a senior partner in BCG’s Hong Kong office. Today, Shanghai and Beijing have as many luxury point-of-sale locations per capita as New York and Chicago. Although average disposable income in China is expected to more than double by 2015, it will still remain one-third to one-sixth that of many international luxury hubs. This fact should give pause to companies that believe they have nothing to fear from a saturated luxury market in China.

Luxury goods are hard to introduce into new markets, especially into smaller cities, where experienced partners and distributors are difficult to find, and few sales people are trained to deliver the high levels of customer service that luxury sales require. But the greatest challenge is consumers’ lack of familiarity with luxury brands, according to coauthor Vincent Lui. ”Although women under 25 are very familiar with  luxury apparel brands, only 3 percent of the women we surveyed could name more than four apparel brands, and 47 percent could name only one.”

BCG has identified three critical imperatives for success in China’s future luxury market:

Market to Chinese consumers traveling outside mainland China. The BCG study found that many Chinese tourists spend more on luxury items on a single trip to Hong Kong than they do in an entire year in their home city. Consumers cite lower prices, authenticity, a wider selection, and better service as reasons for shopping away from home. Mainland marketers should drive consumers to their stores in Hong Kong and vice versa. 

Conduct rigorous quantitative analysis to determine the appropriate footprint for the brand. BCG has developed extensive databases on the demographic and competitive profiles of the top 300 cities in China. Our study concluded that many luxury brands have expanded without sufficient planning and analysis. Going forward, CEOs will expect their executives in China to clearly articulate not only the precise size of the brand’s footprint there but also the rationale behind it.

Acquire the tools necessary to win the competition at the point of sale. Sales associates should know what qualities consumers in different segments look for in luxury products and be able to distinguish the brand’s features from those of its competitors. Their goal is to increase the number of loyal customers; close sales with more of those loyal customers; close sales with a higher percentage of impulse shoppers (including competitors’ customers). Retailers should use a quick diagnostic to determine which of the three dimensions offers the greatest potential.

Methodology
BCG’s insights are based on client work and proprietary data from interviews with senior managers of luxury companies in China and on 840 extensive exit interviews with Chinese consumers who were engaged in luxury shopping trips at the end of 2008. The study also draws on BCG’s annual Consumer Sentiment Survey, conducted most recently from October 2008 through February 2009 by the Center for Consumer Insight (CCI), which provides world-class consumer-insight capabilities to the firm’s clients. Furthermore, the study taps a database on store expansion undertaken by 38 luxury brands through 2009.. Finally, BCG draws on its extensive consulting experience in the luxury retail industry.

To receive a copy of the report or arrange an interview with one of the authors, please contact Ms. Gu Li at +86 21 23064069 or gu.li@bcg.com.

About The Boston Consulting Group

The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 68 offices in 39 countries. For more information, please visit www.bcg.com or www.bcg.com.cn.