Every year, wealthy and middle class Chinese spend increasing amounts of money on luxury goods. But you wouldn’t know this from looking at Mainland China’s luxury sales figures, the growth rate of which is projected to drop from the heady double digit leaps of year’s past to just 2.5 percent this year. Instead of purchasing high-end clothes, watches, shoes and handbags at home, the Chinese are buying them on trips outside the country. In other words, within the luxury goods business, it is not so much about China’s domestic sales, as it is the increasingly peripatetic Chinese.
For some brands, engaging the Chinese traveler is a matter of do or die, since as much as one-third of their home country revenue is coming from Chinese tourists.
These travelling consumers are a large, fast growing and increasingly global population. Last year, the Chinese took an estimated 93 million trips overseas, up from 17 million in 2002. And, since only 8 percent of citizens currently have passports (compared to 33 percent of Americans), there is ample room for growth. New airports keep popping up around China and countries like France, Italy and Belgium are altering their visa requirements to make it easier for the Chinese to visit. By 2016, the Chinese are expected to take 135 million overseas trips annually, for a forecasted growth rate of 13 percent.
In doing so they are venturing increasingly farther from home. While going on shopping-centric trips has traditionally meant Hong Kong and Macau, these days more and more Chinese are venturing to Europe and the U.S. In 2012, 38 percent of Chinese travelers on long-distance trips visited Europe and 13 percent came to the U.S.
Many Chinese perceive store merchandizing to be more sophisticated in Europe and other foreign markets than it is in China, and that overseas stores have faster access to the newest products.
The total amount of money the Chinese are spending on these trips is surging as well, up from $18 billion in 2002 to a projected $154 billion in 2014. Shopping continues to comprise the biggest chunk of this spending. One-third of what’s spent on travel goes toward buying goods – often luxury items – to take back home. (21 percent goes to transportation and 12 percent to food and beverage.) In 2012, nearly three-quarters of the traveling Chinese consumers McKinsey surveyed reported that they had bought a luxury product while abroad sometime in the past 12 months.
All in all, this market forms a critical strategic imperative for luxury goods companies. With the Chinese representing no less than 27 percent of global luxury purchases and more than 60 percent of this being conducted overseas, engaging these consumers and understanding their Consumer Decision Journey is critical to the future success of most luxury brands. For some brands it is a matter of do or die, since as much as one-third of their home country revenue is coming from Chinese tourists.
Chinese luxury consumers show the highest tendency to make impulse buys versus their global peers.
Different types of Chinese tourists
As the market grows and many Chinese become veteran tourists, reaching these consumers is becoming more challenging as there are now multiple segments. There are at least three types of consumers that companies must understand and engage:
- The ultra-wealthy veteran traveler – These consumers, many of them businessmen, go on multiple overseas trips per year and spend, on average, nearly $4,500 per trip, with a few thousand of that going to luxury purchases. More than any other segment, these consumers value a high level of service and want to feel that they have access to goods that would not be available at home in China. These tenured shoppers are looking for less well known brands and ever-more luxurious items.
- The newcomers – This category of upper middle class consumers are traveling abroad for the first time, often coming from tier 2 or 3 cities, and typically as part of a tour bus group. Organized tours remain the most popular way for Chinese to travel abroad, although the number of Chinese travelling independently is growing rapidly. Some 95 percent of Chinese visitors to Louis Vuitton shops in Paris are on organized tours, most of which include shopping destinations as part of the official itinerary. These consumers are eager to shop in flashy flagship stores and they place particular value in the brand experience.
- New repeats – For these consumers, annual travel to Europe and other destinations is becoming an important and valued part of their lives, allowing them to spend their new found disposable income on seeing the world and experiencing the best retail experiences it has to offer. As these consumers become more comfortable with and knowledgeable about travel, they are moving away from organized tour groups and traveling independently. Consequently, their reliance on the Internet for trip planning is high, with online and social sites often serving as a source for identifying “must shop” stores.
Key drivers of behavior
Regardless of whether someone is on their first trip overseas or their tenth, several motivating factors span across all segments. More so than most other nationalities—Brazilians excluded—Chinese tourists are inclined toward shopping while travelling. In order to best assess potential trends going forward, it’s important to understand why. Not surprisingly, the first and foremost factor is price. The fact that more than half of Chinese luxury spending takes place abroad has much to do with the heavy import duties and other taxes assessed on luxury goods coming into China. These levies can boost the prices of products sold in Chinese stores, including online stores, by anywhere from 10 to 50 percent compared to the price in cities like London or Paris. In addition, the overall rising costs of doing business in China — notably increased salary costs and escalating commercial real estate expenses in the prime catchments luxury brands gravitate toward — need to be factored into retail prices.
For instance, a mid-sized Chanel 2.55 handbag that is priced at 41,200 RMB ($6,624) at the French fashion house’s Shanghai store goes for 3,450 Euros ($4,674) in its flagship store in Paris and $5,500 at the duty free store in Seoul—a savings of 29 and 17 percent, respectively, over the Chinese price. In fact, many of the most sought-after bags costing several thousand dollars in China can be purchased for up to 30 percent less in Paris and other European cities.
There is no reason to think that Chinese prices are going to come down significantly in the near future; but if they do, this change would certainly have a chilling effect on overseas shopping habits. Based on the responses to our 2012 Chinese luxury survey, a reduction in the price gap to 20 percent or below would lead three-fifths of the Chinese shoppers who currently buy luxury items abroad to buy them at home.
Implications for luxury brands
It is critical for brands to develop a two-pronged approach to engaging globe-shopping Chinese consumers. That is, they must tailor their branding, marketing and selling strategies to reach this emerging consumer both when he or she is in China and while traveling abroad. Reaching these shoppers before they board the plane is critical because most brand and purchase decisions are made in advance, via careful Internet research and word of mouth recommendations. It is a brand’s strength and visibility in China that will most effectively drive sales abroad.
Yet at the same time, the potential to entice Chinese luxury shoppers to expand their purchase list beyond planned items is ripe: Chinese luxury consumers show the highest tendency to make impulse buys versus their global peers (nearly 40 percent say they purchased an item within one day of wanting to buy it10) and they are notoriously receptive to visual store displays and merchandizing. Making sure the visual stimuli are top notch is critical to wooing the Chinese shopper.
Once consumers are inside stores in Europe, the Middle East or America, the emphasis should be on providing the sort of experience that will inspire repeat visits and positive reports to their friends back home. This means a high level of personalized, Mandarin-speaking service, the opportunity to do duty free processing inside the store, and value added services, such as personalized SMS messages regarding promotions or arrivals of new collections. Since many Chinese are heavily influenced by the visual impression a store offers—including the presentation of merchandise within the store, the store windows, and the physical façade of the building—presentation consistency is key. If a traveler doesn’t see an image in Europe or the U.S. that’s in line with the glitz and glamour they’ve experienced at the brand’s store in Beijing, they might start to wonder whether the brand is truly one of luxury, or if it is just luxury within China. Having a consistent brand image across markets will go a long way toward ensuring this sort of confusion doesn’t occur.
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