DEEPTH | Luxury goods are necessities in China?

The Chinese consumer has become the invisible hand that has propelled the global luxury goods industry to explode in the past decade.

With LVMH reaching a final agreement with Tiffany, the US jewellery brand, the eyes of the global market are turning to the luxury goods sector.According to the fashion business update, according to the Forbes list of real time tracking wealth, LVMH’s chairman and chief executive, Bernard Arnault is worth more than $106 billion, as the deal on Monday has risen by more than 1% to $107.4 billion, with Bill Gates and his value bezos gap between more and more small, the richest man or will soon change, also or will be the first time that the luxury industry won the world’s richest man. 

At the top of the list is amazon founder Bezos, worth $111.7 billion and Bill Gates is worth $107.5 billion.Bernard Arnault’s fortune increased by $10 billion in just one month after LVMH bought the Dior business for 6.5 billion euros in 2017.

Behind LVMH becoming a luxury aircraft carrier is the huge potential energy and cash flow created by emerging markets represented by China.LVMH is undoubtedly the biggest beneficiary of the new cycle of winning the world in the Chinese market.LVMH’s sales for the first three quarters of the year rose 16 percent from a year earlier to 38.398 billion euros, while its core fashion leather goods division rose 22 percent to 15.873 billion euros, according to the company’s results.According to the 2018 financial results, the group’s total revenue rose 10% to 46.8 billion euros, operating profit jumped 21% year-on-year to 10 billion euros, and sales of its core fashion leather goods division rose 15% to 18.455 billion euros.

Although faced with the severe problem of declining freshness of Gucci, Kering Group, the parent company of Gucci, also benefited from Chinese consumers and achieved a high digit growth for more than a dozen quarters, which pushed Kering group into a head-on confrontation with LVMH.For the first nine months of the year, Kering group sales rose 17.2 per cent year on year to 11.523bn, with sales of its core Gucci brand still growing in markets such as China, Singapore and Australia.

Commenting on the latest Tiffany acquisition on CNBC, Raphael Pitoun, a fund manager at CQS New City Equity, said recently that there are increasing opportunities for dominant companies in China’s luxury goods market.“There is a lot of demand for international brands in The Chinese market, and having gone through the economic cycle where you don’t have much money to buy luxury goods, when the economic cycle improves, people flock to stores and online markets to buy more goods.”

“Luxury in China is like a necessity,” he said.

This actually explains why the Chinese market has been able to hold up half the sky after concerns were expressed earlier this year about the luxury giants’ dependence on the Chinese market.The recent expo reflects the continuous optimization of the business environment. The collective appearance of LVMH and Kering group reflects the determination of the international luxury giants to deepen their business in China.

In fact, the luxury fashion industry fluctuates constantly, but this is more of a market opportunity for luxury aircraft carriers, where the strong are getting stronger.Edouard Aubin, head of luxury research at Morgan Stanley, said one of the main reasons for the durability of global luxury giants is that they have huge barriers to entry on the supply side that are hard to emulate.The second is the growing potential market, where a growing number of young, affluent mainland Chinese consumers are driving demand even as the global economy slows.

Knows the truth of LVMH has layout in advance, since 2017 began a thorough innovation from the inside out, and gradually to targeting potential young consumer market in mainland China, alibaba and other third-party from positive hug electric business platform, to open a retail website, and then to hold exhibitions in Shanghai and the opening of a flash, behind every step, around the dialogue with a new generation of Chinese consumers.

Chinese consumers will account for 40 percent of global luxury consumption in 2025 and will be a major contributor to the industry’s growth over the next six years, according to McKinsey’s Report “China Luxury Report 2019 Social Fission: China’s” post-80s “and” post-90s “spawn a new global luxury track, which was released in April.Chinese consumers spent a total of 770 billion yuan on luxury goods at home and abroad in 2018, with each family able to spend 80,000 yuan on average. The increase is mainly due to the surge in the number of upper-middle-class families, whose spending will nearly double to 1.2 trillion yuan by 2025.

The 2019 Global Wealth Report by Credit Suisse also found that of the world’s richest 10 percent, 100 million people in China fell into this category in 2019, surpassing the 99 million in the United States for the first time.Wealth-x, a research firm, found that China has more than $1 billion of ULTRA-high-net-worth individuals, of whom 27.5 percent are under the age of 50, well above the global average of 13 percent.93.5% of the super-rich are entirely self-made.

Statistics from the National Bureau of Statistics show that in 2018, 140 million Chinese families had annual incomes between 100,000 and 500,000 yuan, reaching more than 400 million people in the middle-income group.Some analysis points out that in recent years, China’s consumption is upgrading in the transition period, and families with annual income between 300,000 and 1 million have the ability and desire to consume luxury goods.

Just over 25 percent of all high-end fashion purchases by Chinese consumers are done domestically, and that number is expected to grow to about 50 percent in the next six years

If the increase of disposable income of young consumers is the premise for the explosion of luxury consumption, then the magnification of social functions of luxury goods in East Asian society is the catalyst for luxury sales.The former means that consumers “have more money”, while the latter determines how consumers “spend their money”.  

Compared with European markets, which are more willing to pay for the historical value of luxury brands, East Asian societies seem to agree that the value of luxury products lies not in the products themselves, but in the sense of social recognition they bring.

Earlier this year, in “Why Is Anyone Snapping up Hermes at Costco?In this article, we pointed out that in East Asian culture, individual values require social recognition, which is why luxury goods are particularly popular here, especially in Japan.American culture values individualism, and the self-supporting middle class does not have much spare money to spend. As a result, many Americans are indifferent to luxuries.According to the current domestic luxury market consumers, there are roughly three categories.

The first is the dream of owning luxury consumers, this part of the group most want to have a luxury, but their consumption is not the top luxury items, but some entry-level small luxury brand, such as perfume series, beauty makeup or by saving money to buy luxury goods consumers, purchase frequency is small. 

The second category is the new urban middle class who regard fashion as a certain lifestyle. These consumers have reached the threshold of luxury consumption, hoping to give people an image of keeping up with the trend and enjoying a good quality of life, with slightly higher consumption frequency.In general, those who dream of buying luxury goods are always younger, less expensive but more numerous, easily changing into the second category through age and job.The size of the consumer group at each level is shrinking.

The third category is the plutocratic consumers, who are the most cohesive and loyal consumers favored by luxury brands, but are now more rational, with the size and total consumption decreasing year by year.So the future of luxury consumption does not lie with these people, and luxury brands need more motivation from the bottom of the demand pyramid.

It can be seen that the middle class is becoming the most important incremental market for luxury consumption.This batch of consumer spending to upgrade and identity requirements, and the city rising cost of living has formed a contradiction, cause Chinese consumers when making luxury shopping still sensitive to the price, not from the pursuit of tangible products, to attach importance to the intangible luxury experience, it also caused the consumers prefer to go to the supermarket Costco volume sales for the phenomenon of hermes.

The remolding of the Chinese market by social media in a short period of time has also promoted the social attributes of luxury goods in an unprecedented way.Especially for young people and the middle class who are deep users of social media, luxury fashion consumption has been profoundly reshaped by social media, and the essence of fashion is social.To some extent, this also promotes the further binding of luxury and social.If a few years ago, luxury fashion brands preferred to establish a brand image with a sense of distance, now luxury brands in China have taken setting up a digital brand image, seizing new platforms and traffic pools as the consideration of advancement, and through the market education of fashion media and blogger KOL, their brand image has been deeply rooted in people’s minds.

According to Zheng Miaomiao, a financial commentator and former editor of SuperELLE, “Tiffany is the most ‘middle class’ brand among luxury jewelry brands, which is why LVMH definitely wants to buy Tiffany.”By buying Tiffany, LVMH can continue to capture new middle-class consumers in China and the United States.When Louis Vuitton announced Virgil Abloh as its men’s art director, CEO Michael Burke said in an interview with the New York Times that, “From the mid-19th century to the 1920s and now, the brand caters to the new rich, not the old rich.”  

As Chinese consumers return to The Chinese market due to lower tariffs and narrower price differentials, as well as abundant supply in the Chinese market, there is still more market potential for luxury brands to unlock in China.Data shows that even though the SKU of Luxury goods in China as a whole is still slightly behind, with 15% less SKU than that of major European cities, the variety and color of goods sourced in the Chinese market may be 5% higher than that of other Asian markets and Europe in terms of popular styles.Meanwhile, luxury brands are also launching more seasonal products in China.

Between 2015 and 2018, Chinese consumers increased their share of domestic luxury spending from 23 percent to 27 percent.According to bain & Company’s 2018 China Luxury Market Study, the Chinese luxury market as a whole has benefited mainly from millennials and female consumers, and it is expected that overseas and domestic luxury consumption will be flat by 2025, which means brands should focus on the development of China’s domestic market.

In his latest letter to shareholders, Ronnie Chan, Hang Lung’s chairman, also affirmed the scope for growth in mainland luxury consumption.Just over 25 per cent of all high-end fashion purchases by Chinese consumers are done domestically, he said, and that figure is expected to grow to about 50 per cent in the next six years, while total sales will double over the same period, an almost fourfold increase.He also cited an executive at a high-end European fashion brand who said actual growth could be higher than expected.

In particular, Mr Chan stressed that mainland China, as the group’s main market, had been hit in part by the global geo-economic turmoil, but the impact was not negative.In order to stimulate domestic consumption growth, the Chinese mainland has begun to reduce tariffs on some luxury goods in the past two years, leading to the gradual return of high-end Chinese consumers. “This is evidenced by our revenue growth and the recent performance of our luxury brands.”

Driven by Chinese consumers, who buy a third of the world’s luxury goods, the first internationally competitive luxury shopping mall has opened in China.According to fashion business express, Beijing SKP held the anniversary celebration activity on November 14, solstice on 24. According to insiders, according to the sales data of Pos machine swiping card and cash entering the company, the daily sales volume of SKP single store during the activity reached 1.01 billion yuan, refreshing the previous record of 790 million yuan, which once again aroused the attention of the industry.

In 2018, Beijing SKP achieved sales of 13.5 billion yuan.In China, there are only two high-end shopping malls above 10 billion yuan in Beijing SKP and Nanjing Deji Square.Beijing SKP ranks second in terms of sales per square foot in the world and dominates Asia, behind only Harrods, the British luxury department store, according to the latest 2019 study by Sybarite and GlobalData.Once unknown, the Beijing SKP has brought to light some of China’s most avid luxury shoppers.

Permeate into every corner of life of the surge in social media, disposable income, a large luxury brand marketing interactive advertising bombing, throughout the convenience of online purchase way, in the whole Logo printed on luxuries peers, the hard to avoid all this not to let a young contemporary Chinese identity in the subconscious, he should have a luxury.

Post time: Sep-21-2020