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Young middle-class aspirants likely to propel luxury consumption
May 17, 2011, Tuesday
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AT first glance, the rise of China's luxury goods business seems to defy logic.
On the one hand, the country's per capita GDP is ranked 94th in the world - behind countries like Jamaica and Bosnia. On the other, it is expected to soon overtake the United States as the world's largest luxury market.
The quick and easy explanation for the paradox is that standards of living and income levels are rising along with China's economy, producing a growing number of millionaires and billionaires.
But there's more to what's fuelling China's US$12 billion luxury goods sector than simply having the means to consume. As with other discretionary purchases, retail experts say buying designer clothes, jewelry and other high-end goods in China is also driven by emotions, culture, social values and a certain amount of political baggage.
Melting pot
China's consumer culture has been molded by a "melting pot" of values, according to Pierre Xiao Lu, a professor at Shanghai's Fudan University, who specializes in luxury marketing research. That includes strong values revolving around modernity, wealth and success, many of which were shaped some 30 years ago under Deng Xiaoping, who famously said, "Let some people get rich first."
"Suddenly, the country's flat structure opened up vertically," says Lu. "Distinguishing oneself from others by Western-style success, wealth and modernity became desired and admired. The dominant narrative of modern China became that of upward mobility - both for the nation and the Chinese individual."
The pursuit of luxury chimes with this narrative. "It's the most efficient way to measure success," says Jef-frey Wong, CEO of Meici.com, a Shanghai-based online luxury boutique.
What differentiates China from other countries is the flattening of its traditional social classes during the communist revolution. "Compared with other societies that are more class-based, [China's] relatively flat social structure and the fact that all money is 'new money' put everyone on an equal footing in their endeavour to succeed," says Ashok Sethi, Shanghai-based head of consumer insight of TNS, a market research company.
The absence of class also means there is - in Sethi's words - "no 'inverted snobbery' or 'old money' looking down on the ostentatious ... 'new rich,' which discourages luxury products, and in fact makes it fashionable to appear casual and use moderately priced products," he says. "This is a sentiment restricting the luxury goods market in developed countries, but it does not appear to be making a strong dent in China."
But there's another twist in China. According to a report published earlier this year by McKinsey, the "middle class aspirant" is a rapidly growing segment of luxury goods consumers in China.
Hedonism
Predominantly lower middle class, this group must save up money in order to afford luxury products, which are prohibitively expensive relative to their incomes. Although their purchases are infrequent and account for only 10 percent of the total value of luxury purchases, they are 51 percent of the luxury customer base.
By 2015, 61 percent of all luxury customers will be middle-class aspirants, accounting for 16 percent of the country's US$27 billion of luxury sales.
Social aspirants are greatly influenced by wealthier, more fashionable consumers, whose numbers are multi-plying. By 2015, there will be 76 million upper middle-lass households, compared with 13 million today, with annual incomes of between 100,000 yuan (US$15,400) and 200,000 yuan, says McKinsey consultants.
The number of wealthy households earning between 300,000 yuan and 1 million yuan annually will increase 15 percent annually to 5.6 million and those above 1 million yuan will increase 20 percent annually to 1 million over the coming years.
It's the young middle-class aspirants in China that are the ones to watch, says Vinay Dixit, senior director of McKinsey's Asia Consumer Centers. "They have grown up in a consumerist society, they are optimistic about their future income rising, and they were born under the single-child policy," she says. "Their purchases may be supported by their parents and grandparents, so you have three generations pooling resources. This is quite unique to China."
Old or young, Dixit notes that although the country's per capita savings rate is relatively high compared with that of other countries, increasing optimism and hedonism are influencing middle-class consumers willing to spend on luxury.
"There is the sense of 'I need to reward my hard work now, not in 30 years,'" Dixit adds.
Luxury goods retailers have now woken up to the buying power of the aspirants, who predominantly live in smaller tier cities.
Consultants at Bain & Company say that in 2010, around 67 percent of luxury sales growth in China came from new customers, particularly in lower tier cities.
Materialism
That undoubtedly is making a significant impact on retailers' growth strategies. "China's market is sup-ply-driven; new store openings create new demand," the report says. The 15 brands it surveyed opened a total of around 80 stores in the first eight months of 2010.
Analysts expect this trend to continue. Such trends are leading some observers to voice concern that too many Chinese are using luxury goods as a crude social tool of judging the strength of a person's character, as opposed to focusing on noble, less materialistic qualities.
Though in the luxury business, Wong of Meici says, "When people judge their peers by what they wear, society risks becoming too materialistic. However, this is a trend that businesspeople can take advantage of today."
(This is adapted from an article from China Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. To read the original, please visit: http://bit.ly/iExLOb.)
On the one hand, the country's per capita GDP is ranked 94th in the world - behind countries like Jamaica and Bosnia. On the other, it is expected to soon overtake the United States as the world's largest luxury market.
The quick and easy explanation for the paradox is that standards of living and income levels are rising along with China's economy, producing a growing number of millionaires and billionaires.
But there's more to what's fuelling China's US$12 billion luxury goods sector than simply having the means to consume. As with other discretionary purchases, retail experts say buying designer clothes, jewelry and other high-end goods in China is also driven by emotions, culture, social values and a certain amount of political baggage.
Melting pot
China's consumer culture has been molded by a "melting pot" of values, according to Pierre Xiao Lu, a professor at Shanghai's Fudan University, who specializes in luxury marketing research. That includes strong values revolving around modernity, wealth and success, many of which were shaped some 30 years ago under Deng Xiaoping, who famously said, "Let some people get rich first."
"Suddenly, the country's flat structure opened up vertically," says Lu. "Distinguishing oneself from others by Western-style success, wealth and modernity became desired and admired. The dominant narrative of modern China became that of upward mobility - both for the nation and the Chinese individual."
The pursuit of luxury chimes with this narrative. "It's the most efficient way to measure success," says Jef-frey Wong, CEO of Meici.com, a Shanghai-based online luxury boutique.
What differentiates China from other countries is the flattening of its traditional social classes during the communist revolution. "Compared with other societies that are more class-based, [China's] relatively flat social structure and the fact that all money is 'new money' put everyone on an equal footing in their endeavour to succeed," says Ashok Sethi, Shanghai-based head of consumer insight of TNS, a market research company.
The absence of class also means there is - in Sethi's words - "no 'inverted snobbery' or 'old money' looking down on the ostentatious ... 'new rich,' which discourages luxury products, and in fact makes it fashionable to appear casual and use moderately priced products," he says. "This is a sentiment restricting the luxury goods market in developed countries, but it does not appear to be making a strong dent in China."
But there's another twist in China. According to a report published earlier this year by McKinsey, the "middle class aspirant" is a rapidly growing segment of luxury goods consumers in China.
Hedonism
Predominantly lower middle class, this group must save up money in order to afford luxury products, which are prohibitively expensive relative to their incomes. Although their purchases are infrequent and account for only 10 percent of the total value of luxury purchases, they are 51 percent of the luxury customer base.
By 2015, 61 percent of all luxury customers will be middle-class aspirants, accounting for 16 percent of the country's US$27 billion of luxury sales.
Social aspirants are greatly influenced by wealthier, more fashionable consumers, whose numbers are multi-plying. By 2015, there will be 76 million upper middle-lass households, compared with 13 million today, with annual incomes of between 100,000 yuan (US$15,400) and 200,000 yuan, says McKinsey consultants.
The number of wealthy households earning between 300,000 yuan and 1 million yuan annually will increase 15 percent annually to 5.6 million and those above 1 million yuan will increase 20 percent annually to 1 million over the coming years.
It's the young middle-class aspirants in China that are the ones to watch, says Vinay Dixit, senior director of McKinsey's Asia Consumer Centers. "They have grown up in a consumerist society, they are optimistic about their future income rising, and they were born under the single-child policy," she says. "Their purchases may be supported by their parents and grandparents, so you have three generations pooling resources. This is quite unique to China."
Old or young, Dixit notes that although the country's per capita savings rate is relatively high compared with that of other countries, increasing optimism and hedonism are influencing middle-class consumers willing to spend on luxury.
"There is the sense of 'I need to reward my hard work now, not in 30 years,'" Dixit adds.
Luxury goods retailers have now woken up to the buying power of the aspirants, who predominantly live in smaller tier cities.
Consultants at Bain & Company say that in 2010, around 67 percent of luxury sales growth in China came from new customers, particularly in lower tier cities.
Materialism
That undoubtedly is making a significant impact on retailers' growth strategies. "China's market is sup-ply-driven; new store openings create new demand," the report says. The 15 brands it surveyed opened a total of around 80 stores in the first eight months of 2010.
Analysts expect this trend to continue. Such trends are leading some observers to voice concern that too many Chinese are using luxury goods as a crude social tool of judging the strength of a person's character, as opposed to focusing on noble, less materialistic qualities.
Though in the luxury business, Wong of Meici says, "When people judge their peers by what they wear, society risks becoming too materialistic. However, this is a trend that businesspeople can take advantage of today."
(This is adapted from an article from China Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. To read the original, please visit: http://bit.ly/iExLOb.)
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