A billion-dollar opportunity: Why you shouldn’t underestimate China’s luxury market
Tuesday, December 18, 2012/
Michael J. Silverstein is a senior partner and fellow at The Boston Consulting Group. His most recent book is The $10 Trillion Prize: Captivating the Newly Affluent in China and India. He writes:
China’s luxury market – and the global phenomenon of ”trading up’’ – are well known. Yet when China’s consumer markets recently experienced short-terms blips, several doubters promptly questioned the pace of these markets’ long-term growth.
But high-end fashion label Prada’s recent financial performance suggests that any such ”slowdown’’ is neither broad nor deep. According to The Wall Street Journal, Prada recorded a 30 percent year-on-year increase in net income in the third quarter of 2012, with sales in China jumping up by 33 percent year-on-year. The company also reported a 54 percent year-on-year increase in sales in Europe, which Prada attributed largely to tourists. Reportedly some 50 percent of Prada’s sales to people from China occur in the fashion house’s stores outside of that country. The Journal says that Prada’s dazzling numbers reflect Chinese consumers’ increasingly refined tastes, which make Prada’s high-quality leather goods, with their high price points and subtle logos, that much more attractive.
I completely agree – and I can offer some refinements to the Journal’s forecast. Here at The Boston Consulting Group, we estimate that by the end of the decade, Chinese consumers will spend approximately $41.5 trillion, with annual expenditures increasing from $2 trillion in 2010 to more than $6 trillion in 2020. In our new book, “The $10 Trillion Prize: Captivating the Newly Affluent in China and India,” my three co-authors and I assert that China is poised by 2020 to become the world’s biggest personal luxury market.
Indeed, we calculate that China will have surpassed the United States as the second-largest market by 2015, accounting for $US87 billion, or 23 percent, of a $US379 billion personal luxury market. And by 2020, it will have assumed the top spot, accounting for $US245 billion, or a staggering 40 percent, of a $US610 billion luxury market.
The growing number of affluent and middle-class city dwellers will drive this phenomenal rise in luxury spending. ”Just 1 percent of consumers are millionaires, and they take 20 percent of our sales,” a senior executive at Chanel told us. ”But the middle classes are the key drivers for the future.”
There are other factors, too. China is witnessing a surge in the number of credit card users as they embrace the impulse buying habits more associated with U.S. and European consumers. In 2005, fewer than 50 million credit cards were issued. By 2010, the number had risen to 221 million. By 2020, the major credit card companies are aiming for triple the number of cards – and increased usage, too.
Then, too, an increasingly large proportion of women are prepared to spend big on luxury products. Men have traditionally been the bigger spenders in China, accounting for more than two-thirds of the market. But times are changing. Maserati, the Italian sports car brand owned by Fiat, reports that 30 percent of its buyers in China are women, compared with the 2 to 5 percent typical in the United States and Europe.
As Prada’s current experience reflects, many wealthy Chinese consumers prefer to purchase their luxury products abroad. In fact, 58 percent of the money Chinese people spend on luxury goods and services is spent outside of the mainland. And the biggest beneficiaries of this trend are the luxury stores located next door in Hong Kong, Macau and Taiwan. These three centers account for 33 percent of the money Chinese consumers spend on luxury products. Other foreign countries account for 25 percent.
China’s luxury consumers are looking for European brands – Paris, Milan and London as the capitals of global chic. In 2009, Rolex, Omega, Longines and Cartier held nearly 50 percent of the luxury watch market in China, according to our analysis. Among cosmetics brands, Chanel, Dior, Estee Lauder and Lancome are the most sought-after by Chinese consumers. The strong leather products brands include Burberry and Dunhill from London, Gucci and Prada from Milan, and Louis Vuitton from Paris. Together, these brands control 60 percent of the market. Besides Burberry and Dunhill, two Italian brands, Armani and Ermenegildo Zegna, and one German brand, Hugo Boss, dominate the apparel market. The jewelry market is led by Tiffany & Co. (the New York jewellery house), Cartier and Bulgari.
In a recent interview, Francois Pinault, CEO of the French luxury producer and retailer PPR, told us that the company’s revenues in China would likely triple by 2020. ”The Chinese consumer has a profound belief that they deserve luxury products now. They had 50 years with so little, and now many can afford to buy luxury goods. Their growth in demand is rooted in an expression of individualism in the way you dress. It is a way to differentiate yourself from friends and neighbors. Chinese consumers buy to treat themselves. This China market has evolved faster than any other market in the world.”
We expect this wave of growth to continue across a wide range of consumer luxury goods and services, including apparel, watches, wine, cars, travel, home goods, education and health care. We would urge investors not to be spooked by short-term fluctuations in China’s growth rate. Most middle- and upper-middle-class households in China have limited debt, an increasing commitment to education and soaring aspirations. They are customising – and improving upon – the so-called American dream.
This piece was first published at the Harvard Business Review. Reprinted with permission.