SmithStreet Founder and Co-partner, Franklin Yao, wrote an article for the German Chamber of Commerce focused on China’s emerging middle class and their impact on the luxury/retail market. These are excerpts from the article presenting some of the key takeaways.
Five years ago, we would hear stories about the young, entry-level office receptionist working at a multinational in Shanghai who would save up three months of her salary in order to purchase a Louis Vuitton bag. Those days are long gone, and we now have to understand a new normal for the marketplace for luxury goods in China.
- Chinese consumer spending is no longer driven by the elite or top 1%
- The upper middleclass consumer is not spending irrationally like before
Nowadays, there is no longer the desire to invest in that LV bag because it means having to forgo watching IMAX movies, eating at Ippudo Ramen, participating in an exercise class or flying to Hokkaido for cherry blossom season.
In other words, the new middle-class has a broader set of spending choices today that need to be satisfied before moving into spending on true luxury products.
China’s Move to a Normal Luxury Market; the Biggest in the World
Although these shifts are taking place this middle-class consumer may soon be ready to spend on luxury again. If you want proof of the desire to upgrade in China just look at the continual expansion of Starbucks versus the decline of KFC. In fact, China has the second most millionaires in the world with figures in a 2014 Boston Consulting Group Global Wealth Report listing 2.4mn, trailing the US number of 7.1mn. Another report by AliResearch and BCG pegs the number of upper middle class and affluent households (annual disposable income over USD24,000) to double to a whopping 100mn between 2015 and 2020. So we can see that the consumer market for luxury products exists and is going to increase.
In 2014 SmithStreet conducted a study for a major luxury conglomerate going into 300 luxury consumer wardrobes across 13 cities in China and talking to luxury spenders on store service, discovering that store service was really great if you were recognized by that store manager as a VIP. If not, you generally received unsatisfactory store service, and this was more pronounced when compared to travelers who have experienced store service abroad.