China’s Luxury Goods Market Is Making A Comeback
While nearly 78 percent of Americans are living paycheck to paycheck, an increase of 6 percent between 2022 and 2023 according to a recent survey, Chinese consumers are showing up and dishing out luxury goods and services as the market is set for a strong recovery in the year ahead.
In the latest China Luxury Report by Bain & Company, analysts predict that China’s luxury goods market experienced a comfortable 12% year-on-year increase in 2023. The rebound has seen China’s domestic luxury goods market recover from previous declines during the pandemic years, however, is still slightly below the record level of 2021.
The same Bain & Company report estimates that by the end of the decade, Chinese consumers will represent between 35% and 40% of spenders in the luxury goods market.
The luxury goods market which includes high-value clothing, jewelry, vehicles, and other items experienced a steady decline over the last several years as consumers are battling with the cost of living crisis and many are tightening their purse strings and reducing their discretionary spending.
J.P. Morgan’s Cost of Living survey found that nearly 75% of American consumers said that they expect to reduce spending on non-essential items and products by roughly 6% in 2024. Elsewhere in Europe, a similar sentiment is being shared among consumers, however, the majority of them feel less worried about their financial circumstances, but again, a robust 75% expect to decrease their discretionary spending, according to the survey.
Despite China having some of the hardest, and longest pandemic-related economic and travel restrictions, the reopening of the economy, both domestically and internationally has helped spark a surge in spending on luxury goods, products, and services, helping to give the industry a much-needed boost following several years of meager growth.
Spend, spend, spend.
With luxury goods making a strong comeback, and China’s economy looking to recover from the years of pandemic-era restrictions, consumers have been eager to step out and spend in style.
Earlier in the year, the country’s Ministry of Culture and Tourism said that more than 474 million domestic trips were made during the Chinese Lunar New Year, which was a 34.3% improvement from the year before.
The eight-day festival saw consumers and tourists spending more than $78.95 billion on domestic holiday trips, representing a massive 47.3% year-over-year boost, according to the ministry’s data.
Compared to the same period in 2019, domestic trips represented an overall 19% improvement from the same period five years ago, while consumers managed to spend about 8% more on travel costs.
As China’s domestic economy looks to rebound, international brands and luxury retailers are noticing a strong surge in support coming from Chinese consumers.
During their 2023 financial results, LVMH, the world’s leading luxury and high-end multinational conglomerate noted that categories including fashion and leather goods witnessed a more than 30% improvement in growth in China throughout December.
In total, China’s luxury market accounts for 16% of the global market, although there is perhaps a shared opinion that this could surpass 20% and even 30% in the coming years.
All of this spending is attributed to the belief that China is welcoming millions of new consumer-class spenders into their economy each year, helping to boost domestic performance, and further increase the country’s footprint on the global stage.
It’s estimated that more than 109 million people worldwide will be entering the consumer class in 2024, with China and India at the front of this growth.
Yet, despite much of Asia seeing a decline in economic activity in recent months, similar to what’s happening elsewhere in the world, larger portions of the consumer market are seen holding more disposable income, and having an overall cheaper cost of living as compared to more developed countries in Europe and North America.
Rising disposable income is only one of the main contributing factors that is seeing China’s luxury goods market overtaking those of its Western counterparts.
Other things such as the widespread availability of digital and technological tools have enabled larger portions of the domestic population to access various consumer categories.
The number of consumers shopping online has surged over the last two decades. In 2006, roughly 34 million Chinese consumers were shopping online, ten years later this number rose to more than 466 million.
By the end of last year, China’s e-commerce market witnessed more than 884 million active participants, with total digital buyer penetration standing at 59%.
The effectiveness of digital sales has significantly helped luxury brands reach more consumers and boost their bottom line performance despite the turbulent economic conditions experienced after the height of the pandemic.
As with many other retail outlets and big-box retailers, online sales experienced significant growth during the pandemic. In the luxury goods market, a similar pattern can be seen, with online sales of luxury items jumping by 38% in 2021, accounting for more than 18% of all luxury sales, according to one industry report.
By the end of 2021, online luxury spending generated more than $57 billion in sales, globally. This was slightly below the $58 billion recorded in the year before.
Although online shopping and e-commerce are seeing widespread popularity among the majority of consumers, in the high-end market of luxury clothing, jewelry, watches, and leather goods, in-store experiences continue to triumph.
Additionally, improved brand awareness and consumer market penetration are now playing an essential role for luxury goods companies looking to compete for a slice of China’s consumer market.
Companies have started taking better advantage of cultural and social preferences in China to help them seem more appealing to local buyers. For instance, “mianzi” serves as the social currency for many households in China, meaning that many of them often try to use luxury goods as a way to link their social dynamics.
Understanding the intricacy of luxury and social dynamics means that many brands use this tactic as a way to leverage consumers into buying and spending more. The outcome here is the importance of using brands, and especially luxury goods as a symbol of social stature and prestige, something still highly regarded in some Eastern cultures.
Instead of taking a modern approach, luxury retailers are crafting their penetration in a way that aligns with Chinese consumers’ social and cultural values. By incorporating more local elements into their designs, and collaborating with artists, influencers, and well-known celebrities, luxury brands are helping to elevate the importance of social status, and how high-end products and services are more appealing to the majority of Chinese consumers.
The strategy of personalization and localization are helping luxury brands enter an untapped market that carefully resonates with longstanding cultural traditions, but further highlights the accessibility and appeal of buying and owning luxury goods.
Concluding Thoughts
With China’s luxury goods market taking off at a surging pace, the coming years could see the domestic market reaching new global records in sales as Chinese consumers are placing themselves on the map and attracting high-end brands to penetrate the market with more personalized offerings.
While the excitement is helping to fuel the market’s recovery, it’s easy to start wondering how long this pace will continue before Chinese consumers begin to pull back on their spending and begin searching for more affordable alternatives.
For luxury brands, the challenge is to remain relevant, even in a time when many western consumers are looking to decrease their discretionary spending, and being flashy with your cash is often seen as “out of touch.” Yet, this is perhaps the opportunity that luxury brands need, rather than shifting focus on developing markets as a way to boost their bottom lines, while simultaneously leveraging the booming interest coming from Chinese consumers.
