Luxury Market in China Essay

China is positioned to become the world’s largest luxury market in five years and a study by Datamonitor reported China’s luxury goods market was worth $9. 4billion by the end of 2009, which accounted for 27. 5% of the world’s luxury goods market. [1] They also predict that by 2015, China’s market will be valued at $14. 6billion. The main driver of this growth in the luxury gods market is the extreme wealth creation that China has experiences in the past ten years as its GDP has grown 10% annually on average, which is three times more than the global GDP. Investment Week quotes a recent World Wealth Report by Merrill Lynch Cap Gemini stating that there are 477,000 Chinese millionaires and China is also leading the world with the number of billionaires (Investment week. [2]) The combination of the staggering growth of the Chinese economy creating such great private wealth and the political and social evolution China has gone through over the last 30 years has created a tidal wave of opportunity for luxury retailers. Politically, China has gone through many changes over the last thirty years that has primed the economy and citizens for a surge in individualism and the pride in the ability to afford and purchase luxury goods. In 1976 Mao Zedong passed away and in 1979 the One Child Policy was introduced and applied by China’s new leader, Deng Xiaoping. China’s population was growing at an alarming rate and in order to curb this growth rate, Chinese were limited to having one child per household. Fast-forward thirty years and these only children, who have been raised by 6 parents, has created a â€Å"little emperor† mentality where their every desire it met, and is recently being satiated by Western goods. They now have buying power and they are spending it on high priced goods. The choices and options available today are a stark contrast to the limitations their parents experienced thirty years prior in a vastly different political time. Socially, China has always been a country deeply embedded in traditions such as gift giving, saving face and the respect for the hierarchal society. These traditions all stem from â€Å"guanxi,† the all-important notion of relationships, which is what drives business and social status. The culture of relationships is paramount for being successful in China so the combination of mass wealth and the traditions all surrounding Guanxi has attributed to the exponential growth of the luxury market in China. Although the Chinese have been known to be a culture of saving, the tides have shifted and the 20-30 something’s have created a society of excessive spending due to extravagant purchases to support their new tastes as well as these traditions. The new breed of buyers are young and are embracing their freedom to purchase in their capitalistic society, which is a far cry from their parents socialist upbringing. Therefore both social and political changes have created this perfect storm of excess, which is fueling the luxury good market in China and for many years to come. Mao Zedong, the leader of China from 1949 until his death in 1976 is still regarded as a controversial figure but his rule and communist policies molded the beliefs of many parents and grandparents living in China today. Under Mao’s rule there was no individualism and consumption was controlled. Mao is regarded as a great leader in China as he is thought to have laid the groundwork for China becoming the great power that it is today as a result of his leadership of the Great Leap Forward and Cultural Revolution. While he did create the building blocks for present day China, he has been compared to communist leaders like Hitler and Stalin. He urged citizens to reject capitalism and even at one point â€Å"proposed the Socialist Education Movement (SEM) in an attempt to educate the peasants to resist the temptations of feudalism and the sprouts of capitalism that he saw re-emerging in the countryside. †[3] The citizens living in these times are now parents and while their lifestyles are very conservative, they are raising children in a very different political environment. Their children didn’t have a communist ruler and therefore have different views on modesty and consumption. While there is still a strict focus on studying and discipline, the focus on success and showing that you are successful has been morphed into an obsession with Western brands showing pride in ones accomplishments. Even as young children the Western culture is quite alluring, with children asking to be rewarded for good grades by going to McDonalds as we were told by one of the speakers. Today in China, people are who they wear. Even as Nicole from LVMH mentioned, the Chinese are obsessed with showing that they are wearing designer brands that you will see some wearing clothes and sunglasses with the tags still on them to show who the designer is. These â€Å"nouveau riche† are the products of parents who didn’t have any choices and now they are embarrassing their freedom to chose. Forbes reported â€Å"the average Chinese luxury consumer will spend roughly 11% of her income on luxury handbags along. †[4] They also go on to say that these consumers are â€Å"highly educated and highly motivated to identify products that will complement his or her individuality and rising power. †4 Parents of these kids weren’t allowed to have individuality, but now their children are not only wanting it but also seeking it with huge spending power. Spending 11% of your income on a luxury bag shows the emotional and mental bond to these luxury items. In the US simply to qualify for a loan for a mortgage, your total debt can’t be more than 45% of your income. To think that a quarter of that goes towards handbags alone not even included likely purchases like luxury cars, wines etc makes me think if this type of spending is going to be sustainable for the Chinese market. In China, there were many nice cars, but I didn’t think that perhaps these people are driving cars they can’t afford. I am used to the United States where living on credit is a way of life, but this takes it to a whole new level. The millionaires are able to afford this, but if a middle class person is spending such a high percentage of her income on something like handbags, its going to create an economy where nobody can afford to buy a house and retirement is never attainable. One of the Bentley students that sat with us at lunch mentioned that she wanted to buy a house but that she couldn’t without her parent’s financial support due to the 50%-70% down payment required. She and most young people are lucky that their parents have saved and will be able to help them, but for those in the younger generation who aren’t saving won’t be able to help their kids and there might be a whole future generation who can never afford to own property. These younger generations parents grew up in a communist and socialist society, where there isn’t the ability to care about status, but status and luxury has now become the currency in China. The millionaires in China are younger with an average age of 39. [5] These young millionaires enjoy showing their status with nice things from great bottles of wine, cars to handbags. They are achieving success and are looking to reward themselves with nice things, which also shows status among their peers. A report on the watch market, mentioned that men â€Å"need a watch of a certain quality to be part of the social circle. †[6] The need to show status and create a sense of belonging in a social group has become so apparent that retailers are taking notice and even creating products specifically for the Chinese buyer. Mercedes Benz is even making a car with a longer wheelbase for the Chinese businessmen who are chauffeured around and need to have more room in the back which is a big difference from the rest of the world where carmakers are creating smaller cars that consume less energy and are more economical. [7] The retailers and manufacturers of world are taking note that the new Chinese buyer is very different from their parents given all of the political changes of the past few decades. While the political changes are one factor in the shift of buying trends, policy has also been a great factor and one specifically is the One Child Policy, which was introduced in 1979. This policy has created what many call, the â€Å"Little Emperor† society as a result of one child being raised by 6 parents (on immediate and two sets of grandparents. ) These children have grown up being catered to and supported by six people and now their wants and needs are changing, as they get older. Where as their parents likely gave them the best they could afford, these 20 and 30 something’s are becoming obsessed with Western brands, which cost a premium. Even with a 30% import tax, individuals who grew up getting what they wanted are buying these Western luxury brands, at times spending their entire months salary on a handbag. Although their parents had a culture of saving, this new generation tastes for highly taxed Western goods to show status has greatly changed this cultural norm. For this generation to keep up with their friend, they have forgone the notion of saving in replacement of a life full of luxury goods with no savings. I spoke to Mico about this on the bus and she mentioned that her friends spend all of their money on luxury goods and there’s now a saying in Chinese that means that you spend all of your money that you make that month. She mentioned that buying fakes is a faux pas and that they only buy the real things, which is what leads to them spending all of their money. She noted that this was very different from the upbringing of her parents who were brought up saving almost 40% of their money. In the popular market that we went to in Shanghai, there were almost no Chinese in there and when we asked Mico if she went to the market to get knockoffs, she said that knockoffs’ were â€Å"so three years ago. † It quickly became apparent why That is there where Chinese people in the markets; they are in the real stores buying the real thing. In the streets it was quite apparent that everyone had designer bags and clothing on, but this was mainly in Shanghai, Beijing and Hangzhou. In Xi’an there was still a feeling of communism, everything was still grey and there weren’t many people sporting their designer clothes. The opportunity right now is in the 1s tier cities and many retailers are trying to expand to the 2nd and 3rd tier cities. The opportunity in China purely based on the enormous populations in these cities. The first focus for the retailers were the tier 1 cities and now the 2nd and 3rd tier cities will be paramount for companies to sustain this continued growth. While political changes have made way for the change in buying and spending trends of young Chinese buyers, tradition has maintained an important part of the culture across all generations of Chinese and the luxury market surge has been fueled by these traditions. Guanxi, the focus on relationships as part of the Chinese culture has many components, one of which is the value of gift giving as a sign of respect. Gift giving is a huge part of Chinese culture, most prominent around the Chinese New Year, but a very large part of life socially and professionally year round. According to the authors of the book â€Å"The Cult of the Luxury Brand,† â€Å"quanxi†¦is the single biggest factor spurring the growth of luxe in China. †[8] When you give a gift to someone in China, it means you are thanking him or her for helping you but also solidifies your â€Å"guanxi† with them and continues the future relationship. Luxury items are now raising the bar in gift giving as recipients truly appreciate the luxury gifts and merchants have reported â€Å"frantic levels of spending† 8 all at once by shoppers who are looking to purchase gifts for their business partners and friends. The culture of saving face plays into this as well since the more luxurious the gift, the better. If you are looking to show great gratitude and â€Å"save face† then you will purchase a luxury item as a gift. In business face is extremely important so even Western brands are also learning this culture of gift giving, as they know the importance of partners in their business so they are making sure to take care of them by giving great gifts. In addition to the culture of gift giving that has fueled the luxury market growth, the culture of hierarchal respect has also attributed to this. Many Chinese of the younger generation believe that luxury products â€Å"mark where you have traveled up to but they also give you permission to continue succeeding. †[9] In a culture where you are competing with so many people and success is so important, it’s easy to see how luxury products represent achieving a certain social status and also denotes the fact that you will stay in that status. As Nicole from LVMH was speaking to us she noted that there are usually 40-50 students in each classroom. Students from an early age learn to be one in a large crowd, but as they get older and look to prove to the world what they have accomplished, and they use designer goods to reflect their status. The irony of this is that one would think that after growing up being one in a crowd, one would think that they would want to show status and individuality, but the items they purchase to show their status is exactly what their peers have chosen, which is likely a Louis Vuitton handbag. For instance, although it was quite conducive to the weather, when we were in China, every single person had Ugg boots on. In the US while Ugg is a popular brand, there are many more brands being worn, as there are many more tastes expressed by individuals. It was very interesting to see that there was a proliferation of a small number of brands, namely Louis Vuitton, as I came to quickly realize that the Chinese want to wear brands that are recognizable. While they are moving towards a more individualistic society, their tendency to be one of a group is still quite prominent. They do value the luxury brands to show status, but their need to be part of a group, albeit a high status group, is still quite unmistakable in the sea of Gucci and Louis Vuitton purses that were worn like a badge of honor by the women of China. The trip to China was quite eye-opening form the perspective of a Westerner who is used to a more modest lifestyle with an abundance of variety. The flashy cars and purses were immediately apparent from Beijing through Shanghai, but as I sit here thinking about the political and social changes that China has gone through in the past few decades, I only with I was smart enough to somehow capitalize on this. China is a fascinating country to visit given its great history and culture that is evident today, but it’s also great to have visited a country that is still going through many changes and evolving at such a rapid rate. While the rest of the world is clearly evolving, China is doing so at an exponentially quicker rate than most and that was quite clear with the sea of cranes in every city putting up buildings everywhere. I do believe that culture will always be a part of the Chinese people and lifestyle, but it will be interesting to see when this locomotive of luxury obsession begins to ebb or if China will meet its own credit crunch in the coming years given the drastic change in spending habits that the younger generations have adopted. [1] â€Å"Chinese appetite for premium products growing despite slowing economic activity. † Datamonitor July 20010, English ed. : 16. Print. [2] Andrea Gerst and Scilla Huang Sun, â€Å"China’s passion for luxury goods increases,† Investment Week, September 6, 2010. [3] â€Å"Cultural China,†http://history. cultural-china. com/en/46H9449H13452. html [4] Evelyn Rusli, â€Å"What Chinese Shoppers Want,† Forbes, March 8, 2010. [5] Andrea Gerst and Scilla Huang Sun, â€Å"China’s passion for luxury goods increases,† Investment Week, September 6, 2010. [6] Florent Bondoux, â€Å"Luxury watches find booming market in China,† Media, September 10, 2009, 17. [7] â€Å"Lengthened Mercedes-Benz E-Class to hit Chinese shores† http://www. benzinsider. com/2010/04/lengthened-mercedes-benz-e-class-to-hit-chinese-shores/ [8] â€Å"China Luxury,† http://app1. hkicpa. org. hk/APLUS/0710/p24_29. pdf [9] â€Å"Is China’s Luxury Goods Market a ‘Pot of Gold’ for Marketers? † Knowledge at Wharton, assessed July 27, 2007, http://english. cri. cn/2946/2007/07/27/199@254317. htm.