Over the past month, Beijing has gradually lifted previous pandemic measures and officially opened its borders on 8 January, removing the quarantine requirement for inbound travellers while easing the administrative process for visa applications and passport renewals – a clear indication that China has joined the West in deciding to live with COVID-19.
This shift has boosted market confidence, particularly in the luxury sector, with LVMH, Kering, and Richemont stock prices soaring in the last month. This not only suggests that domestic consumption will start to recover, but also that Chinese tourists will soon return to Western markets. Compared to 2019, total luxury spending by Chinese consumers has decreased by nearly 30 per cent in 2022.
Nonetheless, this country is rapidly becoming the world's largest luxury market and any changes in its consumer base will inevitably have an impact on the global industry landscape. As such, understanding this market and the unique characteristics of Chinese consumers is becoming a top priority for luxury brands.
KPMG and DLG (Digital Luxury Group) has just released a new study analysing key trends emerging in the luxury industry in China today, as well as consumer behaviour and preferences across different luxury shoppers. Titled Luxury Redefined: Building trust with Chinese consumers through authenticity and integrity, the report is based on a survey of over 2,600 luxury consumers from eight first- and second-tier cities in Mainland China, as well as Hong Kong. It also draws upon insights based on in-depth interviews with executives in the luxury sector. YouGov and City University of Hong Kong contributed to the paper as well.
The report notes several pivotal trends and evolutions are reshaping China’s economic landscape in recent years, and their impact on China’s luxury market. These trends include slowing economic growth, the COVID-19 pandemic, greater interest and awareness of sustainability issues and technological advancements.
The spread of the COVID pandemic in China is closely linked to economic growth. China’s GDP showed an increase of 6.0 per cent in 2019, while this growth dropped to 3.0 per cent in 2022. Consumer confidence also showed a significant decline in 2022 owing to the macroeconomic landscape.
According to the report, the pandemic has caused changes in Chinese consumer behaviour as well as a rethinking of consumerism. In the face of uncertainty, Chinese consumers will take more time to consider purchasing high-quality goods and services. Despite the relaxation of COVID policies at the end of 2022, some of these consumer behaviour changes will persist.
In this report, consumers are divided into five clusters based on various characteristics, with each showing different demands and perceptions of the luxury industry. The survey discovered that the age and geographical distribution of consumers belonging to these various clusters differed as well.
Consumers in the first cluster, for example, are more focused on brand names and less aware of nuances between brands. This consumer group is concentrated in second-tier cities and is mostly over 45 years old. The most mature consumers, on the other hand, understand brands and their needs, and even prefer purpose-driven companies. These customers are mostly from younger generations, ranging in age from 18 to 24, and they live primarily in first-tier cities.
The survey also delves into spending habits, lifestyle habits, social behaviours, and travel preferences of different consumer groups using the "6 Mys" framework. Ultimately, Chinese luxury consumers surveyed are divided into seven main consumer personas.
The 'Luxury Connoisseur,' for example, is knowledgeable when it comes to luxury brands and appreciates the subtle details related to design, fabric, and craftsmanship, and wish to express their unique personalities through luxury goods. 72 per cent of these sophisticated luxury consumers are willing to pay up to a 10 per cent premium for brands that align with their values, which is the highest among other personas. These customers are largely influenced by influencers and social media trends.
‘Luxury Newcomers’, to the contrary, are more influenced by their family, peers and sales representatives. These consumers do not know much about the brand, and their primary sources of information are brand advertising and word-of-mouth. Because they are price sensitive, only one-third will spend up to 5 per cent more for brands that share their values, while 21 per cent are unwilling to pay any additional premium – the highest share among all consumer segments.
According to the analysis, as the Chinese market matures, two of the most sophisticated consumers, ‘New Luxury Pioneers’ and ‘Cultural Resonators’, will become more significant in the Chinese luxury landscape, with the fifth cluster – consumers from the most sophisticated phase – expected to account for 25 per cent of Chinese luxury consumers by 2030.
Willi Sun, Head of Advisory, Consumer & Retail, KPMG China, points out that given the scale of the Chinese market, consumer behaviours may differ greatly among consumers from different tiers of city in China. In addition, the drivers for purchasing luxury goods will also be different.
“Therefore, it is important for global luxury companies to understand the evolution of Chinese consumers as different segments do follow a pattern,” he adds. “Moreover, targeting the right segment of consumers to create “desire” will also be able to generate a rippling effect on other up-and-coming segments for a sustainable brand equity in China.”
The report also demonstrates key trends in China today, taking a closer look at how these emerging trends are reshaping consumer behaviours and how brands can optimise their China strategies accordingly.
The global luxury industry has placed bets on Generation Z, and China is no exception. According to this research, 20 per cent of Gen Z consumers are willing to spend 16 per cent of their annual income on luxury goods, demonstrating strong consumer confidence.
At the same time, these consumers are also driving the transformation of brands. Over the past few years, the demands of these digital natives have expedited the digital transformation of brands in China. Now, these consumers are expecting a more personalised retail journey, with 86 per cent of Gen Z respondents from mainland China expecting a swift response when interacting with brands as well as advanced product and service recommendations based on technologies such as AI.
Other industry trends are also taking root in this market, most notably being the focus on sustainability, with 74 per cent respondents saying they are willing to switch from their preferred brand if sustainability and corporate responsibility are emphasised by another brand.
Naturally, the most pressing concern is when Chinese tourists will return to Western countries, and this report demonstrates Chinese consumers' positive attitude toward outbound travel. According to the data, 71 per cent of consumers polled plan to travel abroad once the quarantine requirements are lifted.
The majority of consumers prefer shorter trips, such as to Japan, South Korea, and Singapore within Asia, and prefer to stay for less than a week.
The reopening of China and resumption of Chinese travel will inevitably lead to a redistribution of consumer spending across markets, and brands have to be prepared for this. “Instead of resisting it, brands should embrace it and think about how to continue to capture the spending of these consumers abroad, instead of focusing on the loss of local revenue. At the same time, the strong relationships that brands have developed with Chinese consumers over the last three years will enable them to continue communicating with outbound consumers through targeted communications and personalised client services,” says Pablo Mauron, Partner & Managing Director China at DLG.
“By leveraging the synergy between global and domestic teams, as well as an effective CRM infrastructure, brands can provide services tailored to their clients' preferences before, during, and after their travel as well,” he adds.
The report also discusses key trends in social media, CRM, technology, consumer experience, and other areas that will have a future impact on consumers and the luxury sphere.
Welcome to Data Digest, our breakdown of the latest data releases and reports focused on the luxury industry.
Building trust with Chinese consumers through authenticity and integrity