China Consumer

An understated approach

Luxury goods firms have been forced to adapt their China strategies


The new fashion: it's less about logos, more about female buyers

Japanese designer Rei Kawakabo is a radical even by the standards of the fashion industry. After models paraded one of her women’s wear collections in Paris last year, the Commes de Garcons’ founder offered this explanation of her creative process: “I felt the only way to do something new was to try not to make clothes.”

For someone in the industry of designing and producing apparel, that’s an interesting business philosophy.

It’s also a timely reminder that Kawakabo’s industry is regularly forced to reinvent itself. In China right now that’s precisely what is happening – with the world’s leading purveyors of luxury now rethinking their business and merchandising strategies.

Why so? President Xi Jinping’s anti-extravagance and anti-graft campaign has particularly hurt firms which have relied on selling products festooned with logos to the newly rich, often as gifts for corrupt officials or mistresses. The strategy had worked well for much of the past decade but according to Reuters some high-end brands have switched tack. Consumers, they’ve concluded, now want to get noticed less.

For example, Reuters reported last week that among the major players Hermes has been far less effected by Xi’s crackdown. Its sales in mainland China rose 19% last year. Put it down to its “understated style”, reckons Reuters. As chief executive Axel Dumas told the news agency: “There has been a very rapid evolution of Chinese customers’ taste which means they increasingly look for discreet products and this has played in our favour.”

The move away from oversized logos and ostentatious bling is a trend that WiC first identified in issue 165 but Xi’s anti-corruption initiative has hastened the shift.

For many luxury brands this is a setback of sorts. In the past some of the highest margin merchandise was the stuff crammed with logos – that is, the handbags and belts that targeted big-spending types who simply wanted others to know they could afford the most expensive names. As marketing challenges go this was akin to selling bottled water to the Ancient Mariner.

That’s changing. Firms like Prada and Gucci are reportedly following Hermes’ example and trying to be more discreet in their designs too. But the sea change in tastes is not just about the ongoing anti-graft campaign. There is also an increasing awareness among consumers that the most blatant logos – and their associated effort to showcase their wearers – are frowned on socially. The term tuhao has gone viral online (see WiC217). It translates roughly as ‘nouveau riche’ and is an epithet for those with more cash than refinement. A reluctance to be labelled as tuhao is another reason why low-key is suddenly in vogue.

Luxury houses are overhauling their strategies for another reason: gender. An increase in women shoppers is dictating what is being stocked at stores.

According to a report by consultancy Bain, men accounted for 95% of the country’s high-end purchases in 1995. Today women make up half of sales – and China is trending towards global averages where women account for two-thirds of the luxury market.

Spending on expensive menswear and watches both fell in China last year, data from Bain suggests. But demand for women’s wear, cosmetics and perfume increased 10%, making them the fastest-growing categories. (Bain estimates the size of China’s domestic luxury market at Rmb116 billion, or $19 billion last year).

Step forward Lisa Yan, who Bloomberg describes as “the new face of the Chinese luxury consumer: female and fashion-forward”.

In a profile of the 26 year-old finance saleswoman, Bloomberg notes that Yan checks social media daily to see what celebrities and friends are wearing. She prefers Burberry coats, alternates between a Valentino bag and a Dolce & Gabbana one, and reads magazines like Vogue before trying to replicate the newest styles.

“Luxury buying by Chinese women is driven by jobs and peer pressure,” Yan explained to Bloomberg.

Increasingly luxury goods firms are going to have to do a better job of figuring out what women like Yan want. “The mindset among global brands here is changing from men’s categories and accessories to women’s categories and fashion,” said Bruno Lannes, a Bain partner in Shanghai. “Brands are preparing for this major shift.”

The shift towards the fashion-oriented female buyer has another consequence. Today, almost two-thirds of Chinese use websites, microblogs and mobile apps to get information about luxury goods purchases before they buy, according to Bain. And according to communications agency Ruder Finn, 36% of Chinese prefer to shop for luxury online. Another common sight in luxury stores, explains Linda Chew at Red Luxury, a research house, is that consumers are browsing products but not buying them there.

All of this is making luxury retailing more challenging, but it isn’t stopping the expansion efforts. The other ongoing trend: a push into second and third-tier cities to grow sales and brand awareness.

Shenyang, the capital of Liaoning province and a transportation hub for Northeast China, has been a smoggy titan of heavy industry. But as Shenyang modernises, luxury consumption has followed. Real estate brokerage Jones Lang LaSalle says that Shenyang is now the third largest luxury market in China, ranked only behind Beijing and Shanghai. But it’s just one of a number of second and third-tier cities to attract luxury firms. Top international brands such as Chaumet and Salvatore Ferragamo have been drawn by Tianjin’s strong spending power; Prada and Miu Miu will start up Wuhan in 2014; and Lane Crawford and Dolce & Gabbana are being introduced to Chengdu, according to a report by Woods Bagot and KnightFrank.

Unlike stores in many other parts of the world, many of the new outlets in these cities are designed to showcase the product line rather than ringing items through the till. That leads to another conclusion from the Bain study: China’s luxury consumers do an estimated two-thirds of their shopping abroad. One major motivation is that prices can be as much as 40% lower in Europe. Ruder Finn says consumers think that it lowers the risk of buying fake goods too. And it tends to promise a better consumer experience. In Ruder Finn’s poll, 92% of respondents said service in China’s own luxury stores – excluding those in Hong Kong – was disappointing.

The good news for the luxury goods firms is that more and more Chinese are travelling overseas. The United Nations World Tourism Organisation estimates that 100 million will do so next year (a tenfold increase on 2000) and for many it will be as much about retail therapy as sightseeing.

Mind you, along with the profits will come the odd instance of unconventional behaviour that sales assistants at overseas outlets will need to deal with resourcefully.

WiC remembers being taken aback last year at the sight of two Chinese men eating instant noodles inside a high-end store in Hong Kong, for example. The brand’s European tailor was measuring them for some very expensive suits as they slurped through their lunch. While he tried to disguise an occasional wince, the tailor was keeping focused on the bigger picture: as major spenders, the two men had evidently purchased the right to do as they liked.

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