🇨🇳China market
China delivered more than half the global growth in luxury spending between 2012–18, and is expected to deliver 65 percent of the world’s additional spending heading into 2025, according to research based on UnionPay transaction data for the 2019 McKinsey China Luxury Report. In 2018, Chinese consumers at home and abroad spent 770 billion RMB ($115 billion) on luxury items—equivalent to a third of the global spend—with each luxury-consuming household spending an average of 80,000 RMB per year. Their outlay is set to almost double to 1.
As a growth engine, the Mainland China luxury market maintained strong momentum by registering a 26% growth rate to 30 billion euros in 2019. The Chinese consumer remains the biggest luxury buyer in the world, accounting for 35% of global luxury sales in 2019.
Against the backdrop of slowing growth for the Chinese economy, escalating Sino-US trade tensions, and regional challenges, this bullish growth rate stands out as even more spectacular. The luxury industry has become one of the best-performing sectors in the Chinese economy. The booming market can be attributed to a growing number of middle-class households, rising domestic consumption and online sales.
Chinese government initiatives aimed at boosting local consumption have paid off, with stricter customs inspections and reductions for import duties and in the VAT rate. In the meantime, luxury brand companies are investing more in terms of narrowing the gap between prices at home and abroad, and improving sales services and providing extra after-sales services with the goal of attracting more local consumption.
This year, we also analyzed consumers across different tiers of cities. While 1st-and-2nd-tier cities have become too saturated and competing, the 3rd-and-lower-tier cities are still underserved in terms of luxury brands - even while they account for more than 50% of total luxury sales, according to BCG's Chinese Luxury Market Digital Behavior Report. Albeit the leader in global e-commerce, China remains at an early stage in terms of developing an online market for luxury sales, which accounts for about 10% of total luxury sales in China. However, e-commerce has become a growth engine for luxury brands in China, growing at a rate of more than 20% annually.
Why Chinese customers are buying abroad?
The Chinese market will remain a key battleground for luxury players going forward. After brands made it easier for Chinese consumers to shop domestically, a process that was already underway before the pandemic, “consumers will get used to it and not travel outside just to buy luxury products,” said Arnold Ma, founder and chief executive of Chinese creative agency of Qumin. Sales in mainland China are set to grow from just 11 percent of the luxury market in 2019 to as much as 28 percent in 2025, according to Bain.
The biggest challenge for Farfetch is that the aggregator model will disappear. Farfetch has a partnership with WeChat-owner Tencent, but its model on the platform is still a “traditional e-commerce” one rather than something more interactive, he added.
Local consumption has clearly emerged as a rising trend over the past three years thanks to the proactive initiatives of the Chinese government to promote local consumption. These initiatives have included reducing import duties and the VAT rate, and stricter customs inspections. Meanwhile, the owners of luxury brands have taken the initiative to narrow the gaps between prices at home and abroad, and by providing better sales and after-sales services. According to the survey, in 2021 Hong Kong consumers have spent 44% of their luxury spending locally while Mainland China consumers have spent 31% locally in the past 12 months.
In 2020 e-commerce sales in the country stood at US$1.3 trillion and that number is projected to increase to almost US$2 trillion by 2025. This would mean that in 4 years, almost every second e-commerce dollar could be spent in China
From a geographic perspective, China recovered to 2019 levels of economic activity much faster than the rest of the world.
The Chinese fashion market — including both luxury and non-luxury segments — is already back to pre-Covid sales levels. The non-luxury segment reached +2 percent over 2019 H1 sales in H1 2021.8 However, for a full-year comparison, macroeconomic disruptions through the latter half of 2021 will likely temper this growth to -3 to +2 percent for 2021 versus 2019 sales overall. On the other hand, the luxury sector shows strong signs of growth in China amid ongoing travel restrictions and increased domestic spend; the luxury segment is set to reach +70 to +90 percent over 2019 sales by the end of 2021.
The spikes in spending that emerged in China during so-called “revenge shopping” periods in 2020, when lockdowns ended and consumer confidence returned, are expected to play out in some other fashion markets as they recover. In the US and UK, these spending spikes will likely occur after the start of 2022, according to McKinsey analysis. As a result of these and other factors, McKinsey Fashion Scenarios project an almost complete recovery to pre-pandemic sales levels in 2022 in Europe, the US and China, with the latter’s incremental growth in domestic luxury spend outperforming. Globally, these scenarios suggest that total fashion industry sales could surpass 2019 levels by 3 to 8 percent in 2022, with the luxury segment surging by 15 to 25 percent over 2019 levels. The widening wealth gap could trigger policy changes that impact specific segments, such as the luxury sector in key markets like China.
2018- 770 billion RMB ($115 billion), 2025- 1,2 trillion RMB ($182,5 billion) our target at 2025 1%($1,82 billion) of market.
The global market for personal luxury goods was estimated to be worth $307 billion in 2017, according to the Farfetch's registration documents, citing data compiled by Bain. It is expected to reach $446 billion by 2025, according to the data. Farfetch estimates that China’s domestic luxury market alone is now a $70 billion opportunity.
The changes brought by Covid-19 increased the presence of online in every aspect of life. In the luxury market, online sales made up €49 billion in 2020, up from €33 billion in 2019. The share of purchases made online nearly doubled from 12% in 2019 to 23% in 2020.
Online is set to become the leading channel for luxury purchases by 2025, fuelling the omnichannel transformation.
Mainland China has been the only region globally to end the year on a positive note, growing by 45% at current exchange rates to reach €44 billion. Local consumption has roared ahead across all channels, categories, generations and price points
You have probably already seen groups of tourists entering the most luxurious commercial centers, and buying luxury goods worth thousands of dollars and euros. Indeed, Chinese consumers are extremely fond of luxury products as appearance is an important criterion for them. Materialism is also part of their culture, as it reflects their lifestyle. Over the years, international brands have been able to enter the Chinese market and target Chinese consumers. Therefore, everyone in China can easily find luxury goods in all the biggest commercial centers.
Brands like Louis Vuitton, Chanel, Hermès, L’Oréal, Burberry, Lancôme, Gucci, Dior, etc are among the most popular brands in China, with millions of followers on social media.
It is also important to take into account that Chinese society has changed a lot in the last decade and that Chinese millennials are the main drivers of the luxury market. In comparison, with around 400 million millennials, China has five times more millennials than the U.S, making up around 68% of the country’s consumption growth by the end of 2021. In recent years, tourism has also been a key driver for this new wave that is taking over from older generations who would rather keep their cash at home than invest it in luxury products.
The sales are largely driven by China’s tech-savvy millennial generation — the average age of Chinese luxury shoppers has dropped from 35 to 25, according to the World Luxury Association — and where do they shop? Online, or, more accurately, on their phones.
Demographically speaking, half of luxury consumers on Alibaba’s e-commerce platforms were born after 1990 and they account for over 45 percent of luxury purchases on the sites. According to Tmall, a third of the shoppers on the Luxury Pavilion are in the same age group.
All this means the luxury industry, never enthusiastic as a whole about the digitalisation of their business, have little choice but to jump on board. Luxury brands will increasingly want to use ‘new retail’ technology and data-driven insights to connect with younger consumers.
Online’s dramatic increase comes at the expense of brick-and-mortar stores. Bain expects no growth in the number of stores operated directly by brands in 2020 and a possible decline in store footprints in 2021. Brands will need to adjust their footprints to the new map of luxury buying, evolve the store role and its ergonomics, and maximize the customer experience.
Online spending power between Millennials and GenZ represented 85% of the growth in luxury fashion sales in 2017. The Millennials will overtake GenX as the largest spender in the luxury segment by 2025.
In terms of e-commerce platforms for luxury, Hong Kong consumers prefer buying through the official brand websites (55%) while Mainland China consumers prefer buying through Tmall/ Taobao/ Luxury Pavilion (60%), followed by official brand websites (48%) and JD.com (44%).⁶
It is worth noting that the rate of shopping through official brand websites has been increasing significantly and now ranks number two in Mainland China. Mainland China consumers prefer local e-commerce sites like Tmall to official brands' websites because it provides a better user experience in terms of mobile application, user-friendly buying processes, and local language.
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