Why is the luxury market resilient in China?
Why is the luxury market resilient in China?
Despite economic headwinds and prevalent discourse of a “consumption downgrade” in China, the luxury market has proven to be resilient. The often-cited China Luxury Report, contributed by Bain & Company, predicts the market to grow at mid-single-digit rates in 2024.[1] However, recent sales records of global luxury houses such as LVMH suggest a future that may surpass Bain’s cautiously optimistic forecast. LVMH noted in its 2023 financial performance announcement that fashion and leather goods had grown by more than 30% in China in December 2023.[2]
Here, I outline three reasons explaining why luxury goods and services in China can be expected to remain resilient in the years to come.
1. Chinese cultural and social values drive luxury purchases and are resistant to change
Luxury brands thrive on symbolic values such as class, status, power, exclusivity, and good taste, many of which are deeply intertwined with the Chinese concept of “face”. Face, in essence, signifies the level of respect and admiration a person commands within society.
The symbolic values of luxury goods and their connection to deep-seated Chinese cultural values are explored in a book I am currently finishing. I’d like to briefly explain here how a strong belief in power distance makes Chinese consumers particularly susceptible to the status values associated with luxury spending.
The power distance index, as established by Hofstede’s influential study (2001), measures the extent to which individuals at the lower end of the societal hierarchy accept inequality. Chinese people are classified as having a high power-distance belief (Jiang et al. 2021)[3], meaning that they are more likely to embrace societal hierarchies. In less hierarchical societies where power disparities are openly challenged, overt displays of luxury may provoke discomfort among users. This has led luxury brands to pivot towards more subtle and unflashy designs. However, mainstream luxury consumers in China remain enchanted by conspicuous labels.
2. Growing maturity of Chinese luxury consumers
While class and face projection alone can’t sustain the luxury market indefinitely, the growing maturity of Chinese luxury consumers plays a significant role. Many individuals, even in third- and fourth-tier cities and from ordinary working-class backgrounds, have become discerning buyers. In the past, consumers were drawn to luxury labels primarily for their conspicuous status value. With increasing knowledge and experience, coupled with relentless marketing efforts by luxury brands, consumers have begun to appreciate the intrinsic qualities of high-quality brands. Besides, this growing sophistication means that the desire for luxury items can hardly be satisfied by using counterfeits.
Two examples illustrate how consumers, even in smaller cities, are captivated by luxury goods:
· Sometime in 2023, a mainland Chinese friend who is living in Chengdu contacted me via WeChat. She asked me to check the price and color range of a Chanel 22 Bag for her in Hong Kong. While she could get the bag at around USD6,000 through daigou (meaning “surrogate shopping”, purchase made by shoppers who buy on people’s behalf overseas), she was curious if it might be cheaper buying in Hong Kong. Earning approximately USD700 from her office job, the woman expressed being “driven to madness” by images on Xiaohongshu (a social media and e-commerce platform) showing women carrying the bag. She emphasized it was the beauty of the article and the self-pleasure of looking beautiful with it that stimulated her to buy.
· During a visit to Nanchong, a small city where I conducted fieldwork for my PhD thesis in 2018, I gifted mini perfume sets with detachable bottles to some friends. One recipient, a supermarket saleswoman, was thrilled at receiving the gift, as she typically could only afford inferior locally-made perfumes. Her partner, a street hawker, separately remarked on the stark difference between the gift and the low-quality perfumes his girlfriend had previously used. Another recipient shared her experience of purchasing a large bottle of Gucci perfume after trying a mini bottle I gave her.
3. The luxury market is sustained by a robust affluent class
It is a well-established fact that luxury products follow the money. While the luxury sector thrives in places with a sizeable upper and middle class, it is the ultra-rich who constitute the backbone of luxury consumption. The wealthier people are, the less likely macroeconomic contractions will affect their ability to afford luxury goods.
According to a Tencent and BCG study, heavy luxury spenders––defined as those who spend more than USD41,500 (RMB300,000) on luxury goods annually––comprised 11% of the total luxury customers in China between June 2020 and 2021, yet contributed 40% to sales.[4]
The luxury market primarily depends on the affluent group, rather than aspirants like the woman who sought Chanel 22 price comparison or the supermarket saleswoman previously using low-price perfumes. Despite recent economic downturns in China, the affordability of luxury goods remains unaffected for the high net-worth segment. Even ordinary workers and the middle class maintain a sizeable pool of loyal luxury customers, as evidenced by the stories of the Chanel bag and Gucci perfume.
The luxury market exposes social inequality by making the enhanced opportunities and high-end consumption enjoyed by the wealthy more visible, but this has not affected the desirability of luxury. Luxury consumption can persist as long as the desire continues to be switched on, and the high net-worth segment remains strong.
[1] https://www.bain.com/about/media-center/press-releases/2024/chinas-luxury-market-expected-to-grow-at-mid-single-digit-in-2024/
[2] https://www.cnbc.com/2024/01/29/chinas-luxury-market-is-bouncing-back-with-new-areas-of-opportunity.html
[3] Ling Jiang, Huachao Gao & Linda Hui Shi (2021). The effect of power distance beliefs on the inconspicuous versus conspicuous consumption of luxury accessories in China and the USA, Journal of Marketing Management, DOI: 10.1080/0267257X.2021.1913214
[4] TMI X BCG 202年奢侈品消費者調研