By Bejan Siavoshy

With an economy that boomed for over a decade, a manufacturing sector that produced the largest number of exports in the world, and average income levels tripling in just over eight years, by 2009, one thing was certain; China didn’t just have money—it had money to burn. And with an influx of disposable income comes a wider-reaching taste for the finer things in life.

In the face of a global economic downturn, China had a sector of its economy that was thriving, where other countries saw a free-fall; that was in its luxury market, which grew 16 percent, amounting to 64 billion yuan, in 2009, according to figures from McKinsey. While that number is down from the 20 percent in growth that China’s luxury market saw in the previous year, it far exceeded that of other countries during the same time period. Likewise, by 2010, China overtook the U.S. to become the second-largest consumer of luxury items in the world, just under Japan, which it is poised to overtake by 2015 if growth remains steady, according to a report released in December of 2013 on China’s luxury market by management consulting firm, Bain and Co.

But the operative word is still “if.” While big brands of all types, from Mercedez to Haagen-Dazs, enjoyed the gold rush that China provided for luxury goods producers in the past few years, 2013 saw China’s shimmering luxury market start to dull. The 2013 China Luxury Goods Market Study showed that the country’s luxury market crawled to a growth-rate of just two percent, down from seven the previous year, causing many who were betting big on China’s luxury sector to rethink their strategies.

A China Daily piece from Feb. 2014 showed that Gregory J. Furman, founder and chairman of the Luxury Marketing Council, said luxury retailers won’t look to pull out of the Chinese mainland, but brands are going to most likely avoid investing as aggressively in the country’s retail sector as before. This coincides with many luxury brands that announced plans to carve out a piece of the domestic Chinese market by opening retail stores to scale back or outright abandon those measures. A Bain and Co. report entitled, “China Entering New Era of Luxury Cool-down,” revealed that just 100 stores among the 20 brands in the report opened stores on the mainland in 2013, down one-third from 150 the previous year.
The slowdown, which the Bain report said would continue into 2014, could be attributed to a number of things.

The first is Chinese leader Xi Jinping’s government “frugality” campaign that was launched in an effort to curb graft and overt public spending. Being that luxury items, from top-shelf liquors to high-priced watches, were often given as “gifts” to authority figures in China, the Hurun Report’s Chinese Luxury Consumer Survey 2014 shows that gift-giving expenditures dropped by 25 percent last year.

The Bain report stated that men’s watches—a popular item to gift among officials—accounted for about one-fifth of China’s luxury market. Amid the government’s frugality campaign, high-end watch sales for men declined 11 percent in 2013. Likewise, menswear was a growth-point in the domestic luxury market, but became a slightly declining part of the market in 2013. Additionally, women’s cosmetic, beauty and perfume products took a similar hit, with Bain’s report showing that sales in these products fell to 10 percent in 2013, down from 15 percent a year prior.

Another factor driving down the consumption in luxury items is the amount of Chinese looking to shop abroad. Luxury news outlet Jing Daily said that the better services luxury retailers provide abroad, cheaper prices, the differentiation in products offered overseas versus domestically, and the easier avoidance of counterfeit products are all key factors driving China’s big spenders to purchase luxury items outside the country. The Bain report shows that over two-thirds of luxury consumption by mainland Chinese was done overseas.

Additionally, it is China’s higher-income population that is footing the bill for most of its luxury consumption—and over 64 percent of that population has either emigrated or is looking to emigrate elsewhere, according to the Hurun report. With an increase in money, people tend to covet an upgrade in quality-of-life experiences; China’s luxury consumers are no different. Another factor that has bitten into the country’s luxury market growth last year is that more Chinese are opting for high-end vacations, spa sessions and activities over purchasing just another big-ticket item.

However, many experts say that the appeal of China’s luxury market is far from gone; it is just no longer easy to enter. With luxury brands flooding in amid the luxury sector’s domestic growth, competition has become fierce. In a Forbes piece in January 2014, Roy Graff, an expert on Chinese luxury travel and hospitality and founder of China Edge, said that the flood of entrants into the Chinese luxury market has impacted growth for established brands.
And with the competition has also come a shift in the tastes of Chinese luxury consumers. While the country’s luxury market has been characterized by a taste for gaudier high-end products in the past, China’s new luxury consumers shun logo-laden designs and instead covet higher quality, subtle products that are bigger on a lauded heritage and craftsmanship than on showiness. This change in taste has led to brands like Hermes and Chanel overtaking their long-standing rivals, Louis Vuitton and Gucci, according to a New York Times piece from March of this year.

While China’s traveling luxury consumers are causing key shopping destinations to clamor for their business, back home, e-shoppers are poised to become key consumers across many sectors, and luxury is no different. Citing data from market research firm iResearch, Vancouver-based website developer Strangeloop pointed out that China will have 570 million online shoppers by 2015, two-thirds of its total expected internet user-base; in contrast, the U.S. is expected to have about 200 million e-shoppers online in the same year.

A report by research firm KMPG entitled “China’s Connected Consumers” showed that the Chinese e-shoppers surveyed reported spending an average of about 1,397 yuan (229 USD) on their most recent luxury item bought online. Likewise, one in six respondents reported spending an average of 2,000 yuan on their last online luxury purchase, respectively. The KMPG report predicts that, by 2015, China’s e-commerce market will generate 540 million USD—7.5 percent of all retail transactions in the country.

With changes taking place in China’s luxury market, the going might get tough for retailers in the short-run, but experts say it is not the time to abandon ship, but rather a time to reconsider floundering strategies and evolve with consumers. Focusing on e-retailers, Strangeloop’s research also highlights how luxury brands are failing China’s e-shoppers with long wait times on websites. Citing Nielsen figures, page-load times for a website between 0.1 and 1 second give users a “seamless flow of thought.” Anything past 10 seconds and a webpage has lost the attention of the user.

Strangeloop monitored the page-load times of 100 luxury brand webpages in urban China and found that the majority of these websites take an average of 16.2 seconds to fully load, noting that, “Many luxury brands are failing to deliver an optimal online experience to their growing Chinese market. Brand owners ignore this disconnect at their own peril.”
Roy Graff echoed similar sentiments about luxury retailers’ need to adjust to the changing market in China when he said this to Forbes: “Brands must better manage a global inventory and sales system that understands how Chinese approach luxury purchasing. The Chinese customer is now global. The sooner those companies understand this, the better. In most cases, China is a separate profit center, competing with other regions for the same customer. Thus, they do not share data across national borders.”