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21 Sep 2012

Week in China: The wealth effect

The British fashion brand Paul Smith is known for its whimsical take on traditional Saville Row tailoring. But it was the capricious nature of Chinese shoppers that led Paul Smith, founder of the eponymous brand, to describe the market as ‘extremely dangerous’ to the Financial Times (FT) in 2008. Shoppers in China only “wanted things that say I’m wealthy and I’m fashionable … things with a logo on,” Smith complained. The label packed up and left China.

Five years on and Smith seems to have had a change of heart, choosing Shanghai as the site for his new flagship store earlier this year.

So what’s changed? “There are a lot of people who are not necessarily looking for the obvious symbols of wealth or fashion. They are looking more to buy things that they know are interesting or special,” Smith explained in a more recent FT interview in August.

Other luxury labels have followed suit. Armani is now promoting simply designed dresses at the expense of some of its more logo-heavy shirts and bags. Gucci, too, has been shifting strategy. It used to sell bags with logos that announced themselves like airport display screens. But it is now offering more understated designs too. In fact, 23 per cent of the Gucci bags sold in China this year have no prominent logo, compared to just 6 per cent in 2009, notes Buy Buy China, an industry blog.

According to Tom Doctoroff, author of What Chinese Consumers Want, one of the golden rules for luxury brand owners in China has been to focus on goods that are consumed in public. That’s because they’ve historically tended to command significant price premiums compared to goods used in private, which lack the same audience.

As a basic example: an image-conscious Shanghai business executive might drive an Audi, but at home he keeps his beer in a domestic brand fridge.

Newly affluent buyers tend to gravitate first to the biggest, showiest names. But with time and experience, they get choosier

Such wisdom has worked well for the luxury retailers, who have focused on selling items such as bags, cars and apparel that announce ‘I’m rich, I’ve arrived’. But as Chinese luxury consumers become more knowledgeable (and more numerous, thus eroding the cachet of being part of an elite), some are beginning to develop a taste for the inconspicuous too.

Not much could be more private than your lavatory, for instance. So it says something that US-based manufacturer Kohler recently unveiled its Numi range of toilets. They cost a hefty RMB40,000 (USD6,330) each but despite the price tag, 40 of the new toilets were sold in Xi’an, the capital of Shaanxi province, on the first day they went on sale. Customers were required to pay a deposit and wait for delivery, says Global Entrepreneur.

Ruan Jiamin, president of Kohler China, told the magazine that he thinks that many of China’s super-wealthy have lost their fondness for certain showy luxury brands, especially those that are now seen to be beloved by the nouveau riche. Now they are more focused on quality, rather than gauche acts of display. This still indicates their wealth but in a less ostentatious way.

Kohler’s toilet is a very ‘personal’ luxury, Ruan explains, with a built-in bidet, a heated seat and deodorising function. Oh, and it also has a sound system for those who like to listen to Mozart as they go about their business.

Similarly, Calvin Klein says its underwear business is booming in China, in part due to comparable trends. Again it’s a personal type of purchase, not easily flaunted in public (US rappers aside). But Warnaco, the company that makes Calvin Klein underwear and jeans, reported USD163.3 million in China revenues last year, of which about 30 per cent came from underwear sales. Six years ago, underwear was only a tiny fraction of the firm’s business, it says.

Industry observers say the new preference for less-conspicuous luxury reflects other trends too. Ongoing campaigns against corruption, as well as changing attitudes to a commercial culture of gift-giving may also be having an impact.

In last week’s issue, we mentioned the case of a government official lambasted by netizens over a series of photos in which he can be seen wearing six expensive watches, including a Vacheron-Constantin and a Rolex. He is under investigation, which highlights the dangers that luxury goods can pose to a bureaucrat’s career – especially when they are outside their pay grade.

As Chinese consumers become better informed and more demanding, they are ... looking for more differentiated designs that show they are 'in the know'

This is also a natural evolution in luxury consumption that has been seen in other markets before China, analysts suggest. Newly affluent buyers tend to gravitate first to the biggest, showiest names. But with time and experience, they get choosier.

Paul Smith told the FT that social media has also been playing a part, as friends recommend favourite brands to like-minded people. This creates new niche markets, which have more chance of retaining their exclusiveness. It also bypasses the need for huge brand-building campaigns, creating groups of consumers that are more interested in impressing their peers than all and sundry.

HSBC concurs. In its latest take on the luxury industry in China, Luxury “Red Bull”: A Sequel, the Research team writes: “A few years ago, it was common for Chinese men to leave the label sown to the sleeve of their suits so that people knew what brands they were wearing. We’re not saying that doesn’t happen anymore, but it has become a rarer sight. Chinese consumers have become more sophisticated and increasingly seeking out more subtly designed luxury goods.”

“Long gone are the days of one-brand-suits-all fashion in China,” the report continues. “As Chinese consumers become better informed and more demanding, they are moving away from logo products, and looking for more differentiated designs that show they are ‘in the know’.”

Further, HSBC suggests that this can turn longstanding concepts of competitive advantage on their heads. “Of course, first-movers – like Louis Vuitton and Omega – are still recruiting customers,” HSBC acknowledges. “But in our view they now carry a first-mover disadvantage as Chinese consumer behaviour is evolving.”

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