Chinese digital luxury retailing

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matthunter.com DIGITAL ◊ PRODUCT DEVELOPMENT ◊ STRATEGY

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Important Notice

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Agenda

• China and the global market for luxury goods

• Role of the internet in Chinese luxury consumption

• Driving forces behind online growth

• Online luxury goods customer segments

• Future trends

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Globally the luxury goods market is thriving. China has emerged as a major driving force behind this vitality. In recent years, Chinese luxury goods purchases have surged.

The domestic market is growing rapidly, as young, rich elites are reaching out to embrace finer fashions. The markets of Greater China continue to boom. And Chinese travelling abroad are becoming the leading consumers in major fashion destinations.

Chinese consumers are fast becoming central to the global luxury goods industry

A Chinese Obsession?

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The market for luxury goods is seeing exceptional growth globally

Source: Bain & Company

Worldwide Luxury Goods Market by Area

0

50

100

150

€200B

Luxury Spending

2009

Americas

Europe

Asia-Pacific

Other

Japan

150

2010

171

2011E

191

9%

13%

26%

5%

13%

09-11

CAGR

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As China’s domestic economy has surged, demand for luxury goods has grown rapidly. Areas such as Shanghai’s bund abound with high-end stores for luxury brands of all descriptions.

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China’s domestic market has grown twice as fast as the global market

Note: 2011 estimate as per Bain; 2012 revenues estimated at 18% YOY growth from 2011 as per McKinsey forecast Source: Bain & Company (China Luxury Market Study 2011); McKinsey & Company (McKinsey Insights China)

• China’s luxury goods market doubled in size between 2009 and 2012

• Extensive growth: luxury goods becoming more widely available -In 2011, China saw almost as many new

openings of luxury retailer branches as Europe and the USA combined

-Luxury retailers have pushed out from the major (“tier 1”) cities to begin colonisation of tier 2 and tier 3 cities

-66% of YOY growth comes from new customers

• Intensive growth: luxury consumers spending ever more on luxury goods -33% of growth comes from existing customers

increasing purchases

-Small high-end clientele developing heavy purchasing habit

-Significant aspirant middle-class now spending above Western norms

0

5

10

15

€20B

Chinese Personal

Luxury Goods Spending

2009

7

2010

10

2011

13

2012E

15

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Consequently, Mainland China’s luxury goods market became the 5th largest in the world in 2010

Source: Bain & Company; China Luxury Market Study 2011

Personal Luxury Goods Market –

Ranking by In-Country Spending (2010)

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However on a global scale, Chinese luxury purchases are even more significant

China €12.9B

Taiwan €3.9B

HK €5.8B

Macao €0.8B

Luxury goods purchases in Chinese societies total €26.6B

S’pore €3.2B

Chinese Mainland consumers spend > €6B in Euro markets

Paris €4.3B

Milan €2.0B

Note: Data based on 2010 revenues Source: Bain & Company; China Luxury Market Study 2011

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50% of luxury goods purchased in Milan and Paris are bought by visiting Chinese

Note: Data based on 2010 revenues Source: Bain & Company; China Luxury Market Study 2011

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Chinese consumers are fast becoming the main driving force of global luxury

25% Including purchases in Mainland China, Taiwan, Hong Kong, Macau & purchases by Mainland Chinese when travelling

abroad, Chinese consumers drive

of all global luxury purchases

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Agenda





• Future trends

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Chinese consumers are more reliant on the Internet than other nationalities to…

-…discover luxury brands -…research products -…and complete their purchases

And consequently, the internet accounts for an unusually large share of total purchases

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The in-store experience is still the most important factor in determining purchases

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However, the internet is the next most important influence in persuading Chinese to buy luxury goods

Note: Derived from regression of whether consumers purchased products from a luxury brand with whether they experienced a certain touch point and how the information was received (positively or negatively). Internet specific responses scaled to 100%. Survey products include RTW, Bags, Shoes, Jewellery & Watches. Based on a survey of 2,422 consumers. NB: McKinsey survey therefore largely assumes correlation is causation Source: McKinsey & Company; McKinsey Insights China (2010)

Purchase influencers

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Amongst internet interactions, paid advertising and social reviews are of near equal importance in persuading shoppers to buy

Note: Derived from regression of whether consumers purchased products from a luxury brand with whether they experienced a certain touch point and how the information was received (positively or negatively). Internet specific responses scaled to 100%. Survey products include RTW, Bags, Shoes, Jewellery & Watches. Based on a survey of 2,422 consumers. NB: McKinsey survey therefore largely assumes correlation is causation Source: McKinsey & Company; McKinsey Insights China (2010)

Purchase influencers: Internet only

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When researching, social media is the channel most commonly used to obtain information on luxury goods

“Which channels of the Internet do you normally

get information on luxury goods from?”

Note: Social Media includes: SNS, Weibo (Chinese Twitter-style micro-blogs) and Blogs Source: Bain & Company; China Luxury Market Study 2011

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Although China has a vigorous and well established fashion press…

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…Online fashion bloggers are even more influential

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Chinese consumers’ opinions on luxury brands are heavily shaped by fashion blogs

Consumers who say their opinions on luxury

goods and brands are shaped by fashion blogs

Source: Altagamma

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After researching online, Chinese luxury consumers are exceptionally likely to make purchases online

% of Luxury Consumers Making Purchases Online

Source: Altagamma

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As a result, the online share of luxury spending is far higher in China than elsewhere

% of Luxury Consumers Making Purchases Online

Note: China online figures understate sales by excluding direct retail by major brands 2012 Figures include linear extrapolation based on YOY growth rates from 2010-2011 Source: Data from Bain & Company (Global total, Global online, China total); iResearch (China online)

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These figures imply China has the world’s leading online luxury goods market

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What does this really tell us?

• 13% online penetration vs. 3% online penetration as a global average is a tremendous difference

• Given the uncertainty in measurement and differences in categorisation of “luxury” it’s possible the true figure is significantly lower

However, we can reasonably conclude that the online market is significantly more important in China than in

established markets

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Agenda





• Future trends

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Unique factors have led to accelerated development of China’s online market

• Luxury brands are rapidly increasing their store footprint across China. However, this development has lagged growth in domestic demand and in many cases Chinese stores fail to match the range and experience offered by overseas stores. Underserved Chinese customers have turned to the internet to fulfil their needs.

• Online behaviour varies by customer type. An unusually young, rich elite uses the internet as a tool of convenience to order luxuries as simply as ordering commodities. Fashion fanatics develop sizeable online followings from eager aspirants. And a growing core market turns to the web to flaunt their latest purchases, much as a peacock fans its feathers.

• Collectively these factors make the online environment exceptionally important as a researching and purchasing medium for Chinese luxury shoppers

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A relatively undeveloped network of stores has contributed to the growth of online

• Luxury brands have accelerated store roll-outs across Mainland China in recent years, with China receiving as many store openings in 2011 as the US and Europe combined

• However, surveys suggest this roll-out is long overdue and that many luxury retailers are failing to provide an adequate level of service in their Chinese stores… -45% of Chinese who travel abroad to purchase

luxury goods do so because they find the service and shopping experience superior

-69% say they find more variety when shopping overseas

• For customers unimpressed with store service or located in un-served towns, online has grown in prominence

Source: World Luxury Association 2012

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Wealthy Chinese are younger than their counter-parts in developed economies

China’s average millionaire is 39 years old

The average American millionaire is 64 years old

With youth comes a deeper affection for internet shopping

Source: Li & Fung

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Agenda





• Future trends

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We can obtain a picture of China’s online shoppers by combining several studies

• A number of reports from leading consultancies and agencies have provided customer segmentation and demographic information on China’s luxury shoppers:

-Hurun Wealth Report: Demographics on China’s emerging elite

-McKinsey China Insights: Buying habits examining the share of income spent on luxury goods

-Group M – CIC Internet Word of Mouth Social Media & Luxury Study: Online behaviours of a range of groups

• Each of these reports uses different methodologies and has a different focus making them imperfectly compatible – however, combining aspects of these studies allows us to sketch a more robust picture of online luxury consumer behaviour

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McKinsey categorise luxury archetypes based on annual luxury spending and share of income spent on luxury

McKinsey’s original figures for annual spending, household proportions and share of total consumption are not internally consistent; and imply a different total market size. Information should not be used for market-sizing. Source: McKinsey Insights China (2010)

0

50

100

RMB150K

Annual luxury spending

Luxury

Role

Models

150

Fashion

Fanatics

70

Core

Luxury

Buyers

45

Middle

Class

Aspirants

20

0

10

20

30

40

50%

Percentage of annual incomespent on luxury goods

Luxury

Role

Models

11

Fashion

Fanatics

42

Core

Luxury

Buyers

18

Middle

Class

Aspirants

8

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Luxury role models

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Luxury Role Models are likely to be a driving force of online purchasing

Image Credit: Lifeisnothingwithoutstyle.com;Source: Hurun Wealth Report; Group M; China Daily, iResearch, McKinsey & Company

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Fashion Fanatics

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“Fashion fanatics” are likely to be online opinion leaders

Source: Group M/CIC, McKinsey

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Core Luxury Buyers

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“Core Luxury Buyers” are likely to shop offline but broadcast purchases online

Source: Group M/CIC, McKinsey

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Middle Class Aspirants

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“Middle Class Aspirants” are more likely to search for discounted goods

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Summarising: these four groups likely have very different behaviours online

• Luxury role models • Likely to purchase online

• Price insensitive

• Range and service focused

• Fashion fanatics • Online opinion leaders

• Weak likelihood to purchase online due to love of shopping experience

• Style focused

• Core luxury buyers • Shai-sharers and online researchers

• Influenced strongly by fashion fanatics and moderately by peers

• Unlikely to buy online

• Middle class aspirants • Uncertain of purchases

• Heavily reliant on online research

• Likely to buy online only via off-price channel

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Agenda





• Future trends

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Brands need a digital vision of luxury

The digital space is becoming crowded. A surge of private equity and venture capital investment has led to a number of high profile third party retailers attempting to address China’s digital luxury consumers. Full-price and off-price offerings abound.

Active online followings have the potential to benefit brands. But luxury brands face the challenge of managing their relationship with a highly engaged digital population, whilst maintaining an aura of exclusivity. Employing common buzz-based digital techniques pioneered by FMCG brands will run counter to overall values.

The over-riding challenge is to deliver a distinctive, high quality service that differentiates the excellent from the good. Those that discover how to do this using bits and bytes rather than leather and gold will lead the coming era.

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Beyond exclusivity To re-create the sensation of luxury in a digital setting we must first appreciate the essence of luxury

To many, luxury means “rarity”

But in a digital world, rarity is artificial: abundance is a CTRL+V away

So brands and designers must find a deeper appreciation of luxury to convey

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In the seams of a fine coat or the workings of a fine watch, the sensation of craftsmanship and excellence become palpable

But in the digital world, the scope for differentiation through quality is limited. Flawless operation is a prerequisite for even the humblest of websites; and flamboyant technical genius is often perceived as an intrusion or barrier.

Beyond craftsmanship

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Perhaps…

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The essence of luxury lies in emotion and storytelling

Beyond rarity and craftsmanship, the value of luxury goods stems from an emotional power

If… luxury goods are an embodiment of fantasy in consumable art

Then perhaps ownership buys… the freedom to redesign our self image; to borrow the manna of a designer or craftsman; to absorb the physical characteristics of fine leather or metal

In the digital space where the physical becomes imperceptible, the promise of luxury goods must be established through a different narrative – stories and experiences that lend us the same ability to dream or elevate ourselves

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The luxury brand of the future is the digital storyteller

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matthunter.com DIGITAL ◊ PRODUCT DEVELOPMENT ◊ STRATEGY

Email: [email protected] LinkedIn: http://cn.linkedin.com/in/digitaldirector

Matt Hunter is a digital marketing specialist with 8 years

experience. He previously worked at management consultancy

Bain & Company in London, Johannesburg and Sydney before

heading digital marketing and product development at

Confused.com, a successful UK internet business.

He specialises in digital marketing, product development and

strategy.

He holds an MA in Economics & Management from the University

of Oxford, an MSc in Strategic Information Systems from Cardiff

University and is currently completing the MIT-Tsinghua MBA in

Beijing, China.

<< Available for opportunities in digital marketing, tech start-ups or

PE/VC funds; and roles with Asian exposure. >>

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Appendix: Combining estimates from Bain & Company and iResearch suggests ~13% penetration

• China online figures understate sales by excluding direct retail by major brands. 2012 Figures include linear extrapolation based on YOY growth rates from 2010-2011. Data from Bain & Company (Global total, Global online, China total); iResearch (China online)

2010 2011 2012

China 9.6 12.9 15.2

China Online 0.8 1.4 2.0

China Online % 8.6% 10.8% 13.1%

ROW 163.4 178.1 185.1

ROW Online 3.7 4.2 5.5

ROW Online % 2.2% 2.4% 3.0%

Chinese digital luxury retailing

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