I focus on the intersection of rising Chinese consumers and competitive dynamics. Basically, I try to figure out who is going to win (and lose) in the never-ending fight for increasingly wealthy and influential Chinese consumers.
However I generally avoid Chinese luxury. It is impacted by too many factors – the value of the RMB, rising and falling stock markets, crackdowns on Chinese gifting, real estate values, the unpredictable behavior of high net worth individuals, changes in luxury tastes and fashion – and so on. I just find it too unpredictable.
However, I do think there are three clear trends within all this noise. This is what I have been watching for in 2017.
Trend 1: The majority (or at least a whole lot) of Chinese luxury purchases are happening overseas – and Chinese tourism is going to keep increasing.
While overall luxury spending by Chinese has slowed recently (say 2-3% growth in 2016), the location of the spending continues to shift overseas. Over 50% is now happening overseas, by Chinese tourists and also online through foreign and cross-border e-commerce.
So we can somewhat project luxury spending as it correlates to increasing Chinese tourism. Obviously the amount of spending per tourist can change, but overseas travel is a more stable trend long-term. Over 110 million Chinese traveled overseas in 2016. And by 2020, this should increase to 200 million. And as Chinese continue to travel they will continue to become more sophisticated about and interested in higher-end products.
Note: Bain’s luxury goods market report (here) stated that in 2015 overseas Chinese luxury purchases grew by 10 percent. And this was mostly in Japan, South Korea, Europe and Australia.
Trend 2: Millennials and other young Chinese are responsible for a lot of both overseas travel and the luxury spending.
I was in Santorini, Greece earlier last year, a pretty stunning island that lives mostly on tourism (and a little agriculture). And, no surprise, the small island was full of Chinese tourists.
But what caught my attention was that virtually all the Chinese tourists were young friends and couples. I saw almost none of the typical tour buses with middle-aged tourists in matching hats. These tourists were young. They spoke English very well. They were well-dressed (well, better than me anyways). And they were all spending money freely as far as a I could tell. They were renting scooters, eating in good restaurants, and staying in nice hotels with great views of the sea. They were also on their smartphones virtually all day long – taking selfies, online searches, chatting, sending photos, etc..
Young Chinese and millennials are just a very different Chinese consumer demographic. And it is worth repeating that 80% of the wealth in China today is held by those under age 40. This distribution is the inverse of what you see in most other countries. So when you talk about Chinese luxury spending, especially overseas, you are frequently talking mostly about younger Chinese and millennials. These are the groups that have the wealth, have rising incomes, and are very confident about their future. And they are traveling and buying luxury goods and services in big and increasing numbers.
So the spending of young Chinese and young Chinese tourists is another fairly stable trend within luxury spending overall. And we can expect this one to increase as well.
Note: My anecdotal experience in Greece syncs with reports by GfK stating that more than 50% of Chinese outbound travelers are between 15 and 29 years old. And 37% are between 30 to 44. Similarly MasterCard reports that over half of Chinese millennials (18-29) are likely to buy luxury goods when traveling overseas.
Trend 3: Domestically, “affordable and occasional” luxury is the trend to watch.
My standard mantra is to track the disposable incomes of urban Chinese families. That (and the overall urban household spending) will be the mothership of Chinese consumer spending going-forward.
So how these urban families are buying luxury products and services domestically is an important question. And my answer is that they are definitely buying “affordable and occasional” luxury (my term) in increasing numbers.
Luxury products that are easily affordable to these middle class urban families have a huge runway. This is not Gucci, art auctions, luxury cars, or wine cellars. This is more affordable indulgences such as Coach bags, Apple products, Samsung televisions, Montblanc pens and other lower priced but still luxury items. I am looking for luxury items that are just now becoming affordable for the massive urban, middle class consumer base to occasionally buy.
This syncs with a Goldman Sachs report (Marketwatch article here), which stated “The emerged and emerging middle class have a lower propensity to spend on luxury — but the desire for branded, status luxury brands remains unchecked…three-fourths of total growth in 2016 expected to come from 70 million middle-class consumers in China.”
I was in Hohhot a few years ago, a pretty isolated second-tier city in Inner Mongolia. And I was in a small, typical restaurant on a typical side street. The young waiter there was very chatty, as I think I was one of the few foreigners to ever visit. And what this young man really wanted to know was the price of an iPhone. He wanted to know how much it was in China vs. Hong Kong vs. the USA. He was saving up to buy one.
This is an important side point. Virtually all Chinese, regardless of income level, do buy luxury occasionally. They just do it sporadically and may have to save up for months first. So affordable luxury is a broad and growing trend but “occasional” luxury is also an important subset of this. Most everyone in China does buy luxury at some point – and that’s ultimately a lot of people.
Anyways, I think these are three good trends to track within all the chaos of Chinese luxury spending: overseas buying, millennials and young consumers generally (and as tourists), and “affordable and occasional luxury” products.
Thanks for reading. All comments are welcome. -jeff
I write and speak about “how rising Chinese consumers are disrupting global markets – with a special focus on digital China”.