China is powering the luxury trend at all levels – and this is just the beginning
It’s common knowledge that China is a massive growth driver for luxury brands. Just yesterday, we published a report on the “Moonlight Clans” – luxury-obsesses millennial consumers – that were helping Gucci and other brands to hit new highs. But the extent to which Chinese consumers are becoming the most important segment across all levels of luxury spending – from the “affordable” to the “prestige” – is only the start: the country’s affluent middle classes are continuing to grow, they’re continuing to embrace a luxury lifestyle ethos, and – perhaps surprisingly to some readers – there’s still a lot of room for those trends to grow. The plain fact of the matter is that Chinese consumers still spend most of their money on “basic needs”. That’s set to change.
Chinese consumers were once encouraged to save. Hence, in 2008, household consumption was just 36% of total spending (compared, for example, to 70% in the U.S.). Disposable income at the time was a measly $2,200 per household, per year – hardly the stuff of dreams for big multinational companies and luxury brands.
However, in the years since, a tighter labour market, rising wages and capital gains from a housing price boom, has more than doubled disposable income to $5,800. At the same time, the Chinese government has wound down its anti-corruption drive and cooled the brakes on encouraging saving. The result is that consumption, since 2011, has been the country’s single biggest driver of growth. However, the story’s just beginning: household consumption still only makes up 40% of GDP – 30% less than the U.S.
Daniel Zipser, speaking for global consultancy McKinsey, said: “It’s new households coming into the middle class stage which is driving consumption. The auto industry very much depends on China. The beauty and sports industries have a high share of their global business coming from China.”
Chinese luxury spending has often taken place overseas due to the high tariffs on imports and the fact that European luxury companies often set prices separately in the country. As Chinese consumers have become more aware of what goods cost in other markets – and as they have become more important to global consumption – the trend has been towards parity between markets. As a result, Chinese luxury spending is becoming more common at home.
Between 2015 and 2020, research group Gavekal suggests that the number of affluent households in China (defined as having annual income of $22,000 or more) will double. The country is now in a “firmly middle class” stage, and this means that consumers will start spending more to get premium versions of goods – not just what they need, but what they want.
Zipser says: “China has already reached a good consumption level in terms of volume for all the food and beverage categories, so growth comes from premiumisation.” With 137 “affluent” households by 2020, a population of nearly one and a half billion people, and economic growth hovering around the 7% mark, China’s luxury story is only just beginning.
Dominion holds a number of European luxury brands – and a handful of local Chinese ones – that are exposed to the Chinese luxury sector.
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