International luxury brands should gain better knowledge of Chinese society before attempting to meet the rising and diversified demands of local consumers, according to a German consulting agency.
The country's consumer market has been shaped by three generations who have conflicting ideas about money and what it symbolizes, according to a recent report from Trendbuero Consultancy for Social Change GmbH.
Different groups
The generation born in 1950s and early '60s sees money and luxuries as an expression of power and status, while the so-called "Generation X", born between 1965 and 1979 - who also own 80 percent of China's private businesses - trust material security and dedicate themselves to earning money.
"Generation Y", born between 1980 and 1995 to one-child families shaped by global ideas and consumerism believes that consumption is an expression of self and not just a status symbol.
Within these groups there is a growing number of affluent buyers who will drive diversification of consumer preferences, as well as put pressure for positioning on luxury brands. But it is not the size of the market that will challenge luxury brands - it will be the changing mindset.
While current Chinese social values are mainly based on security, harmony and control, Generation Y - the trend-setters of today and those who will make up the next league of luxury buyers - are causing a value shift toward hedonism, personal experience and sensuality, says Dirk Jehmlich, general manager of Trendbuero Asia-Pacific region.
Trendbuero is an international consulting agency for trend research and marketing consulting with offices in Hamburg and Beijing.
From this shift, the agency expects four types of luxury consumers to emerge who will shape the growing market, differing in social background, experience and income.
The "nouveau riche" - French for "newly wealthy" - currently the majority of China's luxury consumers, equate name brands with success. They want to stand out from the masses. But due to their cultural background, conformity still rules.
The "understaters", mostly from first-tier cities with international backgrounds, focus on differentiating themselves with their spending habits. For them luxury is a question of style, not money.
The "connoisseurs", who appreciate "soft luxury" and spend money to enrich their lives, are self-made businessmen or women with a good perception of self. For them money is seen as a key, not as a treasure.
"Spirituals", a small but growing number of returning overseas Chinese, look for authenticity and spiritual experiences. They are highly individualistic, striving for spiritual adventures and bored by what they perceive as the superficial world of luxury. A return to nature and the primordial are more important to them.
A large group of consumers in second-tier cities belong to the nouveau riche, Jehmlich notes. "These people had no luxury goods before. Now they think they have money and they want to stand out."
For them, the main attractions are big names, large labels and high prices. For fashion it could be Louis Vuitton, Armani or Gucci. In automobiles, BMW, Mercedes-Benz and Hummer, and watch brands like Rolex are their first choices. Jehmlich warns of underestimating luxury buyers from these cities.
Even if second-tier cities often lag behind in education, infrastructure, income and interaction with foreign cultures, luxury-buying residents learn from celebrities and increase their expectations for products, marketing and services to an international level and above.
Trendbuero observes that many buyers from second-tier cities adapt the behavior of first-tier luxury consumers even if their intentions and preferences were different before.
A gap in understanding
Jehmlich says that, "people dress the same and buy the same, but still there is a gap in understanding brands and luxury experiences. To bridge this gap - balancing global expectations with local limitations - will be the main challenge of luxury marketing in second- and third-tier cities."
In main cities such as Beijing, Shanghai and Guangzhou, people have longer history of wealth, and have more exposure to foreign cultures. They prefer lower-profile brands, such as Anna Sui and Mac Jacob.
"A large number of them have become understaters, who have realized that being rich is not just about buying luxury goods, but understanding the difference between Cartier and Hermes. The new way to show off is being sophisticated," Jehmlich says.
The analyst also noted there is a large number of affluent middle-class consumers in main cities who may not be able to afford a 10,000-yuan handbag. But they have a zest for big-name accessories costing between 1,000 to 2,000 yuan.
In smaller cities, such a group is still small but rising, as many consumers imitate their heroes to improve themselves.
Jehmlich says luxury goods are especially important for Asian markets such as China and Japan.
