Pressure is mounting for luxury companies to find their niche and establish their credibility, as the market continues to grow in sophistication and witnesses an influx of new businesses entering the sector, the latest KPMG China report revealed.
"The challenges facing new entrants to China's luxury market are intensifying. The market has become more crowded, as indicated by the rising number of luxury brands recognized by consumers in China," said Nick Debnam, partner in charge of consumer markets with KPMG China.
The report by KPMG, the global network of professional firms providing audit, tax and advisory services, said that on average, survey participants this year recognized 64 different luxury brands compared to 52 in the 2006 survey.
In Shanghai, this rose to 73 brands, while the figure for second-tier cities stood at 52.
The report entitled China's Luxury Consumers: Moving up the Curve is based on a survey of 15 cities, covering an adult population of 66 million where 30 percent were from middle income households.
Respondents were between 20 to 44 years old, and all earned upwards of 3,500 yuan per month, with a minimum income of 5,000 yuan in the larger cities of Beijing, Shanghai, Guangzhou and Shenzhen.
Over the past decade, income and retail spending have continued to rise strongly in China. In 2007, retail sales in China topped 8.9 trillion yuan, up more than 17 percent year-on-year, which amounts to a doubling of China's retail spending in the space of just six years.
Income levels have also risen strongly, but remained low compared to more developed economies. Yearly disposable income per capita among urban households rose by 18 percent to 13,876 yuan in 2007, while per capita consumption expenditure stood at 12,667 yuan, a year-on-year increase of 14.7 percent, according to the National Bureau of Statistics.
The economic realities facing Chinese consumers also dictate which product categories have been most successful, with many executives commenting that the market for accessories and jewelry has grown more strongly than apparel.
Within apparel, several executives observed that brands need to carefully position themselves, citing examples where companies have been successful in the sales of premium casual wear, but struggled to retain the connection to their origins in more high-end couture and ready-to-ware.
China is not a single, homogenous market for luxury goods and is showing increasing signs of segmentation and differentiation, with consumers motivated by more diverse factors and seeking satisfaction in different ways.
Two important needs that are guiding the evolution of the luxury sector are the need for individuality and the need for a rich and indulgent experience.
Status-seeking, known as the "bling factor" in the report, remained key to the growth of luxury consumption. However, Chinese consumers are also developing greater appreciation of brand values and heritage, with connoisseurship, trend-setting, and indulgence also emerging as luxury consumption drivers.
"As Chinese consumers have become more sophisticated, luxury companies also need to look beyond conventional advertising to build brand awareness," said Debnam.
"Alternative marketing strategies, including exhibitions, events, and sponsorship can be more effective in educating the market and reinforcing certain values, such as status, heritage and exclusivity."
The fact that Chinese consumers are able to travel easily overseas due to reduced restrictions and the renminbi appreciation also contributed to the growing sophistication of the luxury market.
In 2006, mainland tourists made 34.5 million outbound journeys, compared with just 12.1 million in 2001.
In the survey, respondents earning more than 8,000 yuan per month traveled overseas on average 2.3 times per year.
"In terms of their consumption patterns, China's consumers are very willing to buy luxury products overseas. This is partly because the high levels of duty and value added tax within China mean that products overseas are often significantly cheaper, but also Chinese consumers want the experience of visiting boutiques or flagship stores," said Debnam, citing over half of the survey's respondents also buy luxury goods as gifts for others when traveling.
While Chinese consumers show a strong desire for luxury products, they remain cautious over credit. In most product categories, fewer than 10 percent said they were willing to buy luxury items on credit. Some 29 percent of respondents still do not own a credit or debit card, while only 10 percent owned three or more cards.
As China's luxury market continues to develop, luxury companies are also changing their business models. One emerging trend is a willingness to invest directly in China's luxury and retail sectors.
However, the report suggested distributors and joint venture partners can still play a valuable role in helping develop a brand's presence.
In terms of franchising and joint venture arrangements, adequate incentive for the licensee are needed as well as clear terms outlining compensation should either party wish to end a joint-venture agreement.
The report also highlighted the tax implications brought about by the choice of business models of luxury companies. In particular, China's new Unified Corporate Income Tax Law introduced the need for contemporaneous documentation of transfer pricing, and companies now need to take a serious look at proactively managing their transfer pricing risks.
