The Generational Shift of the Luxury Market in China


Alexander Wei | November 03, 2021

Sanlitun Taikoo Li in BeijingCredit: Swire Properties

The rapidly expanding Chinese luxury market has been in transition. While the purchasing power of young customers is undeniably increasing, mature consumers continue to account for half of all luxury consumption in this country. How can luxury brands understand and respond to China's "generational shift"?

LVMH released its financial results for the third quarter of the fiscal year 2021 on October 12, with Asia Pacific (excluding Japan) and the United States (excluding Hawaii) continuing to lead the group's overall recovery. In comparison to the first nine months of 2019, revenue in Asia Pacific (excluding Japan) increased by 29 per cent in 2021. This momentum shows no signs of abating for the time being.

Although China's goal of achieving "Common Prosperity" may add uncertainty to the future growth of luxury firms in this market, according to the '2021 Tencent x BCG China Digital Luxury Report' recently released by Tencent and BCG, the luxury market in mainland China will grow at a rate of 23-25 per cent next year and is expected to reach a value of 630 billion RMB by 2022.

The luxury market in mainland China has expanded by nearly 100 billion RMB in the last year. While previous industry insights might have suggested otherwise, this new study shows that only 34 per cent of this came from 'passive' repatriation due to the pandemic, while 28 per cent of the growth actually originated from 'active' growth in the market thanks to post-90s consumers with greater spending power. The report also displayed that new luxury consumers that began purchasing luxury products after 2020 account for 17 per cent of the total luxury shoppers in China. This indicates that there is still untapped potential in this country for brands to explore.

At the same time, global brands continue to face challenges in China due to the fragmented retail network and the complexities of the consumer demographic. Given the 'generational shift' observed in the market, how can luxury brands adapt to the ongoing transformation of China's luxury landscape, coupled with the fact that post-90s and mature consumers exhibit distinct consumption behaviours but are equally important in terms of market size?

A Complex Consumer Mix

Mainland Chinese consumers born after 1990 have witnessed the Chinese economy's meteoric rise as well as the Chinese luxury market's steady expansion. Today, post-90s consumers account for 50 per cent of China's luxury shoppers and 46 per cent of total market size, with an annual growth rate of more than 30 per cent. Pre-90s consumers, on the other hand, account for 54 per cent of total luxury sales – based solely on their heavy and medium spending segments (consumers who spend over 50,000 RMB on luxury per year).

Post-90 consumers already account for 46 per cent of the luxury market sales in mainland ChinaCredit: 2021 Tencent x BCG China Digital Luxury Report

Tencent collaborated with BCG to survey 4,700 consumers who purchased luxury goods between June 2020 and June 2021 for this report. In this study, they also discovered that these two consumer groups have different perceptions of 'luxury' and consumption behaviours.

'Social' plays a pivotal role in the purchasing decisions of young luxury consumers, who are influenced not only by product reviews on social media but also by word-of-mouth recommendations. According to Lin An, Managing Director & Global Partner at BCG, compared to post-90s consumers, mature customers evaluate a wider range of criteria when making purchase decisions, demonstrating higher expectations for luxury brands' products and services.

Luxury conglomerates are now implementing various strategies to appeal to younger audiences, and even rebranding themselves with a 'younger' image. However, given the current share of consumers in China, global brands require a two-pronged approach that addresses the needs of consumers across various ages to ensure sustainable growth.

Online Channels Continue to Expand

The growth of the luxury industry in China must also be attributed to the maturation of the e-commerce environment in recent years, which has enabled luxury brands to expand their digital presence while effectively converting consumers on online platforms.

Although offline touchpoints have fully recovered in China, the report predicts that 31 per cent of consumer journeys will take place entirely online in China by 2021 – a 1 per cent increase from 2020. Meanwhile, ROPO (research offline, purchase online) continues to be the most dominant consumer journey, accounting for 61 per cent of the market in 2020. This also suggests that brands can reach the vast majority of consumers via online channels.

At the transactional level, offline storefronts continue to be the most prominent sales channel in mainland China, accounting for 78 per cent of the market. However, the luxury e-commerce business has grown significantly in the last two years, with online channel penetration – including, Brand-owned WeChat Mini Program, cross-border e-commerce platforms, and domestic e-commerce marketplaces – reaching 39 per cent, up from 13 per cent in 2019.

Online channel penetration in China is expected to reach 39 per cent by 2021Credit: 2021 Tencent x BCG China Digital Luxury Report

Consumer behaviours continue to differ across channels. Average consumer spending within the WeChat ecosystem, for example, is the highest across all e-commerce channels at 170,000 RMB per year (including transactions on Brand-owned WeChat Mini Program and WeCom). In recent years, brands have been increasingly leveraging Mini Programs, allowing them to offer prospects and clients a more relevant and tailored shopping experience when combined with existing brand assets on WeChat (e.g. WeChat Official Account and Channels). Third-party marketplaces such as Tmall and tend to target lower-tier cities – where brands have no offline touchpoints – and entry-level consumers with an average spend that is significantly lower. This segment also primarily consists of post-90 consumers. As a result, brands must develop differentiated product and marketing strategies across channels.

Experience and Service

The factors that different consumers look for most when purchasing luxury goods are somewhat similar – elevated service and experience. 56 per cent of consumers polled believe that the service experience will be the most important factor in their decision to continue purchasing luxury goods in mainland China.

"The relationship between brand and consumer in China today has evolved from a pure linear transactional bond to a multi-dimensional space filled with content, service, and experience," says Stefan Huang, Project Leader at BCG. "It is critical for brands in this space to build multi-dimensional and emotional interactions with consumers."

The 'generational shift' makes it difficult for brands to provide a consistent and high-quality experience to various consumer segments across a limited range of platforms. But some brands have been more successful than others on this front. To cater to different client demands, French luxury house Louis Vuitton developed several Brand-Owned WeChat Mini Programs, such as the Louis Vuitton Sneaker Store, which launches footwear via a 'drop' model, and a pop-up Menswear Store Mini Program. “Louis Vuitton doesn’t see Brand-Owned WeChat Mini Programs as a single sales channel, but as part of Louis Vuitton’s overall China-market brand experience and retail ecosystem,” stated Wendy Chan, SVP, LVMH Digital Asia.

The Chinese market is complex and unique, and starkly different from the West. However, if there is one thing that global markets have in common, it is that digital transformation in the luxury industry is inevitable, whether in the face of a new wave of consumers or due to the evolution of digital channels. Brands need to constantly innovate, and embrace the spirit of testing and learning to stay ahead of the game.

The full report is available for download at the link below.

2021 Tencent x BCG China Digital Luxury Report

Analysis | China | Reports