To say that the Chinese shoppers represent a large slice of the luxury market, would be a massive understatement. But it is fair to note that in 2022, activities by Western brands to capitalise on those opportunities were more muted than they had been in previous years. And yet, as China reopens its borders to international travel, luxury brands are hoping to get a boost in revenue from Chinese tourists outside of China, and capturing it will prove to be one of the most critical elements of every luxury brand’s strategy this year.
Firstly, it’s important to highlight the size of the opportunity that Chinese shoppers represent. Pre-COVID, they represented 30 percent of the luxury market, with two-thirds of their spend taking place outside China – that’s 20 percent of the total luxury market.
In the last three years, in the absence of international travel, Chinese consumers have had no choice but to spend inside China, resulting in luxury brands’ revenue inside China doubling from 10 percent of the global luxury market to 20 percent. Their spending outside China essentially disappeared. And as the increase in local expenditure did not compensate for the lack of spending abroad, Chinese consumers went from representing 30 percent of the global market to only 20 percent, and luxury brands have been forced to rely on other geographies to generate their global revenue.
This was made easier by the strong growth in other markets, prompting luxury brands to shift their focus to other regions. In its full-year results, LVMH recorded revenue of €79.2 billion in 2022 and profit from recurring operations of €21.1 billion, both up 23 percent, a new record for the world’s largest luxury group. It said that Europe, the United States, and Japan had risen sharply, thanks to strong demand from local customers and the recovery of international travel. However, Asia was stable over the year due to developments in the health situation in China.
Now that the situation has changed once again, luxury brands are going to have to direct their efforts at luring back these Chinese shoppers, both inside and outside of the country, and getting it right will be crucial in the months to come. But just because you want them to come and spend abroad, it doesn’t mean they’re going to come rushing back as they have done in the past.
“After three years of COVID-Zero policy, it will take some time for Chinese consumers to feel comfortable and start traveling abroad again, especially outside Asia,” said Jacques Roizen, Managing Director, Consulting at DLG.
“Beyond COVID, after a disappointing local economy in 2022, the biggest driver is likely to be consumer confidence,” he added. “However, it has become an official national priority to stimulate consumption and most observers are cautiously optimistic, based on the magnitude of the efforts and the intensity of the focus that the government is putting on stimulating consumption and boosting confidence.”
In the meantime, luxury brands must think about where to put their efforts for the coming year, given the shift in circumstances. Do you focus on local activities, as they have been doing over the past few years, or shift back to a more global focus to capitalise on the perceived influx of Chinese luxury tourists?
At the end of last year, many luxury brands had taken a “wait and see” approach when it comes to investing in China. Not necessarily stopping their activities in the market, but not necessarily putting any further investment either or aiming for bigger growth,.
The last three years created an anomaly where luxury brands doubled their revenue in China but lost a third of their global revenue from Chinese consumers. The result was a lot of headlines about the growth luxury brands experienced in China, but the truth is that the lack of Chinese travellers has impacted the industry significantly.
With the resumption of travel from China, many are trying to project whether the 20 percent of global luxury expenditures by Chinese consumers will grow back to the 30 percent pre-COVID or even go beyond that. And just as importantly, which portion of their total expenditure will take place inside and outside China.
“For luxury brands, the reopening is going to create a significant challenge,” said Roizen, who previously held roles at Pandora as Senior Vice President, Greater China, and Executive Vice President at Baozun.
That new challenge, he noted, will be how brands ensure that what they are doing in China is really making an impact in the right way with the audiences they want to engage with because how you make an impression in most global markets differs vastly with the audiences in China and many luxury brands struggle to actually master this, even with the help of their local teams.
“China is a completely different ecosystem and a completely different consumer ecosystem,” said Roizen. “Brands need to remain authentic to their identity, but they need to understand China and make local adjustments to ensure they stay relevant to the Chinese consumer, especially for brands that are looking for significant growth in China.”
“When business is harder, you can’t afford to leave money on the table. It’s going to force brands to optimise their business in China,” continued Roizen, who took up his new role at DLG in October, to help lead the company’s new consulting business in China, which aims demystify the Chinese digital ecosystem for global luxury brands.
Mapped out into six parts: e-commerce, social media, social campaigns, marketing spend, customer relationship management, people and technology, DLG’s consulting arm, which is led by Roizen and Pablo Mauron, DLG Partner and Managing Director China, is focused towards global executives who want to ensure their Chinese digital strategy reflects their business objectives, global strategy and incorporate local best practices.
“Many global executives remain very confused about the Chinese digital ecosystem, which is a source of frustration when business is not great,” said Roizen. “We still see many brands whose presence on TMall looks more like an e-shop than a brand introduction platform.”
“And if what customers see is mostly an invitation for transaction, or items at entry price or special offers, it’s cheapening the brand,” he added. “Brands need to remember that TMall is also an information platform for offline shoppers to do their research on a brand’s history and universe. ”
Take livestreaming for example, there is a big difference between using a livestream where you are trying to raise brand awareness, using a Key Opinion Leader (KOL) vs a livestream hosted on WeChat focused mostly on generating revenue with an existing audience, explains Roizen.
Each method has its own objectives. Do you just want to cast your net wide and recruit new eyeballs on your brand? Or do you want a conversion livestream, where you invite a selected number of prospects that have shown a lot of interest in your brand and have your head of marketing or product, to introduce the brand and product to an engaged audience.
“In that case, instead of talking about the 0.5 percent to 2 percent conversion rate of an awareness livestream, you're talking about 10 to 15 percent conversion rate, because all the people in the audience, want to be there. They know what they're going get, and they're very committed to the brand,” said Roizen.
“The Chinese digital ecosystem is fairly complex and requires a level of expertise that is very fragmented among different specialties that are not necessarily used to working together,” he continued. “And so, it's very rare to be able to have a comprehensive conversation across all areas of the ecosystem with experts, but DLG is putting together a product that will allow people to have a comprehensive understanding of how to rapidly improve their presence and their performance across the entire Chinese digital ecosystem. And it has never been more valuable than today.”