Why are the Chinese rushing to luxury goods?

On the one hand, the country's GDP per capita ranks 94th in the world - behind Jamaica and Bosnia - while on the other hand, China is expected to overtake Japan and the United States as the world's largest market for luxury goods. In the face of this seemingly paradoxical phenomenon, the explanation at hand is that people's living standards and income levels have risen along with economic development, and a large number of millionaires and billionaires have been created. But there is more to China's $12 billion luxury market than just people's ability to spend. As with other discretionary purchases, retail experts believe that the purchase of big-name fashion, jewelry and other high-end products in China is particularly driven by emotional, cultural and social values, as well as certain "political perceptions. According to Professor Lu Xiao of Fudan University, who specializes in luxury market research, China's consumer culture is made up of a "melting pot" of values. These include the strong values of pursuing "modernity, wealth and success". These values are based on two factors: socialism after 30 years of reform and opening up, and the rise of Western powers. Deng Xiaoping, who initiated this economic reform, once famously said, "Let some people get rich first." "Suddenly the flat social structure of this country expanded vertically. In order to show that they were different with Western-style success, there was a rush and appreciation for wealth and modernity. The dominant story of modern China is one of higher social and economic status - both of this country and of the individual." Lu Xiao talks about. People's addiction to luxury plays in harmony with the backdrop of this grand narrative. "Luxury has become the most effective way to evaluate success in Chinese society." Wang Hao, CEO of Meici.com, an online luxury boutique in Shanghai, says, "As a large and densely populated country, China is a very competitive society. At the same time, being recognized by society is a basic human need." So how can people stand out in this competitive environment? According to Wang Hao, Chinese people's interest in luxury goods today is similar to that of Europeans a century ago, during the period when Europe was gradually moving towards a capitalist society. Onward and upward ...... "Compared with other countries where classes are more distinct, the structure of social classes in China is flat, and all the money is 'new money' (新钱), which puts everyone on the same footing as the people who ran to success on the same relatively equal starting line." says Ashok Sethi, head of consumer research at market research firm TNS. In Sethi's words, the lack of class differences also means that there is "no 'inverted snobbery' in China, and no 'old rich' who look down on the 'new rich' who flaunt the city. There is no 'old money' group (meaning wealthy families with a long history of ancestral property) who look down on the 'new rich' who flaunt their money. The latter group will not buy into luxury goods and will see casually dressed, moderately priced products as fashionable." He argues that "the existence of this group in developed countries constrains the development of luxury, but this force is not a climate in China, and therefore is not enough to hinder the pursuit of luxury." And this one-way force creates even more distortions. A report released earlier this year by McKinsey & Co. said that the "middle class aspirant" (中产阶级下层群体), a group that aspires to enter the middle class, has become a segment in China that has seen very rapid growth in luxury consumption. This group, which dominates in terms of numbers, has to save up in order to afford luxury goods. In terms of income level, they do not have access to expensive luxury goods. Although these people do not make frequent purchases and account for only 10% of overall luxury spending, they nonetheless represent 51% of the luxury consumer base. McKinsey expects that by 2015, 61% of all luxury consumers will come from this segment, and they will account for 16% of the $27 billion in luxury sales in this country. Those who aspire to move up the social ladder will be greatly influenced by wealthier, more fashionable consumers, whose numbers are multiplying. McKinsey's consultants believe that by 2015, the number of upper middle-class households with annual incomes between 100,000 yuan ($15,400) and 200,000 yuan ($30,800) will reach 76 million from 13 million. Wealthy households with annual incomes between 300,000 yuan and 1 million yuan will increase to 5.6 million households at a rate of 15 percent per year, while wealthy households with annual incomes of more than 1 million yuan will grow to one million households at a rate of 20 percent per year. Vinay Dixit, a senior director at McKinsey's Asia Consumer Centers, talks about China's aspirational millennials as the ones to watch. "They have grown up in an environment where consumerism is prevalent, they are optimistic about future income growth, and they are only children. What's even more different is that their purchases may be supported by their parents and grandparents, so young Chinese actually have the resources of three generations combined. This is a Chinese characteristic." Despite the fact that this country has a higher per capita savings rate than other countries, the growing optimism and hedonistic sentiments are both making the middle class more willing to spend money on luxury goods, says DeVry. "There's this mentality that says, 'I'm going to reward myself for my hard work now, not wait until 30 years from now.'" Luxury retailers are now beginning to recognize the importance of the purchasing power of consumers in those smaller Tier 2 and Tier 3 cities. In 2010, 67 percent of China's luxury sales growth came from new consumers, especially those outside of first-tier cities, according to consultants at Bain & Company. This result has major implications for retailers' growth strategies. In a report, Bain noted that "China's market is supply-driven, with new store openings creating new demand." The 15 luxury brands surveyed by the firm opened 80 stores in the first eight months of 2010***. Analysts predict this trend will continue. McKinsey & Company expects the incomes of residents in their 20s and 30s in non-Tier 1 cities can be expected to surge to higher levels, and thus, the number of luxury-hungry consumers will grow. The Rise of the Chinese Element These trends are of deep concern to some observers, who say that too many Chinese use luxury as a simple criterion for judging a person's quality rather than focusing on certain noble, non-material attributes. Wang Hao, who is in the luxury goods industry and is a member of Maxi.com, believes that "when people use what they wear to judge their peers, the society risks becoming too materialistic. However, this trend does favor certain business people." At a recent luxury industry seminar in Shanghai hosted by CEIBS, Bruno Lannes, a partner at private equity firm Bain Capital, said, "Luxury is associated with history, tradition, art, culture and exquisite craftsmanship. In addition, luxury goods are exclusive and unique, with connotations of quality and service. Currently, the problem in China is that many people do not buy luxury goods for these reasons. Instead, they see luxury as a symbol of their status, which is a misunderstanding of luxury." According to Lu Xiao of Fudan University, in addition to the correlation with social identity, many Chinese people use luxury consumption as part of their search for identity and influence in a modern world dominated by the West. "Because the West represents advanced technology, strong influence, and modern values, most mainland Chinese are pursuing these values in whatever way they can find." This is particularly evident among the older generation who grew up during the Cultural Revolution. Known as the "lost generation," they missed out on higher education and lived in a "cultural void" designed to completely trash Chinese history. Now, critics say, they are responsible for some of the country's poorest imitations of Western style and influence. These include a Chateau de Maisons-Laffitte fake on the outskirts of Beijing and a White House replica in rural Anhui province. "Certain of the lost generation, now roughly in their 50s in age, have acquired new wealth." Lu Xiao spoke of. "They can afford luxury goods, however often lack the proper elegance. They like to show off and have a skewed notion of what constitutes tradition as well as social identity, which explains their extremely ostentatious behavior." Also troubling to some consumers is China's lack of its own luxury brands. According to a survey by Bain & Company, all the best-selling high-end fashion brands in China come from Europe, such as Chanel, Gucci and Louis Vuitton. However, Lu Xiao argues that going back to its roots, luxury consumption in China is far from new - the tradition of favoring high-end antiques, for example, goes all the way back to the imperial era. "Aren't there any Chinese brands that offer elements of luxury that can be found in ancient Chinese culture?" Lu Xiao asked. A recent report on China's luxury market by stock brokerage CLSA predicts that local luxury brands will eventually emerge, especially those based on domestic materials such as jade, ceramics and precious woods. The report also noted that certain items that would not be considered luxury in other parts of the world, such as Pu'er tea stored for 80 years and mahogany furniture from Hainan, are already selling at record prices in China. In response, international brands are also localizing their products for Chinese consumers. A McKinsey & Co. survey of more than 1,500 luxury consumers in 17 Chinese cities last year showed that one-third of respondents said they preferred luxury goods designed specifically for China. "The desire for luxury goods that have absorbed China's rich cultural and historical heritage is palpable among younger groups and the upper middle class, and some companies are responding to it." Last year, for example, French fashion house Hermes was the first to launch "up and down" branded retail stores that include Chinese elements, with ready-to-wear garments based on designs by Chinese designers. Complexity and Ambivalence Using psychological segmentation, Lu Xiao's research has identified an important group of luxury consumers who want to be noticed, but at the same time are conservative and unassuming. Traditional Chinese culture appreciates the qualities of prudence and simplicity, and this notion was also encouraged by the pre-reform social environment, which prohibited or even punished the expression of individuality and the display of wealth. Today, however, the old values have been cast aside, and with them comes the belief in the values of wealth and personal fulfillment. This contradictory value orientation is especially pronounced among consumers who work in government organizations. In her research, Lu Xiao found that government officials who could afford luxury goods were less ostentatious than business people who could also afford to consume them. "In a government sector environment, wealth is not something that should be publicly displayed to others or flaunted to others. Conservatively designed products such as, ties, scarves, business suits and handbags without logos are the most popular." Just like in developed countries, ostentatious consumption will cool as Chinese consumers' hunt for luxury goods wanes. McKinsey & Co. found that Chinese consumers, who were earlier adopters of luxury goods, are now less attracted to big, attention-grabbing brands, with quality and value for money playing a more important role in their purchasing decisions. "There has been a major shift in people's loyalty to brands."