The missing link in measuring luxury brands in China

Lately, there has been a tremendous amount of articles and reports on Luxury brands in China. Their topics range from advertising investment (for example, under-investment on digital media) to consumer segments (for example, the rich wife circle). As China becomes one of the biggest markets for almost all luxury brands (reportedly some fifty percent of Prada’s sales to people from China), measuring sales, the optimal metric in the lower consumer funnel, has been a daunting task for them.

Here is why - Most wealthy Chinese don’t actually buy luxury items in China. This is particularly true for consumers who live in first tier city such as Shanghai (might be a surprise for some readers).

The major cause is - “Tax”. since China implements a skyrocketing high tax system when it comes to luxury brands (for example, in Cosmetics, 50% luxury tax and 15% VAT are regulated), consumers are paying if not all but a majority part of it. Therefore, if you walk into a LVMH boutique store in Shanghai, you are likely to see 30-40% more expensive of the same product in other markets.

blog 1.6.2013

So where do Chinese luxury demand go? Interestingly, nearby countries/markets first. Hong Kong, Taiwan, Japan, and Korea. For some of the affordable, Paris, New York, and London.

Now we have major measurement issues here - what is the real purchasing power for China market? how do we know if media is effective in China market since we don’t know how much sales/revenue media and marketing efforts generate? Furthermore, what is Sales ROI for China media investment?  

So far, brand managers and marketing directors have been struggling with the challenge. A few have tried to come up a topline, benchmark % estimate based on credit type, language preference, and survey on stores outside China market. However, it is believed that the figure is still far from accurate as cash is the most popular payment method among Chinese consumers.

No one knows if Chinese government will change the regulation anytime soon, and even if the new system gets implemented, will it change consumer perceptions and behaviors right away? Lots of good questions here. Personally, I think that Ad Awareness might be a better metric in this case.

Let’s go back to Luxury sales in China – so where do sales come from? Another interesting fact – most luxury sales in the top tier cities are from consumers who travel from second, third, and fourth tier cities. These consumers are learning about Luxury lifestyle and getting to know their first brand experience. In their perception, price is highly associated with the quality. Therefore, overpriced Prada or La Mer serve the market well.

`Daniel Yiu

Other luxury brand article related readings

By Michael J. Silverstein, HBR (English) - Don’t underestimate China’s Luxury Market

FT Chinese (Chinese) - Differentiation in China’s Luxury Market

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