China’s outsized contribution to global luxury spend and its resilience during the pandemic is luring many Western brands to expand their footprint in mainland China.
According to a report from McKinsey, China’s luxury market will reach 1.2 trillion RMB, 44% of the world’s total by 2025. However, luxury newcomers have to compete with the well-established luxury brands that entered the market years to decades ago along with the homegrown brands who are gaining popularity. Does China still represent a golden opportunity for luxury newcomers?
Retail in Asia had the pleasure to interview Aude Bousser and Fabienne Pellegrin from LBB Asia to understand the challenges newcomers face and the strategy they need to adopt when expanding into mainland China.
RiA: You help companies with their omnichannel retail development in the APAC region and more specifically in Greater China where there is a huge demand for high-end goods and services. However China is also a very competitive market. What is the number 1 advice you give to your clients?
LBB Asia: Be prepared : Thorough analysis of the market is key, it is imperative to understand the China distribution landscape and digital ecosystem, which are very different from Europe / US. Be fully informed about the associated costs so as to avoid having to pull out of the market early, we see it happening very often unfortunately. Have a detailed roadmap, and make sure you have the necessary and available resources to go direct or else you will need to find a Chinese partner.
RiA: Key and established luxury players have been in China for over 20 years and China is known to be a winner-takes-all market. At the same time, China’s homegrown brands are gaining popularity. Is there still a place for new luxury players in China?
LBB Asia: China operations and communication costs have dramatically increased in the past 10 years. A new brand will have to compete with top international brands (Estee Lauder, LV, Cartier to name a few) who spend millions of euros in branding and traffic purchase on ecommerce platforms as they were among the first to land in China back 15-20 years ago. They are highly successful and China has become a key market for them in terms of sales so they can spend almost free flow!
As you mentioned, we have seen the emergence of successful Chinese brands and given the choice between foreign and local brands with similar positioning and attributes, Chinese consumers are now often opting for local brands with strong identities. Yet those are still quite limited for the time being in the luxury & high-end segment. Chinese brands are particularly powerful in the fast fashion segment, and have created numerous challenges for Western brands in China trying to establish or maintain their presence (Etam, Cache Cache, Topshop or H&M for instance).
For the last two and a half years, most of, if not all luxury growth has come from China. The country’s wealthy, highly educated, and entrepreneurial young Chinese Gen-Z and millennial consumers have been the driving force behind this boom.
An additional 400 million Chinese consumers will transition from low-income to middle-class or higher over the next 10-15 years. Hainan has become a second Dubai, reflecting the massive domestic infrastructure investment that will impact the future of Chinese tourism and spending.
Nevertheless, there is still plenty of room for newcomers provided that they approach the market with a distinctive brand positioning and a differentiated distribution strategy. Brands should get to know precisely their target consumer cohorts in China and adapt their marketing and distribution approach accordingly. Brands who try to launch on 5 or 6 social media and ecommerce platforms, thinking that they will reach 0,01% of the Chinese population, find themselves spending a lot of money for disappointing results. Going in China today without precise targeting is suicide.
RiA: As the Chinese market grows, many global companies are increasingly willing to customise their offerings for China. What is your take on localisation? Do you advise brands to create a customer service experience or products that are tailored to Chinese customers?
LBB Asia: It can make sense for some brands and some product categories, though one model does not fit all. If you have an eyewear brand, Asian fit is key, developing favourite colors for Chinese consumers is also important but for instance using Chinese gimmicks for Chinese new year on luxury handbags does not always serve the brand.
A brand’s cultural origin is also very much at the core of its DNA and it is part of what makes it desirable. One striking example of a localisation that backfired is when the Norwegian Cruise Line launched the Joy ship, fully decked out in Chinese design and decorations and had to decommission the ship less than 2 years later because the Chinese consumer was in fact looking for a western experience.
RiA: China is leading the way when it comes to digital but the digital landscape can be difficult to navigate for Western brands. For example, e-commerce is a must in China but the cost can be very high. Which e-distribution channels should be prioritised?
LBB Asia: First of all you cannot really separate ecommerce and social media in China, they really work hand in hand and feed off each other. The consumer journey in China includes many different digital touchpoints which brands need to curate. Here again there is no “one size fits all’ strategy and it will all depend on your segmentation and your positioning. That being said Tmall in its many different forms remains a player which is hard to ignore but it cannot work well alone. Brands need to craft a digital ecosystem which starts with brand discovery and awareness, ignites and feeds consumer interest, drives conversion and promotes brand loyalty and referral.
RiA: We have talked a lot about digital and e-commerce. What will be the role of retail in China in the future?
LBB Asia: Retail is crucial but tends to be more and more a communication tool in China. It is one of the necessary touch points to complete the Chinese consumer’s journey. The challenge for retail is that while you expect a certain level of revenue, it is becoming the preferred way to showcase and experience the full brand experience knowing that a large part of the consumers will buy on Tmall or WeChat after searching for other consumers’ feedback on Red or Tmall. Retail has become THE marketing tool while e-commerce has become THE profit centre, not an easy take for western brands.
Based in Shanghai and Hong Kong, LBB Asia is a brand management company specialised in the premium and luxury retail markets in Asia. Through their brand management and strategy consulting activities, LBB Asia supports Brands in both the planning and the execution of their omnichannel retail development strategies in Greater China. LBB Asia works with brands such as Weber, IZIPIZI, Babyzen, Ouate or Talika.