2018 China Luxury Market Study

What’s Powering China’s Market for Luxury Goods? Sales are growing at a healthy 20% rate, but not all brands are celebrating. This report was authored by Bruno Lannes, a Bain & Company partner based in Shanghai and a member of the firm’s Retail and Consumer Products practices.Copyright © 2019 Bain & Company, Inc. All rights reserved. What’s Powering China’s Market for Luxury Goods?1At a Glance It was the second year in a row of 20% growth for luxury goods in China. Brands benefited from repatriated purchases, a focus on millennials, increased digitalization and China’s expanding middle class. Although growth was robust overall, some companies outperformed with growth rates in excess of 25%, while others lagged with less than 10% growth. The winners’ strategies offer clear lessons for the future. China’s luxury goods market is humming along nicely, with a second straight year of 20% growth in 2018 (see Figure 1). Think of it as a powerful machine running on four engines operating in perfect alignment.More than 70% of millennials have a positive financial outlook; 81% of them expect their income to increase. Engine 1: RepatriationThe Chinese government’s reduction in import duties and stricter controls over gray markets— combined with brands’ efforts to narrow the price gap with overseas markets—have led more Chi-nese consumers to make their luxury purchases in China, instead of traveling to previous bargain locales such as Hong Kong, Seoul, Tokyo and cities in Europe. Chinese consumers made 27% of their luxury purchases in China in 2018, up from 23% in 2015, and we anticipate that this share will increase to 50% by 2025 (see Figure 2). But this doesn’t mean that Chinese consumers are buy-ing less abroad. Luxury spending by Chinese shoppers now represents 33% of the global market (see Figure 3). What’s Powering China’s Market for Luxury Goods?2020406080100%Channel breakdown for Chinese luxury goods spending(€ billions)2011412015762018852025EMainlandChinapurchases Overseaspurchases 16029232750Domesticspendingshare (%)Why Chinese shoppers are buying locally insteadof overseas Import duty reductionsStricter control over gray marketsPrice harmonizationSources: Bain Luxury Goods Worldwide Market Study, 2018; Bain analysis Figure 2: The repatriation of spending will continue in the coming years05010015020020111071211413116Mainland China luxury market (RMB billions)14114151131611717142181702%20%20%CAGR(17–18)CAGR(16–17)CAGR(11–16)• After spectacular growth in 2017, momentum remained strong• Millennials contributed almost all of the incremental growth of China’s luxury market over the past year• Category rebalancing continued, with women’s spending outpacing men’sHighlightsNote: CAGRs are based on constant exchange ratesSources: Bain Luxury Goods Worldwide Market Study, 2018; Bain analysis Figure 1: The domestic luxury market posted 20% growth in 2018, driven by millennials and women What’s Powering China’s Market for Luxury Goods?3020406080100%Global luxury market by consumer nationality (€ billions)20001162010 19%1672015 31%2452018European 18%American 22%Japanese 10%Chinese 33%Other Asian 11%Rest of world 7%2601%33%4%19%8%2%2%CAGR(15–18)CAGR(10–15)CAGR(00–10)Note: Segments do not add up to 100% due to roundingSources: Bain Luxury Goods Worldwide Market Study, 2018; Bain analysisFigure 3: Chinese spending represented 33% of the global luxury market in 2018Engine 2: MillennialsConsumers aged 23 to 38 are willing to spend on luxury brands, and financially able to do so. Fully 70% of China’s millennials own their own homes—twice the rate of US millennials, according to HSBC’s Beyond the Bricks study (see Figure 4). And they can get funding from their parents if they want to buy luxury goods. Moreover, these young consumers are well informed about luxury and eager to embrace innovative trends, such as the convergence of high fashion and sportswear. Millennials are the big market for luxury sportswear products like Balenciaga’s Triple S sneaker, which was intro-duced in 2017 and maintained its popularity throughout 2018, and accessories cocreated by Louis Vuitton and Supreme, a fashion brand with roots in skateboarding. Unlike older generations, millennials are more heavily influenced by what they consider to be cool than by brand names or product pricing. They value newness more than discounts. They rely on social media and freely share their opinions online. Like their counterparts in all age groups, millennial women buy more luxury goods than men do. Cosmetics, a traditionally female category, grew by more than 25% in 2018, for example, while watches, a predominantly male category, grew by less than 10%. What’s Powering China’s Market for Luxury Goods?457%38%3%2%Source of funding for luxury fashion purchases Millennial homeownership percentageSelf-madefundsBrandsponsorshipOtherParents’funds26Average 38%2831414670343535UKUAEUSFranceChinaAustraliaCanadaMalaysiaMexicoSources: Gold Standard Research Center