American Brands Are Losing Appeal in China, Just as It Becomes the World’s Largest Luxury Market
The Covid pandemic took a big bite out of the reliably buoyant luxury market. The personal luxury goods market, which includes fashion, jewelry, watches and beauty, will drop 23% this year to $257.5 billion, the largest annual decline in history and the first time sales have dropped since 2009, according to Bain’s 2020 Fall Luxury report.
The luxury market won’t reach 2019 levels until 2022 or 2023, but 2021 is still in question since the second wave of Covid is threatening the recovery that started in the second half of this year. Currently, Bain is predicting 10% to 19% growth in 2021.
Besides months of store closures, the luxury market has suffered from the travel bans put in place early, followed by luxury consumers’ reluctance to travel abroad. Europe suffered the biggest hit, dropping 36% this year, with sales in The Americas down 27%.
These two regions are mourning the loss of affluent, high-spending Chinese tourists, who before Covid made as much as two-thirds of their purchases in tourist hot spots, like Paris, London, Rome, New York, and Los Angeles. This year some 80% of all luxury spending will be made locally.
But while Chinese consumers’ access to luxury goods was reduced, their appetites remained undiminished. Their spending stayed home, and as a result, China will be the only regional market that posts growth this year, up 45% at current exchange rates.
Nonetheless, China remains the third-largest market for luxury goods with $52 billion in sales, behind The Americas with $74 billion and Europe with $68 billion. But that may change by 2025, when Bain predicts Chinese consumers will account for fully half of all luxury goods spending.
If the Chinese consumers don’t resume their globetrotting and continue to spend more of their money at home, Bain expects China to overtake The Americas as the world’s largest luxury market by 2025. This may mean trouble for American luxury brands that simply don’t have the cache of their European counterparts.
Chinese are losing interest
During this October’s fashion month in China, the Shanghai-based KOL (key opinion leader) management and analytics firm Parklu reported not one American brand ranked among the top 20 most watched collections, while Prada, Chanel, Dior, Valentino and Burberry topped the list.
Further, an AlixPartners survey with more than 2,000 Chinese consumers found more than half (57%) planned to spend less on American products during this year’s Single’s Day (November 11), a shopping holiday that now eclipses Black Friday and Cyber Monday in e-commerce sales. They further signaled a preference for Chinese brands due to a rise is national loyalty.
The Chinese luxury consumers’ incredible sophistication and education, along with their youth – 25-to-30 is the sweet spot for luxury brands – enterprising spirit and national pride leads Daniel Langer, Ph.D., CEO of Équité, professor of luxury strategy at Pepperdine Graziadio Business School and Jing Daily contributor, to say, “Ten years from now, at least one of the top ten luxury brands in the world will be Chinese.”
That could bump Tiffany & Co.TIF off Interbrand’s top ten list and doesn’t give much hope to Ralph Lauren, Michael Kors or Coach that aspire to get on it.
The American way of doing business doesn’t sit well with the Chinese. While not all European luxury brands are doing it right, Langer believes they have a better handle on it.
“The American way is more short-term focused and transactional, whereas the European way of doing business is more brand-equity building and long-term focused,” he says.
Tiffany has fallen victim to this. “Tiffany as a luxury brand has lost its true north,” Langer believes, “It embarked into too many areas that are not core, like cheaper entry items and accessories. And they are failing in experience creation. Go into a store, and it’s not very personal and almost a little bit arrogant.”
“In terms of experience creation, American brands are rather transactional, and not very relationship building,” he says.
Another failing for American brands, and reflecting their short-term focus, is their heavy reliance on promotions. Americans are quick to offer discounts to preserve revenue, which they have done at an even faster pace due to the pandemic.
“If you want to be absolutely certain to destroy your brand, then start to promote,” Langer ironically exclaims.
“But if you look at the brands that are managed really well, like Chanel, they have done the opposite. During the pandemic, they have partially increased prices. I can’t think of one American brand that has been able to raise prices,” he continues.
American brands’ short-term focus erodes brand equity, if they even had it in the first place.
“American brands have traditionally been very weak in brand storytelling. They work from a playbook of building brand awareness, instead of building equity,” he says, and adds, “You can build brand awareness easily, just do something crazy or spend a lot of money, like on a Super Bowl ad. This is very attention grabbing, but it’s not building brand equity.”
Brand equity is based on storytelling that focuses on what the customer wants to know and what they value. American brands are great talking about themselves, but fail miserably at telling stories to customers about why they should care about the brand.
“Chinese customers are unbelievably savvy when it comes to the value of brand; they want to know what is behind the brand,” Langer shares.
“I would say the Chinese customers are the most savvy customers in the world in terms of luxuries. This means you can’t fool them and this is the mistake American luxury brands are doing, asking customers to pay high prices for something with little intrinsic value,” he continues.
Desire drives dollars
Effective brand storytelling creates desire which is the foundation of the luxury business and what will make a brand succeed in China in the years to come.
“The Chinese consumer wants to know everything about the brands, every detail, what the brand stands for, how it is created. That is the reason why they choose the brand. They want it authentic,” Langer says and that may be the biggest failing of all for American luxury brands. They just don’t ring true to the Chinese consumers.
Mind the gap
Rather than be blindsided by the rising influence of the Chinese consumers, American brands need to work fast to close these gaps.
Langer points to the collapse of Diane Von Furstenberg as a warning of what may come for American luxury brands that don’t adapt to the emerging power and influence of Chinese consumers.
“What I observe regularly is that brands don’t go deep enough in their internal assessment of gaps and often don’t take measures that are comprehensive and decisive — issues linger, brand equity erodes, and over time the brand loses its ability to influence and drive consumers,” he concludes.