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Seeking to Understand China Market for Luxury Consumption

Apr 18-2013   



 

By Yvonne Kong

 

On 10th October, 2007, Mr. Andrew Wu gave a speech with the theme seeking to Understand China Market for luxury consumption. Graduate of York University, MBA Graduate of Schulich School of Business, York University, Mr. Wu now works for LVMH as its Group Director for China.

 

Focusing on how people should see the China market from a marketing prospective, Mr. Wu started by first introducing the luxury industry and the LVMH Group, the largest international luxury company that shared 14% of the global cake in 2006 (according to a Merrilyn Lynch Report from August 2007).

 

Keeping in mind of LVMH’s history, Mr. Wu suggested that the success of this Group is in fact not built on promoting the Group’s name, as it is a house of brands but not a branded house. Highlighting the theme of his speech, he stressed that any successful marketing must be based on good understanding of the broader market in question, but not be limited from the narrow product perspectives.  Regarding China, with its fast transformation and rapid growth, Mr. Wu pointed out the attention of LVMH brands to stay fresh and to stay in touch with the market change. Christian Dior cosmetics entered China in 1979 when the country just started its “Open Door” policy and was the first Western prestige cosmetics brand to set up a direct China subsidiary in 1993 to develop this market, Louis Vuitton opened its first China boutique in Beijing in 1992 when the country started the opening of its retail industry, and Sephora entered  China in 2005 as soon as the country joined WTO to allow direct foreign investment in retail, To date, 31 LVMH brands (including 8 wine & spirits brands) are already officially present in China, with 0ver 900 retail outlets in well over 35 cities across the country, and the Group’s brands each devotes serious attention to understanding the market, including very carefully choosing new locations for its store and outlet openings every time.

Mr. Wu then shared his viewpoints on understating the China market as follows:

 

Explosive Wealth Creations

Walking through the past four decades, Mr. Wu recalled a time when children from major Chinese cities sang “I pick up a penny from the street” (about 30 years ago), a time when super wealth in the country was measured by merely “10,000 RMB yuan” (about 20 years ago), which is now the common monthly income threshold for paying personal tax by white collar workers> He pointed out that today over 10 million yuan worth of a real estate property is no longer unusual and successful local entrepreneurs as well as aspiring achievers’ goal to make over RMB 100 million yuan is very realistic by any accounts. Last year’s No 1 ranked rich person (publicized by Forbes Magazine) grew his worth by 56% this year but dropped his ranking from No 1 to No 10! That is the “Liu Xiang” speed of change in China, and fast running does not even guarantee to keep you in the same position.  

 

Revolutionary Generation Changes

Mr. Wu highlighted the Chinese consumers into four distinctive generations: the “Free Spirit” generation, the “Open-Door” generation, the “Cultural Revolution” generation, and the “Founding” generation - each with the experience of a dramatically different “revolution” in their prime years and now resulted in “revolutionary generation gaps” unrivalled by any other markets or countries. For any marketers, we should not project characteristics of one generation up to another and discontinuous changes in terms of consumer behavior are often observed when the younger generation moves in to make an impact on preferences of products or brands.  For instance, this applies for our saving rate (much less with the generation born from the 1980s) and also for propensity to consume (much higher with the same young generation).

 

The “Cultural Revolution” Influence

The “Cultural Revolution”, as observed by Mr. Wu, continues to affect the Chinese market and this is also makes Mainland China consumers different from those of Hongkong and Taiwan.  For instance, the herd mentality in China is much more pronounced than else where, as the country moved from “everybody a Red Guard” in 1960s and 1970s, to “everybody a Mahjong player” in 1980s, to “everybody a stock trader” in 1990s and today, to “everybody a property buyer” since this decade.  And the political habit of either “fully condemning something” or “totally glorifying something” still shows up in many places, including when it comes to luxury consumption. However, attitudes are changing visibly, as the country has moved from total isolation from the outside world to the “open door” and to “open mind” eras. Attitude change leads to behavior change of course.  And the local luxury consumption is moving into more and more sophistication, neither in need of official advocate nor official objection.

 

Benefit from Pursuit of Fashion

Mr Wu pointed out that, with the entry and leadership of high-end international cosmetics brands in the 1990s, such as Christian Dior, Chinese local department stores across the country have completely transformed their image and quality; also it has also effectively expanded the brand-positioning space that is now offering a much wider spectrum of prices and products full of many newly-created local brands in between.  Another example would be Louis Vuitton opening its flagship boutique in Shanghai in 2004 which had positively drawn global publicity on Shanghai and serious attention to China’s consumer market, and Louis Vuitton opening its boutique in Hangzhou in 2005, literally elevating the Hangzhou Tower into a retail pinnacle that had won admiration from across the nation.  More importantly, the pursuit of international fashion in China has helped the younger generation become much more self-confident and has clearly moved the Greater China fashion center towards Mainland Chinese cities such as Shanghai and Beijing. Even luxury brands are now using Mainland celebrities as spokespersons and fashion events, such as the 2006 Fall/Winter Dior fashion show staged in Shanghai, attracts top Hong Kong, Taiwan and Korean celebrities to attend.  “Fashion is reuniting China!” And the pursuit of fashion is important condition for creating fashion and eventually leading in fashion.

 

The Concept of “International Stage”

Thinking of the coming 2008 Olympics Games, Mr. Wu argued that there should be two different inspirations: the obvious one would be “nation vs. nation” team competition, with the competitive score board, championship and medal focus for each country, and wanting to be a national “No 1”. But the other equally important if not more important one would in fact be “international stage” for the host country, with the multi-national participation & gathering size as measure, nation variety world and international ticket sales as focus, and wanting to be “biggest Olympic event”.  Managing a successful retail market like China or in any substantial market should learn from the later inspiration, not the former, as ownership of a successful “international stage” is what matters, not ownership of a brand or origin of a brand.  LVMH Group is in same way also a “stage”, as some brands are French, some Italian, some British, some American, … Even celebrated designers for its top French brands are American, British, etc, not always French!  To want to cultivate the retail industry and brand development in China, and to move from the manufacturing mentality of “Made in China” towards a more commercial mentality of also “Consume in China”, better understanding of how an “international stage” works will be helpful.

 

Going Beyond but Staying Relevant to Luxury Development in China

Apart from the above, Mr. Wu went on to also shed light on several other topics, such as relation between innovation and IPR protection, shift of marketing orientation from P2G and B2G towards G2P and B2C, China’s multi-centered marketplace, the Chinese “experience economy”,  and challenges in the Chinese operating environment for international marketers.

 

After the speech by Mr. Wu, Dr. John Yang, US dean of BiMBA, proposed the following question: What is the core part of marketing? Marketing is to research the culture, the change and the general tendency emerging from humanity science. The reason for the failure of many foreign companies when entering Chinese market is the lack for research on Chinese culture. The key point of localization is the understanding on local culture, which is not only a part of marketing, but also a part of strategy. The understanding on the culture of the target market is also necessary when Chinese enterprises go out. Chinese brands’ international reputation builds firstly on the understanding on the current status of each country and the sensitivity on changes of market and clientele.

 

Dr. Yang then shared his three elements about internationalization: the internationalization in thinking, behavior and strategy model. Thus the internationalized MBA is the distinguished MBA that differentiates from all other MBAs in China.

Seeking to Understand China Market for Luxury Consumption

Apr 18-2013   



 

By Yvonne Kong

 

On 10th October, 2007, Mr. Andrew Wu gave a speech with the theme seeking to Understand China Market for luxury consumption. Graduate of York University, MBA Graduate of Schulich School of Business, York University, Mr. Wu now works for LVMH as its Group Director for China.

 

Focusing on how people should see the China market from a marketing prospective, Mr. Wu started by first introducing the luxury industry and the LVMH Group, the largest international luxury company that shared 14% of the global cake in 2006 (according to a Merrilyn Lynch Report from August 2007).

 

Keeping in mind of LVMH’s history, Mr. Wu suggested that the success of this Group is in fact not built on promoting the Group’s name, as it is a house of brands but not a branded house. Highlighting the theme of his speech, he stressed that any successful marketing must be based on good understanding of the broader market in question, but not be limited from the narrow product perspectives.  Regarding China, with its fast transformation and rapid growth, Mr. Wu pointed out the attention of LVMH brands to stay fresh and to stay in touch with the market change. Christian Dior cosmetics entered China in 1979 when the country just started its “Open Door” policy and was the first Western prestige cosmetics brand to set up a direct China subsidiary in 1993 to develop this market, Louis Vuitton opened its first China boutique in Beijing in 1992 when the country started the opening of its retail industry, and Sephora entered  China in 2005 as soon as the country joined WTO to allow direct foreign investment in retail, To date, 31 LVMH brands (including 8 wine & spirits brands) are already officially present in China, with 0ver 900 retail outlets in well over 35 cities across the country, and the Group’s brands each devotes serious attention to understanding the market, including very carefully choosing new locations for its store and outlet openings every time.

Mr. Wu then shared his viewpoints on understating the China market as follows:

 

Explosive Wealth Creations

Walking through the past four decades, Mr. Wu recalled a time when children from major Chinese cities sang “I pick up a penny from the street” (about 30 years ago), a time when super wealth in the country was measured by merely “10,000 RMB yuan” (about 20 years ago), which is now the common monthly income threshold for paying personal tax by white collar workers> He pointed out that today over 10 million yuan worth of a real estate property is no longer unusual and successful local entrepreneurs as well as aspiring achievers’ goal to make over RMB 100 million yuan is very realistic by any accounts. Last year’s No 1 ranked rich person (publicized by Forbes Magazine) grew his worth by 56% this year but dropped his ranking from No 1 to No 10! That is the “Liu Xiang” speed of change in China, and fast running does not even guarantee to keep you in the same position.  

 

Revolutionary Generation Changes

Mr. Wu highlighted the Chinese consumers into four distinctive generations: the “Free Spirit” generation, the “Open-Door” generation, the “Cultural Revolution” generation, and the “Founding” generation - each with the experience of a dramatically different “revolution” in their prime years and now resulted in “revolutionary generation gaps” unrivalled by any other markets or countries. For any marketers, we should not project characteristics of one generation up to another and discontinuous changes in terms of consumer behavior are often observed when the younger generation moves in to make an impact on preferences of products or brands.  For instance, this applies for our saving rate (much less with the generation born from the 1980s) and also for propensity to consume (much higher with the same young generation).

 

The “Cultural Revolution” Influence

The “Cultural Revolution”, as observed by Mr. Wu, continues to affect the Chinese market and this is also makes Mainland China consumers different from those of Hongkong and Taiwan.  For instance, the herd mentality in China is much more pronounced than else where, as the country moved from “everybody a Red Guard” in 1960s and 1970s, to “everybody a Mahjong player” in 1980s, to “everybody a stock trader” in 1990s and today, to “everybody a property buyer” since this decade.  And the political habit of either “fully condemning something” or “totally glorifying something” still shows up in many places, including when it comes to luxury consumption. However, attitudes are changing visibly, as the country has moved from total isolation from the outside world to the “open door” and to “open mind” eras. Attitude change leads to behavior change of course.  And the local luxury consumption is moving into more and more sophistication, neither in need of official advocate nor official objection.

 

Benefit from Pursuit of Fashion

Mr Wu pointed out that, with the entry and leadership of high-end international cosmetics brands in the 1990s, such as Christian Dior, Chinese local department stores across the country have completely transformed their image and quality; also it has also effectively expanded the brand-positioning space that is now offering a much wider spectrum of prices and products full of many newly-created local brands in between.  Another example would be Louis Vuitton opening its flagship boutique in Shanghai in 2004 which had positively drawn global publicity on Shanghai and serious attention to China’s consumer market, and Louis Vuitton opening its boutique in Hangzhou in 2005, literally elevating the Hangzhou Tower into a retail pinnacle that had won admiration from across the nation.  More importantly, the pursuit of international fashion in China has helped the younger generation become much more self-confident and has clearly moved the Greater China fashion center towards Mainland Chinese cities such as Shanghai and Beijing. Even luxury brands are now using Mainland celebrities as spokespersons and fashion events, such as the 2006 Fall/Winter Dior fashion show staged in Shanghai, attracts top Hong Kong, Taiwan and Korean celebrities to attend.  “Fashion is reuniting China!” And the pursuit of fashion is important condition for creating fashion and eventually leading in fashion.

 

The Concept of “International Stage”

Thinking of the coming 2008 Olympics Games, Mr. Wu argued that there should be two different inspirations: the obvious one would be “nation vs. nation” team competition, with the competitive score board, championship and medal focus for each country, and wanting to be a national “No 1”. But the other equally important if not more important one would in fact be “international stage” for the host country, with the multi-national participation & gathering size as measure, nation variety world and international ticket sales as focus, and wanting to be “biggest Olympic event”.  Managing a successful retail market like China or in any substantial market should learn from the later inspiration, not the former, as ownership of a successful “international stage” is what matters, not ownership of a brand or origin of a brand.  LVMH Group is in same way also a “stage”, as some brands are French, some Italian, some British, some American, … Even celebrated designers for its top French brands are American, British, etc, not always French!  To want to cultivate the retail industry and brand development in China, and to move from the manufacturing mentality of “Made in China” towards a more commercial mentality of also “Consume in China”, better understanding of how an “international stage” works will be helpful.

 

Going Beyond but Staying Relevant to Luxury Development in China

Apart from the above, Mr. Wu went on to also shed light on several other topics, such as relation between innovation and IPR protection, shift of marketing orientation from P2G and B2G towards G2P and B2C, China’s multi-centered marketplace, the Chinese “experience economy”,  and challenges in the Chinese operating environment for international marketers.

 

After the speech by Mr. Wu, Dr. John Yang, US dean of BiMBA, proposed the following question: What is the core part of marketing? Marketing is to research the culture, the change and the general tendency emerging from humanity science. The reason for the failure of many foreign companies when entering Chinese market is the lack for research on Chinese culture. The key point of localization is the understanding on local culture, which is not only a part of marketing, but also a part of strategy. The understanding on the culture of the target market is also necessary when Chinese enterprises go out. Chinese brands’ international reputation builds firstly on the understanding on the current status of each country and the sensitivity on changes of market and clientele.

 

Dr. Yang then shared his three elements about internationalization: the internationalization in thinking, behavior and strategy model. Thus the internationalized MBA is the distinguished MBA that differentiates from all other MBAs in China.