Pumping out fancy clothing, handbags, jewelry, perfumes, and watches, the luxury goods industry had a challenging time in the Great Recession. In 2008, banks were failing left and right, unemployment rates were sky high, and consumer confidence was at an all-time low. In 2009, total luxury goods industry sales fell by 20% globally. How did the industry cope? Marketing to the Chinese emerged as one of the leading coping strategies for the luxury goods industry. Since 2008, Chinese consumption (both at home and traveling) had been growing between 20% and 30% annually. In 2009, China surpassed the United States to become the world’s second-largest market. In 2011, China rocketed ahead of Japan for the first time as the world’s champion consumer of luxury goods— splashing $12.6 billion to command a 28% global market share. Everybody who was somebody in luxury goods had been elbowing their way into China, which appears like the New World to old European brands. The luxury goods industry was dominated by the Big Three: LVMH (with more than 50 brands, such as Louis Vuitton handbags, Moët Hennessy liquor, Christian Dior cosmetics, TAG Heuer watches, and Bulgari jewelry), Gucci Group (with nine brands such as Gucci handbags, Yves Saint Laurent clothing, and Sergio Rossi shoes), and Burberry (famous for raincoats and handbags). Next were a number of more specialized players, such as king of menswear Ermenegildo Zegna. By definition, high fashion means high prices. Before Chinese consumers became a force to be reckoned with, the luxury goods industry had long endeavored to manage the fickle and capricious customers. Although the seriously rich were not affected by the Great Recession, their number remained small. Most luxury goods firms had been relying on “aspirational” customers to fund their growth. As the recession became worse, many middle-class customers in economically depressed, developed economies began to hunt for value instead of triviality and showing off. Japan had been the number-one market for luxury goods for years, and most Japanese women reportedly owned at least one Louis Vuitton product. But sales were falling since 2005 and dropped sharply since 2008. Young Japanese women seemed more individualistic than their mothers and often hauled home lesser-known (and cheaper) brands. As Chinese consumers charged ahead, their consumption patterns quickly revealed some interesting surprises. First, the Chinese purchased more luxury goods outside of China, often on vacations abroad, than in China. Although practically all luxury goods producers now had opened retail outlets in major Chinese cities, they suffered from high prices—thanks to import duties. Retail outlets in China also suffered from the perception (although never proven) that some counterfeit products might slip into their supply chain. Because luxury products purchased abroad were less likely to be faked, many Chinese vacationers in Europe were actually shoppers. They also enjoyed the lower prices abroad. Instead of buying one or two pieces, some Chinese shoppers bought five Rolex watches or ten Louis Vuitton bags on one trip. To cater to such demand, almost all luxury shop operators in Europe now employed some Chinese-speaking staff. Many China-based travel agencies organized “European vacation” itineraries with only two hours in the Louvre or the British Museum but six hours in Paris’ Galeries Lafayette or London’s Harrods. Second, both inside and outside of China, Chinese shoppers discriminated against made-in-China luxury goods, which were viewed as inferior in quality. Since a luxury item should carry all the mystique associated with a high-prestige country, many Chinese consumers argued, why bother to spend that much money to buy something made in China (never mind the bonafide Western luxury brands of these products)? Third, interestingly, several years ago, it was the Japanese ladies who did the heavy lifting for the top line of luxury goods firms. Now it is the Chinese dudes (more likely than the Chinese women) who were eager to open their wallets to indulge themselves with luxurious trappings. As a result, menswear brands such as Ermenegildo Zegna and Dunhill did very well. Such conspicuous consumption generated hot debates in China. It attracted two criticisms. First, luxury goods were some of the most visible signs of rising income inequality. Second, luxury goods and corruption were allegedly twins. Not every luxury item bought from Galeries Lafayette or Harrods was for the personal consumption of the purchaser and his or her family members. An untold number was reportedly used as bribes. Therefore, critics argued that luxury goods fostered corruption. For all their proclaimed interest in corporate social responsibility, no luxury goods firm bothered to confront the Chinese debates concerning the ethical responsibility of their products. However, the industry was concerned about the sustainability of current growth. Over time, as the pent-up demand for the first generation of Chinese who were wealthy enough to travel abroad and buy luxury goods gradually recedes, such a shopping pattern (buying five to ten pieces of the luxury item on one trip abroad) may not repeat itself. But then, given the population base, a lot more Chinese consumers from second-and third-tier cities may want to imitate what their fellow countrymen and countrywomen in first-tier cities did by indulging themselves with such products. So, there is still plenty of room for growth in China. Of course, the luxury goods industry was also eagerly chasing consumers in other emerging economies, such as Brazil, India, Poland, Russia, and Saudi Arabia. Where did LVMH open one of its newest stores? Ulan Bator, Mongolia.
1. Using the four Ps of marketing, explain how luxury goods makers can enhance their effectiveness in marketing to Chinese consumers.
2. From an institution-based view, explain why Chinese luxury goods consumers emerged to become a major group of consumers of such fancy items.
3. From a VRIO standpoint, explain how luxury goods makers were able to capture the hearts, minds, and wallets of Chinese consumers.
4. ON ETHICS: If you were CEO of a Western luxury goods firm, how would you respond to a Chinese reporter who asked you to comment on the two main criticisms of luxury goods consumption in China?