Photo credit: Chen Man

A few months ago, I spent several weeks in Shanghai observing and studying the development of luxury in China. Below are some of the results from my study, and why I think the true opportunity for brands to reach Chinese luxury consumers lies in creating truly global strategies that aligns with a consumer’s mindset and decision making journey.

In the past decade, China has witnessed unprecedented economic growth, resulting in a country that now boasts more than two million millionaires and which is predicted to overtake the spotlight as the largest luxury market in the world by 2015 with 180 billion RMB in sales ($27 billion USD at today’s rates). Louis Vuitton, which opened its flagship China store in 1992, now has a presence in nearly 30 cities with 42 storefronts open and counting, and its China sales have been a key contributor to the company’s growth in recent years. , Others, like Michael Kors, have doubled their storefront presence in China in 2012 alone. Coach, which expects increased China sales of approximately 177% between 2010 and the end of 2012, is planning to open 30 stores a year for the next few years to add to its 65 plus store locations throughout Greater China that already exist.

Despite efforts by luxury brands to continue to add to rapidly expanding retail footprints – and the successes they have had – many consumers prefer to go abroad to shop for luxury products, driven in part by taxes on imported luxury goods. In some cases, taxes on luxury items can be as high as 30%, and prices for the same product can be as much as 40% cheaper in Europe when compared with those in China.

In the last couple years, surveys independently conducted by global strategy firms Roland Berger and Bain Consulting indicated that over 50% Surveys of Chinese luxury consumers purchase luxury products outside of China. Hong Kong was the number one destination, given its proximity and ease of access of most Chinese consumers. In 2011, the city of seven million residents welcomed 28 million mainland Chinese visitors, up from 22.7 million visitors in 2010. Domestically, consumers preferred shopping in Shanghai, long regarded as China’s fashion-forward capital.

And when looking at China’s millionaires, the number of consumers who purchase luxury goods domestically fell to less than 30%, driven in part by price, but influenced primarily by the purchasing environment itself.

Many consumers said they preferred the in-store experience that stores abroad offer, indicating knowledge of craftsmanship, professionalism, and the ability to balance the right level of attentiveness while giving consumers the opportunity to personally enjoy the space as key factors. “Chinese consumers, when they come to a boutique in Paris, they ask and they want to know how the product was made, how artisan created it, the whole story behind the product and the brand,” said Natacha Dzikowski, managing director of TBWA\Luxury Arts.

Today, Chinese consumers account for 50% of all luxury purchased in Paris and Milan. In Paris, Louis Vuitton faced the challenge of keeping up with demand from Chinese consumers; in 2010, when the RMB was strongest against the euro, Louis Vuitton went through three months of inventory in one month. In order to manage demand, they had to close several locations an hour early, and also limit the number of accessories that could be purchased at one time.

In addition to the pressures Chinese consumers have placed on supplies of luxury products, stores have also struggled to keep pace with the number of Chinese consumers who come through the door. Since most Chinese shoppers come by tour busses, staff at Louis Vuitton have found it difficult to provide the premium service that is usually attached with the brand.

However, despite these tendencies to shop globally, almost all consumers will do some research in China beforehand. More than 20% actually make their purchasing decisions before they even leave China, according to a study conducted by Roland Berger.

What This Means for Brands

In knowing that the affluent Chinese luxury consumer is often a global one, luxury brands should develop strategies that may not necessarily target specific geographic locations in China (the most common marketing plans today focus on regional targeting based on Tier 1, Tier 2, and Tier 3), but rather focus on creating global strategies that cater towards a global Chinese traveler/consumer.  Since Chinese consumers will still be most at home in China, efforts should focus on educating the consumer about the brand and product availability.

In addition to actually selling product, in-country stores can act as a “showroom” for what consumers may expect to buy when they’re abroad.  They can consider having catalogues available that also show what is available in other brand locations, particularly in regions that are native to a brand’s heritage.  For elite customers, brands can consider developing VIP programs that integrates systems which allow a customer to “reserve” a product that they can pick up during an upcoming trip.

Additionally, brands can consider developing applications and environments which allow users to learn more about the global network of physical stores, and identify local stores which have on-the-ground language support.  These efforts can be coupled with media strategies in areas like search to target the global luxury consumer, and arm them with tools needed to shop abroad.  For example, brands can use geo-targeted search strategies on Baidu to help direct consumers to the nearest stores when traveling.

Especially as travel abroad is increasingly seen as a favorite pastime among affluent Chinese, brands should look to establish themselves as a key part of that experience (examples of how this can be achieved: sponsoring custom content, developing on-the-ground apps that allow users to explore brands in other markets (e.g., Burberry in London can design a tour that takes a user through the historic city while interweaving the iconic brand’s own story as part of it).

When it comes to an increasingly global and outwardly looking  Chinese consumer, the focus for brands should be about building a running — and cross-border — narrative that brings together a brand’s rich heritage and craftsmanship through an investment in opportunities that allow them to be a connected part of consumer’s decision making process, regardless of where they are or what medium they’re interacting with.

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