Chinese shoppers prefer to buy luxury goods overseas, says study (Retail Asia)

Published in the January 2009 issue of Retail Asia
 
BUT LUXURY BRAND RETAILERS WHO PICK THE RIGHT LOCATION CAN STILL SUCCEED IN CHINA. JENNEE GRACE U RUBRICO REPORTS.

EVEN as luxury brands are racing to establish their presence in China, the populace of the world’s biggest market still prefers to purchase luxury goods overseas, where they are cheaper and
are guaranteed to be genuine, a study conducted by research company Nielsen and the Pacific Asia Travel Association (PATA) revealed.

The latest Nielsen China Outbound Travel Monitor noted that nearly half of Chinese international travellers purchase designer goods when they go abroad, with Europe and North America being the favoured luxury goods destinations.

According to the monitor, 74% of Chinese travellers who buy luxury goods abroad said they do so because these are less expensive than in China, while almost 60% said that they are assured of the products’ authenticity. Meanwhile, 48% said that they purchased luxury goods outside China because of “better selection”.

“Chinese consumers these days are more informed and sophisticated, and luxury brands offer quality and project a certain high social status. While they have more disposable income, they will still spend wisely and are taking advantage of international travel to pick up luxury brands they may not ordinarily be able to afford at home,” said Dr Grace Pan, head of Travel and Leisure Research- The Nielsen Company China.

The study, conducted early last year to cover the behaviour of 4,100 Chinese travellers from 26 cities in China in 2007, revealed that 59% of Chinese tourists purchase luxury goods when they go to Europe while 56% do so when they visit North America.

On average, Chinese tourists spend US$900 on luxury goods when overseas.

Industry figures pegged spending by Chinese tourists abroad at almost US$30 billion in 2007, making them the fifth biggest international travel spenders, Nielsen stated.


“Considering that the aggregate spend in 1995 was less than U$4 billion, the 2007 result is nothing short of phenomenal,” observed John Koldowski, director- Strategic Intelligence Centre, PATA.

PATA is forecasting outbound travel from China to “grow dramatically”, he said, with many Asia-Pacific destinations posting an increase in tourist receipts.

“The popular destinations for shopping and sightseeing trips — Singapore, Malaysia and Hong Kong — will see solid gains in Chinese visitor arrivals,” he maintained.

Dr Pan, however, acknowledged that the global financial crisis would “undoubtedly impact upon travel spending and luxury goods purchases”, making it paramount for retailers to “gain clarity on rapidly changing marketplace conditions, in particular issues such as pricing and innovation”.

Asked whether it still made sense for luxury brands to open flagship stores in China, given the results of the study and the slowdown in the world economy, Dr Pan said: “Although the world is experiencing the economic downturn, the demand for luxury brand goods in China is still there. I think that the question regarding whether or not to open flagship stores in China shall be changed to where to open flagship stores.”

She told RETAIL ASIA: “Luxury brand suppliers may need to be careful in terms of where to open their flagship stores in China under the current situation.”

On his part, Deloitte Consulting Southeast Asia senior manager Tan Hsiao Wey was also optimistic about the Chinese luxury market.

“While the Chinese are travelling out more often now, there is still a large group of elite and young executives who only travel domestically … especially the ‘little emperors’ who are now stepping into the workforce. This group has been pampered by their parents and grandparents; they will continue to
spend on expensive items,” the Malaysia- based executive said.

“[The] Chinese are very status conscious and, hence, like to show off their designer brands. Many Chinese are also buying gifts, especially watches and leather goods, for government officials
to build their guanxi (connections).”
Tan noted that people who are into luxury brands are less price-sensitive in this premium segment.

He also noted that over the recent years, premium shopping malls that offer designer goods and luxury cosmetics have proliferated in China, and there is room for the market to grow in the mainland.

“I think China will continue to hold strong growth, given their domestic consumption but at a slower rate compared to the past three years. China’s GDP will decline to perhaps 8%-9% — this compared to the previous 10%-11%. Luxury market in China has a long way to go before it can match Japan’s market size. There are still a lot of opportunities,” Tan said.

As the region’s powerhouse contended with shrinking exports, China’s economy was expected to have reined in its growth last year, said state-owned Xinhua News Agency.

Quoting a report from a Chinese credit rating agency, Xinhua said that China’s economy, as measured by its gross domestic product — or the value of goods and services produced by a country in a given year — would likely slacken its growth to 9.4% in 2008 from 2007’s 11.4%.

“The fundamentals of the economy are sound, but falling export orders [will] take a toll on the national economy in the short term, and domestic consumption needs time to play a bigger role,” Xinhua said, quoting a report released by China Chengxin International Credit Rating Co, a credit rating agency which is a joint venture of China Chengxin Credit Management Co Ltd — China’s
first rating firm — and US-based Moody’s Corporation.

Earlier, Manila-based multilateral agency Asian Development Bank had projected China’s GDP to slow to 10% in 2008 and slide to 9.5% in 2009 due to a reduced trade surplus, lower growth in investment, and the global economic slowdown.

The “changing external economic environment” as well as the burst of domestic asset bubble would also exacerbate the economic slowdown in the mainland, Xinhua further noted, adding
that a proactive fiscal policy is key to preventing the economy from falling.

In the third quarter of 2008, China reported a 9% growth in its economy, the slowest in five years, as the country was weighed down — along with the rest of the world — by the global financial crisis that sapped the world’s appetite for Chinese goods.

Domestic industrial production, Xinhua observed, also waned due to lackluster domestic demand and rising costs of raw materials.

The Chinese government, however, has intervened to prop up the economy, lowering interest rates repeatedly as well as approving a fiscal stimulus package, increasing export rebates and cutting
property transaction taxes to boost domestic spending.

As the most populous market in the world with 1.3 billion people, China is definitely one of the most attractive destinations for designer labels, contributing 5% of worldwide sales of luxury goods. In recent years, the country has been seeing luxury labels, including Prada, Valentino and Bulgari, opening their flagship outlets in various cities. ra