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Why Luxury Brands Need Chinese Consumers

Globally, Chinese consumers account for more than a third of luxury brand sales. Brand managers and market observers anticipate that demand from young and wealthy Chinese will expand the country’s luxury market by at least 25% over the next few years. And as the average Chinese household increases its wealth and discretionary spending power, more of them are choosing to spend their money on luxury brands. This creates a great investment opportunity for savvy investors.

Millennials are living large

Millennials are people aged 20-34. Chinese Millennials purchase luxury goods more often than their Western counterparts, and about a decade sooner. They’re less likely to save money and more likely to spend it on luxury goods. 93%of Millennials plan to buy more luxury goods over the next few years.

Luxury brands have positioned their products to be attractive to Chinese consumers like these. They use Chinese social media influencers and celebrities to heighten awareness and desirability of their products, like Yang Mi, the brand ambassador for Estee Lauder(NYSE: EL) and Michael Kors(NYSE: CPRI).

These brands target Chinese tourists traveling overseas while developing local marketing strategies specifically for Chinese consumers. They’re ensnaring Chinese Millennials via WeChat marketing campaigns and other kinds of digital marketing. The brands are also using e-retailers to reach and educate Millennials about luxury products.

Wealthy Chinese live even larger

The top 1%of income-earning households in China numbered approximately 4.5 million (or roughly 14 million people) in 2017. With an income of more than RMB 300,000(US$44,250), these households combined with Millennials spent US$22 billion on luxury goods in 2017 in mainland China. Overall, mainland Chinese spending represented 32% of the global luxury market(US$319.6 billion).

Wealthy Chinese bought 33% all luxury brand purchases in China in 2008. By 2017, they represented 50% of overall Chinese luxury consumers – but provided 88%of all luxury spending in China.

China loves luxury goods

The growth of Chinese wealth and its effects on global personal luxury product spending is unprecedented. In 2008, when China hosted the Olympics in Beijing, Chinese households accounted for 12% (US$151.6 billion) of global luxury brand spending. By 2016, global personal luxury spending had grown by 75%, or US$65 billion, thanks to Chinese domestic and overseas spending on personal luxury goods. In 2016, mainland Chinese consumers accounted for 32% of global luxury sales (US$537.2 billion).

Moreover, since 2015, the increase in spending on luxury products did not come from first-time buyers, but from Chinese consumers who had already purchased products. Brand loyalty seems to be taking hold in China, and it may play a bigger part in future increased spending on luxury brands.

More surprisingly, by 2025, 7.6 million households in China will account for US$147.5 billion in luxury brand spending, according to estimates from McKinsey. That’s 44%of the global luxury brand market, which is predicted to about US$400 billion. Basically, by 2025, wealthy Chinese households will spend the equivalent of the combined luxury brand spending of the French, Japanese, Italian, UK, and US markets in 2016.

Brands beware consumers’ wrath

Luxury brands, like Swatch(SWX: UHR), Burberry(LSE: BRBY), and Gucci, have come to depend on their sales to mainland Chinese consumers to provide overall revenue growth, according to a recent Bloomberg report.

While luxury brands are eager to please their Chinese consumers, they are also justifiably terrified of angering and offending them. Currently, the Chinese are very sensitive to any slights or criticism of Chinese people or culture.

Those who run afoul of the Chinese people are swiftly punished. Recently, consumers lashed out against Dolce and Gabbana (D&G) because of the brand’s culturally insensitive videos and online comments. The debacle is proof that offending Chinese consumers can be catastrophic for a brand. In D&G’s case, its sales spiraled downward, products were removed from Chinese store shelves and E-commerce sites, and it was disinvited from fashion shows.

To boost sales, curtail copycats

Tighter intellectual property laws and enforcement will increase China’s global influence on the luxury brand market. At present, Chinese consumption of luxury brands is still negatively affected by consumer fears that the products purchased in mainland China or via Chinese e-commerce sites are fake and/or of poor quality. These ongoing fears have limited the growth of Alibaba(NYSE: BABA) and JD.com(NASDAQ: JD).

The same concerns also affect shoppers’ decisions about where to purchase luxury goods. The result, most mainland Chinese shoppers prefer to purchase their luxury goods in Hong Kong and overseas markets. If China can crack down on copycat goods, mainland Chinese consumers may start spending, and ultimately keeping, more of their wealth in China.

Luxury brands cannot ignore the Chinese market. Despite the perils of operating in it, they must establish themselves in it if they wish to grow their brands, expand their market share, and develop a growing, influential, loyal following.

Investors looking for year-on-year strong returns from investments in luxury brands are advised to research the brands entering the mainland Chinese market, and the ones already there. Given the importance of the Chinese market to their sales numbers, profits, and market dominance, luxury brands may become some the most lucrative investments in China.

Investors looking for year-on-year strong returns from investments in luxury brands are advised to research the luxury brands entering the mainland Chinese market and brands already present in the mainland Chinese market. Given the importance of the Chinese market to their sales numbers, profits, and market dominance, luxury brands may become some the most lucrative investments in China.

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Disclosure: Alisa Hopkins doesn't own any shares mentioned. Motley Fool Hong Kong is not licensed by the Hong Kong Securities and Futures Commission to carry out any regulated activities under the Securities and Futures Ordinance.