Luxury consumer behavior in Mainland China Essay

China recently became the world’s second largest market for luxury goods with an annual increase of more than 30% in 2010, even surpassing Japan. Further estimates predict that China will become the largest upscale product and consumer goods market in the world. How does a country with an average GDP per capita of $3,800 USD, and classified behind 105 in the world ranking possess such a strong propensity for consuming luxury goods and products? Specifically, how does one make sense of Mainland Chinese luxury buyers and their respective consumer behavior? This article answers these strategic questions for foreign companies and marketers who are interested in the luxury industry in China, and for those who want to develop a greater understanding of one of the world’s largest market and its 1. 3 billion consumers. â€Å"At the core of this paper is an explanation of Mainland China’s 21st century value system that can only have been shaped from the country’s rich history. † At the core of this paper is an explanation of Mainland China’s 21st century value system that can only have been shaped from the country’s rich history. Answering how China has become the buoyant socialist state economy it is today, is to shed light onto the country’s various economic, social, cultural and psychological histories. The history of luxury consumption in China is one of the country’s oldest. It remains deeply rooted into China’s cultural and sociological landscape and has subsequently influenced other Asian countries such as Japan, Korea, Vietnam, Thailand, Malaysia and Singapore. The contemporary Chinese antique market and auction houses offer a telling explanation of how luxury is consumed in China. During the economic downtown, collections of Chinese antiquities were sold at Christie’s auction house for far more than their estimated value. In 2009, a 12th-century B. C. bronze vessel from the Western Zhou Dynasty sold for over 14 times its estimated value. These antique collectors are, in large part, Chinese or Asian. Collecting an expensive, storied antique is viewed in a similar vein to purchasing a luxury good. To own an artifact at home was tantamount in grandeur to that displayed by museums around the world that also housed ancient Chinese art collections. In sharp contrast, during China’s Cultural Revolution from 1966 to 1976, tradition and Chinese cultural heritage was viewed negatively as something boring, worthless, and divisive. History and heritage were destroyed in favor of new equalizing ideology. The Cultural Revolution created a cultural void, and those affected would go on to be known as the ‘lost generation’. Currently in their 50s, some members of the ‘lost generation’ have attained new wealth. They partake in the purchasing of luxury goods, and often lack subtlety. They are ostentatious and inherently possess a skewed view of what is traditional or socially accepted, subsequently explaining for very extravagant behavior. A few examples include the rebuilding of the Chateau de Maison Laffitte of Paris in a suburb of Beijing, or one wealthy man’s endeavors to build an exact replica of the U. S. President’s White House in a rural area of Anhui province. The underlying theme is the Mainland Chinese desire to mimic emblems of power from Western culture. â€Å"Today, the Mainland Chinese consumer’s 21st century value system is comprised of three salient parts: the traditional Chinese value system persists, the socialist Chinese value system (dominant), and the Western value system which is often regarded like a trend. † As the West represents advanced technology, super powers and modern values, the majority of Mainland Chinese seek to pursue these values the best they can. Therefore the pursuit of Western values can be said to have a strong influence on the Chinese consumer value system. Today, the Mainland Chinese consumer’s 21st century value system is comprised of three salient parts: the traditional Chinese value system persists, the socialist Chinese value system (dominant), and the Western value system which is often regarded like a trend. The updated Chinese socialist value system of Deng’s reform and opening policy brings modernity, wealth, achievement and success, while the Western values bring personal liberty, post-modernism, also modernity, achievement and success. Together, the Chinese consumer’s 21st century value system is a veritable melting pot; strong values of modernity, wealth and success are dominant. Thus, the pursuit of modernity, wealth and success remains the key in explaining luxury consumer behavior in Mainland China. From this explanation of the dominant set of values within Chinese society, it is hardly surprising to discover that Mainland China’s car sales in 2009 averaged 13 million, even exceeding car sales in the U. S.. Additionally, sales for German car manufacturer Mercedes Benz went up 77%. Deng’s Open reform policy in 1978 allowed for individuals to pursue wealth through various means. Economic development transformed the social structure from a model that was horizontally equal to that of vertical extension and growth. Now, after three decades of inexistence from 1950 to 1980, social classes have reemerged. During the following three decades from 1980s to 2010, social wealth increased by an average 10% of growth each year. The Mainland Chinese consumer saw better financial opportunity and became increasingly wealthy. Financial and career success and achievements naturally became a way for people to distinguish themselves from others. It became de rigueur to openly display a person’s individual success, and luxury goods and designer brands effectively communicated status and wealth. However, at the core of this newfound wealth and status was the honest pursuit of better living conditions. Better living conditions meant for higher quality products and upscale brands. Therefore, international luxury brands perfectly fulfilled the needs of Mainland Chinese consumers from all angles – cultural, social, and economic – attributing for a more modern, powerful, and self-confident approach to life. â€Å"At the core of this newfound wealth and status was the honest pursuit of better living conditions. Better living conditions meant for higher quality products and upscale brands. † In Mainland China, one may see a person carrying an authentic Louis Vuitton bag while riding a crowded, public bus somewhere in the rural countryside. Luxury goods are consumed on a mass level, and are not confined to a select few. The central cause for an increased consumption of luxury products results from the country’s socialist value system. During the transitional period from a pure planned system to a market-driven economy, consumers inherently retained the idea of equality. Government authorities also try to maintain and communicate that equality in Mainland China is crucial to national identity. Based on steady economic development and a newfound consumer confidence towards the future’s potential, Mainland Chinese consumers believe that they are, in essence, the same as each other. Even if they cannot afford a luxury brand item today, they will save up several months of savings to eventually have it. It is important to note that all Chinese luxury consumers do not aim to show off. There is a homogenous identity and behavioral patterns that come with new wealth. However, only focusing on this collective homogenous identity, and not pay attention on the differences would cause a marketing plan to fail. The Mainland Chinese market is large and sophisticated enough to use multi-criteria methods to understanding its various crossed aspects, such as psychographic, geographic and demographic aspects. Psychographically, consumers are different from socio-psychological and cultural attitudes towards luxury point of views. These psychographic variables segment in the market into four groups known as luxury lovers, luxury followers, luxury intellectuals and luxury laggards with three dimensions according to the different psychographic aspects: collectivism-individualism, analytical-impulsive thinking, conspicuousness-functionality for luxury goods. Geographically, the regional differences in China (in terms of climates, cultural customs and languages) are varied; they are the equivalent to the collective differences found throughout Europe. China can also be divided into four large regions: North, South, East and West. Cities within a given region can be further classified into tiered cities according to city’s level of economic development. Demographically, the factors classify naturally consumers into traditional groups. For the purposes of this paper, the research sample used is meaningful for study as the income levels are controlled at ten times the national average income. This ensures luxury consumption because of the sample’s disposable income level and the easy affordability of luxury goods. Age is also controlled in the range of 25 to 45 years of age in order to be sure that the sample belongs to members of Mainland China’s new generation, avoiding the inclusion of members from the ‘lost generation’ entirely. All sample participants were educated at the university level and possessed an undergraduate degree. The psychographic segmentation of Chinese luxury consumers as luxury lovers, luxury followers, luxury intellectuals and luxury laggards cross with geographic factors to show the regional distribution difference of the four groups in various parts of the Mainland Chinese market. The results can be found in Table I and Table II. Table I: Psychographic Segmentation of Chinese Luxury Consumers Table II: Chinese Luxury Consumer Segmentation Geographical Distribution in China The segmentation proves the heterogeneity of Chinese luxury consumers although conspicuousness is dominant for luxury lovers and followers, representing 31. 2% of the total market in first tier cities. Still, conspicuousness is very visible and serves as motivation especially among ‘first movers’ for purchasing new products. First movers are often portrayed by the media as opinion leaders, and are they are tactfully used to influence the market. However, intellectuals and laggards focusing on functionality and individualism are still the main dominant groups for luxury consumers in China even in first tier cities. Why are luxury’s main consumers still quiet and conservative about their attitude towards luxury goods? â€Å"After the initial introduction of international luxury brands in China, the curiosity of Mainland Chinese consumers wore off as they began to seriously confront the psychological discomfort associated with the absence of a Chinese luxury brand. † The conservative conspicuousness is coming from the cultural and psychological contradiction: 1) the admiration of ancient China’s luxury lifestyle influences the luxury pursuit today. Currently, luxury brands are widely available from many foreign countries, such as France, Italy, and Switzerland. After the initial introduction of international luxury brands in China, the curiosity of Mainland Chinese consumers wore off as they began to seriously confront the psychological discomfort associated with the absence of a Chinese luxury brand. Why was there no Chinese brand capable of carrying out the essence of luxury found in ancient Chinese culture? 2) Chinese tradition encourages people to be benign and to not have an extravagant life. Exercising frugality and discreetness are seen as the proper way for a person to behave in society. This virtue of frugality and discreetness is also the socially accepted norm by the Chinese socialist value system. Therefore, frugality and discreetness received two confirmations from two value systems (tradition and socialist) in comparison to modernity, wealth and achievement values, which were confirmed twice by socialist and western value systems. As a result, the internal psychological values within the 21st century value system of Mainland China are conflicted. This conflict is reflected in the attitudes and behaviors of its consumers, especially in regard to the luxury market, and accounts for the following: an ambivalent attitude towards luxury consumption and psychological dissonance after purchasing. An exception is gift giving or special product categories. â€Å"The conflict of having a centralized power structure versus liberty and an openness of the market creates individual wealth while limiting the expression of wealth and status. † Conservative conspicuousness can also be understood by the unique socialist system within Mainland China’s market-drive economy. The conflict of having a centralized power structure versus liberty and an openness of the market creates individual wealth while limiting the expression of wealth and status. Those consumers who are typically found in politics or a government related environment are said to be luxury intellectuals. In this setting, wealth should not be overtly expressed or shown off to others. Products that are discreetly designed, such as ties, scarves, business suits, or handbags without logos are most popular. Alternatively, if an individual outside of politics consumes luxury products, it is most likely that he or she is a luxury lover or follower. (Please see Table III) Table III: The Conservative Conspicuousness of Chinese Luxury Consumers The potential for luxury industries to thrive in the Mainland Chinese market is high. With steady economic development, more information on luxury goods readily available online and offline, the increasing relevance of e-commerce, and a greater awareness for a higher quality of life, consumerism will propel to the center of this dynamic market. As consumers get more savvy and sophisticated, the Mainland Chinese market will, in due time, be much more difficult and complicated to operate. About the author Pierre Xiao LU is Assistant Professor of Marketing at School of Management of Fudan University in Shanghai. He specializes in luxury consumer behavior study, luxury brand management and selective retailing. His theories about Chinese consumer formed the fundamental understanding for international brands towards this market and largely adopted by successful upscale brands. Before he joins Fudan University, he received his PhD in marketing from ESSEC Paris where he is visiting professor of LVMH Chair and of its Asian campus in Singapore. Lu is author of â€Å"Elite China, Luxury Consumer Behavior in China† and co-author of â€Å"Luxury China, Market Opportunities and Potentials†. He can be reached at xiaolu@fudan. edu. cn. References †¢ Michel Chevalier and Pierre Xiao Lu, Luxury China, Market Opportunities and Potentials, Wiley and sons, 2010 †¢ Jacques Gernet, Le Monde Chinois, Paris: Armand Colin, 1999 †¢ Alexandra Peers, What’s Still Recession-Proof, The Wall Street Journal, September 24, 2009 †¢ Pierre Xiao Lu, Elite China, Luxury Consumer Behavior in China, Wiley and Sons, 2008 †¢ China car sales top U. S. by Gilles Guillaume, Reuters, January 11, 2010 †¢Ã¢â‚¬ ¢ http://www. reuters. com/article/idUSTRE60A1BQ20100111 †¢ Mercedes-Benz says 2009 China sales up 77 percent, Reuters, January 11, 2010 †¢Ã¢â‚¬ ¢ http://www. reuters. com/article/idUSTRE60B0EY20100112 †¢ Pierre Bordieux, Distinction: A Social Critique of the Judgment of Taste, London: Routledge, 1984 †¢ Pierre Xiao Lu, Elite China, Luxury Consumer Behavior in China, Wiley and Sons, 2008 †¢ Michel Chevalier and Pierre Xiao Lu, Luxury China, Market Opportunities and Potentials, Wiley and sons, 2010 †¢ Pierre Xiao Lu and Benard Pras, Profiling Mass Affluent Luxury Goods Consumers in China: a Psychographic Approach, Thunderbird International Business Review, forthcoming.