Luxury Segmentation by Dominica Baird

Dominica Baird LMFA-730-OL Professor Meeta Roy Project B—Part 2 July 21, 2014

!Executive Summary

The Chinese luxury market is growing but has been slowed recently by a number of economic and societal factors. Now, more than ever, it is crucial to better understand the Chinese luxury consumer. The Roland Berger Consumer Segmentation Method is an excellent way to understand the nuanced personalities of the varied Chinese luxury consumer. Established luxury brands as well as luxury brands new to the Chinese market can all benefit from this segmentation method.

!Chinese Luxury Market

The Chinese luxury market has experienced explosive growth over the last few years. A growing economy, fast-growing middle-class and a growing number of Chinese millionaires and billionaires have all contributed to the luxury market growth (Kwong). Aspirational behavior at all income levels has played a part in the growth. According to Euromonitor, sales of luxury goods in china tripled in value between 2007-2012. The country’s luxury market is expected to double in value in 2017, when China will likely become the second largest luxury market in the world behind the US (“Luxury Goods Landscape: China”).

!Chinese Luxury Market Trends

Despite the luxury market’s tremendous growth and continued positive outlook, the momentum started to ease in 2013 because of a slowing Chinese economy ("Beyond bling”). The following are some other trends affecting the Chinese luxury market:

!In an effort to discourage the Chinese tradition of lavish gift giving amongst bureaucrats, the

central government recently imposed regulations to prohibit the purchase of luxury goods with public funds. Officials are even investigated if they are caught owning luxury goods. This has significantly reduced gifting, which was a large part of the Chinese luxury market. This has resulted in a higher demand for less conspicuous luxury goods such as items without logos and beauty products (“Luxury Goods in China”). Likewise, it has also decreased the demand for flashier items such as luxury watches (Walker).

!The domestic luxury market has been adversely affected by the growing trend of overseas

travel. Chinese duties and taxes have caused luxury goods to be more affordable when purchased overseas (“Luxury Goods in China”). As a result, in 2010, half of Chinese consumers surveyed by Roland Berger Strategy Consultants reported purchasing luxury products abroad ("Chinese Consumer Report - Luxury”). Worldly exposure has created a more sophisticated Chinese luxury shopper that is less interested in logos and more interested in quality and their personal connection with a brand (Chow).

!The wedding boom in China has increased some segments of the luxury market.

In 2013, women’s luxury jewelry saw a value growth of 9%, at a time where other luxury categories were shrinking. This growth is likely due to the increase in weddings and the custom for both bride’s and groom’s parents to give the bride gifts of “rings, neckwear, bracelets and earrings” (“Luxury Jewellery and Timepieces in China”)

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Consumer Segmentation Method Roland Berger Strategy Consultants, one of the world's leading strategy consultancies, has segmented Chinese luxury consumers into six archetypes based on “physical, psychological and behavioral characteristics.” The study, conducted in 2011, examined purchasing behaviors and values with a combination of telephone and fixed-location surveys. There were 10,000 participants from 20 Chinese cities.

!The following Chinese luxury consumers were identified (See Appendices 1-2 for more detailed consumer lifestyle information): !The Era Leader

Represents 25% of Chinese luxury buyers. Between 25 to 40 years old. Social profile: Private business owner, corporate executives—including foreign, state-owned and private. Highly educated. Psychological traits: Values being perceived as a member of the elite. Wishes to be revered. Self-cultivates, or educates and improves themselves. View luxury products as a symbol of wealth and power. Behavioral traits: Follows others. Recognizes top brands—does not venture away from from them—buys top brands only. Appreciates the very highest quality and more traditional luxury brands.

!Wealthy Second Generation

Represents 30% of Chinese luxury buyers. Between 20-35 years old. Social profile: “Young people from the second generation of the wealthy and officials.” This group also includes “rich men’s wives.” Psychological traits: Self-confident, innovative, passionate. Behavioral traits: Independent and have strong self-awareness. Active information seeker—highly receptive to market information ("Chinese Consumer Report - Luxury”). Not afraid to flaunt wealth both in public and on social media. Less interested in traditional luxury goods and more interested in standing out from the crowd.

!This group is also known colloquially as fu’erdai, which literally translates to “rich second

generation.” This group has grown up with luxury and is known for driving flashy cars and showing off their extravagant luxury purchases on social media (Bhattacharjee).

!Ambitious Elite

Represents 10% of Chinese luxury buyers. Between 25-35 years old. Social Profile: Middle managers of multinational or state-owned companies, professionals and entrepreneurs. Psychological traits: Enterprising, passionate, enjoys challenges. Behavioral traits: Has strong self-awareness and a good understanding of luxury goods. Active information seeker—highly receptive to market information. Well traveled and well informed about luxury goods market. Starting to buy less logos, more likely to buy a brand because it fits their personality.

!Savvy investors

Represents 5% of Chinese luxury buyers. Between 25-40 years old. Social profile: Real estate speculators, stock market traders, freelancers and unemployed “professional” investors. Psychological traits: Embraces trends, yet values individuality. Desires luxury products.

Behavioral traits: Has fluctuating consumption capacity. Focuses on popularity. Recognizes top brands—does not venture away from them—buys top brands only. Sees luxury goods as a status symbol and also a way to set oneself apart from the crowd.

!Stylish White Collars

Represents 10% of Chinese luxury buyers. Between 20-30 years old. Social Profile: New to workforce and has stable income. Makes more money than his or her peers. Psychological traits: Interested in beauty products, luxury goods and fashion. Behavioral traits: Has strong self-awareness and good understanding of luxury goods. Active information seeker—highly receptive to market information. Has traveled and is becoming familiar with more luxury brands. Not always logo-driven.

!Gift Buyers

Represents 20% of Chinese luxury buyers This is a broad category that “lacks distinctive features.” Psychological traits: Wishes to be revered and respected. Behavioral traits: Doesn’t purchase luxury goods very often. Focuses on brand popularity ("Chinese Consumer Report - Luxury”).

!Gifts are an important part of Chinese culture because it is a way of building relationships and

networking. Showing appreciation in China is often expressed with a gift (Raitisoja). According to Euromonitor, gifts from Hermes, Louis Vuitton and Montblanc pens are some of the most popular Chinese gifts. This segment may see some change as leaders have begun to discourage lavish gift giving—particularly to government officials—because of corruption fears. This has led to increased popularity of more discreet gifts. For example, Montblanc pens rather than flashy wristwatches. (Walker).

!Brand Awareness

The Roland Berger study found that brand awareness is a vitally important to Chinese luxury purchases (Fig. 1). This is because of the large number of gift buyers as well as the fact that many luxury customer segments will only purchase well-known luxury brands. A brand is more important to luxury shoppers than “design, quality or price.” This is especially true of the Era Leasers and Savvy Investors segments.

!Chinese consumers rely heavily on recommendations from others and from information

obtained at physical stores. According to the study, Social networks are important because of the social aspect of luxury goods—“they are a proof of social status.” ("Chinese Consumer Report - Luxury”)

Fig 1. Chinese luxury shoppers “Main Channels of Getting [brand] Information” ("Chinese Consumer Report - Luxury”)

!Roland Berger Method and Gucci !Gucci in China

Gucci was introduced to China in 1996, and has since expanded aggressively. By the first half of 2013, Gucci had opened more than 60 stores in mainland China. Consumers can only purchase Gucci product through store-based channels—including Gucci stores, specialty stores and department stores. There is detailed product information on Gucci’s website, however, online shopping is not available.

!The core business of Gucci in China focuses on personal luxury goods, including designer

apparel, luxury accessories, luxury jewelry and watches, and luxury beauty products. Gucci also offers special gift items such as Gucci teddy bears, jewelry boxes and photo albums.

Gucci has made great efforts with social media and is active in a number of social media platforms. The company has made efforts to be involved with a number of Chinese social media sites including Sina Weibo (similar to Twitter) and Douban and Youku (similar to Youtube). ("Gucci (China) Trading Ltd in Luxury Goods (China)”).

!Applying Roland Berger Method Segmentation Method to Gucci’s Customers in China !The Era Leader—as Gucci is a very established luxury brand in China, the Era Leader will

recognize and appreciate the brand name. This segment is likely a customer of Gucci’s so every effort should be made to develop a long-lasting customer relationship. This segment sees luxury brands as status symbols so they will likely purchase Gucci products with prominent logos as well as iconic products such as the Horsebit Loafer.

!Wealthy Second Generation—This segment is knowledgeable about luxury brands, therefore is aware of Gucci. They are trend-driven, so they will be more likely to gravitate towards the season’s key fashion pieces and luxury beauty items that are featured in their favorite magazines. As they are active information seekers, every effort should be made to capture this segment’s attention on social media and though the use of brand ambassadors.

!Ambitious Elite—This segment has a good understanding of luxury goods, yet may only be

familiar with a limited number of brands. As a result, this shopper may be more inclined to ask themselves “whether the brand suits me,” rather than purchase something just for the brand name ("Chinese Consumer Report - Luxury”). This members of this segment are also active information seekers, so it is important that Gucci captures their attention through social media or advertising.

!Savvy investors—This is another segment that will only purchase brands with Gucci’s name

recognition. They also prize individuality and popular products, therefore, they may be more tempted to purchase an “it” bag rather than a very traditional style. The relative instability of their jobs or investments can cause this segment’s income to fluctuate. As such, affordable luxuries such as small leather goods and fragrance are key items for this group as well.

!Stylish White Collars—This segment is savvy about the luxury market but may have less

disposable income compared to luxury shoppers. Important items for this group will be less expensive ones such as beauty, fragrance and small leather goods. They are active information seekers and may be more inclined to purchase key items featured in magazines. They may be more inclined to splurge on a Gucci fashion piece if they have seen it in the media and the price is right.

!Gift Buyers—Gucci’s existing gift portfolio, small leather goods and fragrances are key items for this segment. The crackdowns on gift giving shouldn’t affect items of this nature because they are discrete. The addition of more planners, key holders and travel document cases with logos could certainly entice gift buyers looking for something discrete from a well-known company.

!Recommendations for other luxury brands in China !The Chinese luxury market has begun to present challenges to luxury brands. Any luxury brand that is interested in succeeding in this market should first make sure to have a good understanding of the Chinese luxury consumer. There is a broad range of Chinese luxury consumer —from the traditionalist who only purchases logo-driven luxury products, to the young, savvy luxury consumer seeking products that will make them stand out in a crowd.

An understanding of the trends driving the Chinese luxury market are also crucial. For example, the recent crackdown on luxury gifting is decreasing the demand for flashy luxury goods such as watches.

!In order to succeed, a luxury brand will have to have a wide range of products to appeal to the

varied luxury consumer and the changing market. There must be products both with logos and without. Smaller, less conspicuous products should be available for gifts and entry-level shoppers. Both affordable luxuries such as beauty and fragrance as well as big ticket items should all be offered to get new customers in the door, while attracting existing luxury shoppers.

!Impactful, targeted marketing along with a focus on pleasant in-store shopping experiences

should be goals for any luxury brand wishing to enter the Chinese market. The right kind of marketing can add brand awareness, a key component to success in the Chinese luxury market, as well as drive word-of-mouth referrals which are important to some of the luxury customer segments. Positive shopping experiences are also crucial because they may encourage domestic purchases instead of overseas purchases.

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Appendix 1

!Sources: “Roland Berger Chinese Consumer Report—Luxury,” market research. 7

Appendix 2: Luxury Consumer Lifestyle Boards

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Works Cited

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