It is less than two years since KPMG China published its first study of the luxury market, but in that short time things have advanced dramatically. Where luxury brands were once focused on establishing highly visible (but often barely profitable) flagship stores in Beijing and Shanghai, many are now reaping the financial benefits of their brand-building strategies and taking their ambitious expansion plans to China’s other major cities.

We recognised the need to take a fresh look at the luxury market and seek deeper insight into the habits, tastes and motivating factors that are driving its growth. While luxury goods are affordable to an increasingly wide segment of Chinese society, consumers are also being exposed to brands with an unrivalled intensity.

Many of the executives surveyed in this report acknowledged that while status and the “bling factor” lay behind much of the growth in luxury consumption, it was too simplistic to see the market solely in these terms. Our survey confirms this point: Chinese consumers are motivated by an increasingly complex range of factors and are becoming more interested in pursuing brands to experience their quality, to stand out from the crowd, or to reward themselves.

This report also delves closely into the travel habits of Chinese consumers. Twenty percent of our survey respondents travel overseas more than once per year. As a result of their exposure to international trends and more niche brands, we expect consumers to become even more discerning in the years ahead.

Globalisation, along with the increasing propensity of Chinese consumers to travel, is closing the gap between China and the Western world. Serious retailers must capture this opportunity and enter into the market early, otherwise they risk falling behind.

If you are in the luxury or retail business and have an interest in China, we hope you find this report useful. KPMG China has advised and assisted a number of leading luxury brand companies on their financial management and growth strategies in China. We would welcome the opportunity to discuss this report and its findings with you.

Nick Debnam
Partner in Charge, Consumer Markets
KPMG China
George Svinos
Head of Retail, Asia Pacific
KPMG Australia

Key findings:

❏ As this report shows, China’s luxury market has become measurably more crowded over the past two years. Consumers are becoming aware of an ever-growing number of luxury brands, becoming more discerning in their tastes and making greater efforts to understand the heritage of individual brands. This is creating even more pressure on new entrants to rapidly find their niche and establish their credibility.

❏ Chinese consumers are prolific shoppers when travelling overseas or to Hong Kong and Macau. However, the survey suggests that increased travel does not diminish the amount consumers spend on luxury when at home. Moreover, many people intentionally save or draw up a shopping list prior to travelling. This underscores the fact that it remains important to be on the ground and build brand recognition within mainland China.

❏ It is essential for luxury brands to have a clear strategy which takes into account the scope and extent of intended market penetration. A growing number of companies are investing directly into the China market by establishing wholly foreign-owned enterprises (WFOEs), but there are still many advantages to working with a joint venture partner or licensee.

❏ The choice of business model will also have tax implications, with China’s tax authorities increasingly looking at the transfer pricing issues relating to management fees, royalties and other transfers of intellectual property.

❏ This year’s survey reveals little change in the conservative attitudes towards credit, which suggests that the recent pace of growth in luxury consumption has not been driven by unsustainable patterns of credit-based consumption.

Download China’s Luxury Consumers: Moving up the Curve

PDF format, 1.8MB, 40Pages. Published by KPMG China.

About the survey

In early 2008, KPMG China commissioned TNS to survey middle-class Chinese consumers about their changing attitudes towards luxury brands. In total, TNS received 902 qualified responses to the survey. These respondents were based in 15 diverse cities and were between 20 and 44 years of age. All earned upward of RMB 3,500 per month, with a minimum income of RMB 5,000 in the larger cities of Beijing, Shanghai, Guangzhou and Shenzhen. Fifty-nine percent of respondents were educated to university level, with 11 percent educated to postgraduate level. Fifty-six percent of respondents were male and 44 percent were female.

TNS also conducted qualitative interview-based research with 14 higher-earning consumers to identify and corroborate the motivating factors behind their consumption of luxury brands.

This survey data is complemented by nine case studies with executives of luxury and retail companies. These are based on interviews conducted by KPMG China’s Consumer Markets practice between December 2007 and March 2008.

About KPMG

Overview

KPMG is a global network of professional firms providing audit, tax, and advisory services, with an industry focus. The aim of KPMG member firms is to turn knowledge into value for the benefit of the firms' clients, people, and the capital markets. With more than 123,000 people worldwide, member firms provide audit, tax, and advisory services in 145 countries.

About KPMG China

KPMG China has eleven offices (including KPMG Advisory (China) Limited) in Beijing, Shenyang, Qingdao, Shanghai, Chengdu, Hangzhou, Fuzhou, Guangzhou, Shenzhen, Hong Kong and Macau, with more than 7,000 professionals.

In 1992, KPMG became the first international accounting firm to be granted a joint venture licence in China, and our Hong Kong SAR operations have been established for over 60 years since 1945. This early commitment to the China market, together with our unwavering focus on quality, has been the foundation for accumulated industry experience, and is reflected in our appointment by some of the China's most prestigious companies.

As China businesses join the global economy and international companies seek to enter the China market, KPMG's blend of international experience and local knowledge makes us well-positioned to serve our clients in this increasingly complex, but exciting market.

Our single management structure for all our China offices allows efficient and rapid allocation of experienced professionals wherever the client is located in China. The flexibility of this single structure allows us to effectively serve companies across China - and we have many projects where professionals from different offices work together on a project under the supervision of a single nominated client partner, who has operational control of all resources.

Our business in China has established industry groups, enabling targeted, industry-specific experience and solutions to be delivered where needed. For our clients, this focus on industry and country specific knowledge means we can deliver exceptional people with an intimate knowledge of your specific business issues, as well as an overriding commitment to strive for the highest quality services.

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