08
Apr
2013

Luxury brands and the Chinese money-go-round

I read an article recently that brought up the subject of whether the Chinese luxury market was sustainable or not that included a quote from a US based retail advisory company that basically said that luxury brands that were either just about to enter the market or those considering it should do so with extreme caution. The main force of the argument was that the Chinese economy was slowing, and that consumers wouldn’t want to spend the money, or possibly have any to spend. There is nothing wrong with caution, but to claim that money was drying up in China was what caught my attention.

My guess is that this commentator has not been to China, and probably doesn’t understand the culture of the country and how different it is to the US or Europe. If we just consider the wider economy, the government may be predicting growth of just less than 8% for this year, but as Shaun Rein pointed out in a recent article, the country can do well even if it doesn’t hit this level of growth. Compared to much of the rest of the world, China is growing incredibly, and the people are rightly very proud of this.

The assumption that money is not available in China, and will not be spent this year is completely ill founded, and this is why. China is a cash economy, one only needs to watch people entering a bank and handing over large piles of 100 RMB notes, the source of which does not need to be explained at that time, and certainly doesn’t raise eyebrows. I have seen families, little old grannies and young woman pushing stacks of notes under the cashiers window, and questioned the source. Admittedly, in recent years the credit and debit card are now prevalent on the streets, so the demand for a luxury ‘man bag’ to hold a large pile of notes is decreasing. Buts still cash is very much king.

If you have influential power anywhere in China, you become a cash magnet. From the parking attendant who will charge a lower parking fee if you don’t want an official receipt (Fa Piao) that then goes into his pocket, to someone in administration who can see that your paperwork is quickly approved; cash is the reward and can increase income levels significantly. Young people in particular often have multiple ‘wallets’ available to them, that may belong to their father, mother and in the case of women, their boyfriend. Their purchase power is not directly linked to their income.

By way of illustration, after Chinese New Year we interviewed 100 middle class Chinese consumers from a number of cities across the country to determine if they had purchased or had been given luxury items as gifts over the holidays, what these were and how much had been spent. Its not unusual to find a young woman who earn less than 5000 RMB ($800) a month buying a handbag that equates in value to the same amount or more. In one case a young woman in a tier two city earning less than 5000 RMB per month spent $2000 of somebody’s money on an LV handbag; no doubt the money came from wallets other than her own.

My point is that lubricates the system, purchases often have no relevance to the buyer or their income, but the access they and their family have to cash. For a brand to decide to enter China, or even to attract Chinese travellers to spend with it, it must understand this culture and recognize the opportunity. China has never been for the faint hearted; it’s a long game, but most importantly it has its own unique rules and characteristics, which must be learned. Cash is plentiful, you just have to know how to attract it.

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