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Jun
2015

Middle class consumers and spending over Chinese New Year

The burgeoning Chinese middle class represents huge opportunities for luxury brands, and in particular the younger white collar workers who have high aspirations for their future lifestyle. They are more knowledgeable and open to new ideas and experiences. This group is growing rapidly as salaries and standards of living rise, so who are they and what are their current consumption habits?

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What is middle class in China?

There are a number of definitions of middle class in China, some come from the Chinese national institutes and some from the National Bureau of Statistics. Some from the World Bank, and some from consulting organisations such as McKinsey, and of course they are all a little different. The number of ‘middle class’ in China is estimated to be between 6% to 10% of the population, or roughly 100 million people.

From a practical perspective, being based in China, the team at Luxury Insights China see’s how fast salaries are growing across the country. Manual workers are seeing their salaries increase at high single digit levels, and those in white-collar roles even faster. Taking into account all the definitions and adding our own experience, we would estimate that a typical middle class individual is likely to earn US$12,000 to US$65,000 per year depending upon their age and experience, or an average of approximately US$30,000.

All definitions agree that middle class Chinese are office orientated, will have a Bachelors degree at least, are likely to be between 25 and 45 years old, and will take an active interest in their quality of life. Although this entire demographic are of interest to luxury brands because of their aspirations and increasing incomes, it is perhaps the lower half of this group that represent the greatest engagement opportunity. Those between 25 and 35 years old, are in general, more international in their outlook, have a broader range of experiences and see themselves as global citizens.

Why are they different from those of a similar age living in the western hemisphere?

If we think about young people aged 25 to 35 in Europe or the USA, we will see them as saving for their own home, or paying rent or a mortgage any of which could consume a large proportion of their income. They will still spend money on entertaining and clothing, and they may earn relatively more than their Chinese equivalents, but their disposable income could be considerably smaller. Why?

Culturally, Chinese parents will ‘fund’ their children in a relatively big way for much longer than those of us from the west as this is seen as an investment for later life. A middle class child at university is likely to have their accommodation and tuition fee’s paid for by their parents and they may also get a reasonable level of ‘pocket money’. Boston Consulting Group have labeled this group of consumers ‘the sugar generation’, and estimate that by 2020, there will be 280 million people in this category.

If they are in employment, they probably will stay at home rent free, and have multiple ‘wallets’ to call upon. By this we meanthat they may have their own cash, but they also have their mother and fathers cash if required. For women, they may also have an additional ‘wallet’, that belonging to their boyfriend, and it is quite common to see men buying luxury bags and other items for their girlfriends in stores across the country.

This availability of cash, has resulted in a very relaxed attitude to spending, and a feeling amongst this particular group that they work hard and deserve to reward themselves, which is why they can afford to buy a US$800 bag, possibly more than once a year. Something their western counterparts of the same age or status might not have the cash to do, or even the desire to ‘splurge’ so much money on a single item.

Spending and receiving habits over Chinese New year

Chinese New Year, like Christmas in the west has expanded from a single day of celebration to a week long holiday with a long run up period and a trailing tail. It’s the official end of the work year, and a time when individuals choose to reward themselves and often give and receive gifts to or from others. As the end of the fiscal year, it is also the time when employees receive an annual bonus that in most cases is the equivalent of one, or perhaps two months’ salary, so it’s a traditional time of spending.

This month, the Luxury Insights China Insights team carried out interviews of randomly selected individuals from our consumer database to gain a picture of their purchasing and gift giving habits over the Chinese New Year period. The sample of 100 interviewees came from five tier one and tier two cities in China, and were 71% female and 29% male. The target group was principally those that would be classed as middle class, because this is the time of year they will typically spend on luxury. Of the respondents 33% either purchased luxury for self-reward, as gifts for others or both.

The demographics of the sample

Monthly income

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Employment

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Their purchases

The purpose

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Where was the product purchased?

  • China
  • Hong Kong
  • Europe
  • Daigou (middle man/grey market)
  • Korea
  • Taiwan
  • Singapore
  • USA
  • Airport duty free

China was the most popular place for the purchases to be made, followed by Hong Kong and Europe. A Daigou, or middleman was also used in lower tier cities

Which category of product?

43 different items in total

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The favoured brands

  • Armani
  • Burberry
  • BV
  • Cartier
  • Chanel
  • Chow Tai Fook
  • Coach
  • Este lauder
  • Ferragamo
  • Gucci
  • Hermes
  • Loewe
  • LV
  • Omega
  • Prada
  • Roger Vivier
  • Valentino
  • Zegna

In terms of the most popular brands purchased, they were Chanel, LV, Burberry, Coach and Gucci in that order

Receiving gifts

20 respondents received gifts for Chinese New Year or Valentines Day, only three selected their own gift

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Who gave the gift?

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Where were gifts purchased?

Seven overseas, six in China and one in Hong Kong. 6 recipients did not know.
Of this group that purchased or received a luxury product as a gift, their next planned purchase varied from six months to over one year for their own consumption. In the case of business consumption, this was expected to be in three months. Reasons for the next purchase included items for use at work i.e bags and fashion, to whenever their next overseas trip would be.

Big spending is not just income related

Across the middle class consumer category, respondents typically spent 5000 RMB (US$800) on average or the equivalent of 50 to 100% of their monthly earnings as a means of self-reward.

  • A woman in Hangzhou earning less that 5000 RMB per month spent (or may have used someone else’s ‘wallet’) to buy an LV bag for 20,000 RMB (US$3,200)
  • A female from Chengdu spent 60,000 RMB (US$9,650) on jewellery from Hong Kong brand Chow Tai Fook as self reward before Chinese New Year

For those with a monthly salary between 20,000 and 50,000 RMB, who may be senior employees or business owners

  • One male consumer from Xi’an bought a HK$6000 BV wallet and HK$5000 scarf as commercial gifts one month before the holiday, and he said that he will buy another group of luxury items as commercial gifts in three months
  • A lady from Shanghai bought luxury as self reward in Hong Kong and Singapore, she appears to have very good taste buying a Chanel bag, Chopard watch, Roger Viver and Valentino shoes spending in total around 110,000 RMB (US$17,700) one month before the holiday. She claims to be very loyal to the brands. Shoes are her favourite purchase, and she will buy again in six months

Discounting

Discounting was applied over the Chinese New Year period, and of our shoppers, one benefitted from a 50% reduction on a Ferragamo bag, and another received a further 20% off a Chopard watch that was already discounted by 25%.


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