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Jun
2015

The market for modern European furniture in China

Anti corruption activities and greater spending on luxury products and services have hit the premium and luxury sectors in Mainland China over recent years, but as they say, ‘every cloud has a silver lining’ and one cloud in particular that we have seen deliver positives has been a greater focus amongst Chinese in general and especially those with money, on a better lifestyle. Today its not so much about just the ownership of a nice car or bag, the consumer is looking for things that make their life better and more enjoyable.

Another cloud with a silver lining is the slowing of property sales as we see more people investing in creating a more enjoyable home environment for their own benefit, and as a place to entertain friends and family rather than always going out to do so. We therefore took some previous work we had done to evaluate the market for modern European furniture in China and refreshed it as it represents a sector with huge growth potential if we consider the number of people and private residences there are in China; the following makes very interesting reading.

Overview

The overall market for furniture in China is still by most estimations growing at between 20% and 30% per year and has been for the past five years, our figures for the premium and high-end modern European sector of the overall market indicate a 17% growth rate per annum. Therefore in principal, any brand operating within the Chinese market needs to expand its business each year at this rate in order just to maintain their current market share. Although we have seen a slowing in terms of expansion of stores in response to a general decline in the economy, furniture purchases are still being made in large numbers.

In a country where consumers are often influenced by those brands arriving early an opportunity in T2 and T3 cities still exists for newcomers to enter China and position themselves appropriately in the sector even without a track record in the larger cities.

Similar to those working in the luxury sector, furniture brands with a foothold in the market had been expanding their footprint across the country particularly in 2011 and 2012. More foreign furniture suppliers had started to enter China, and many Chinese furniture brands had both expanded their geographical coverage and their product lines in order to offer the growing number of Chinese consumers a wider choice of product for their homes.

According to PWC in a report released in early 2012, they expected the demand in China for home appliances and furniture to demonstrate continued growth for the following two years, but naturally the decline in late 2012 will have and did affect this projection to some extent. However, our prediction at that time was that this growth would continue during the ten year long baby boom period that the country was just entering.

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Chinese luxury consumers are younger than their western counterparts, from about 25 upwards, rather than 40 in Europe and the USA according to the Hurun Report. The growing upper middle class and affluent consumer group follows the same dynamic. Many are more international in attitude and have some study experience overseas or work for international organisations within China. There increased appetite for western design and products therefore represents greater opportunity for modern European brands, but also a challenge as these consumers are being offered an even greater range of furniture choices.

Household disposable income has grown consistently over the years. Growth has been most prominent in the highest income segment, followed by the high income and upper middle-income segments, all registering double-digit compound annual growth rates (CAGR) of 14.5%, 12.7% and 12.0%, respectively from 2000 to 2010, and are expected to continue to grow at a similar rate.

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The definition of modern European furniture

The Oxford Dictionary defines contemporary simply as, ‘following the latest ideas.’ This fails to grasp the essence of contemporary furniture design. Contemporary furniture, which is often also called modern contemporary furniture or just modern furniture, is furniture created after the 19th century and was heavily influenced by the modernist art movement. The concepts of modernist art were translated directly into the world of furniture. Instead of creating substantially visual furniture, furniture evolved into simplistic visual design. Contemporary furniture design uses the furniture, and the area it resides in, as part of an overall design theme for a person’s dwelling.
The main players in the high-end modern European furniture market in China are Boconcept, Flexform, Moroso, B&B Italia, Natuzzi, LigneRoset, Roche Bobois, Hulsta, Camerich, Qumei, I&D, Markor and Da Vinci.

Estimating the size of the premium and high-end modern European furniture market

As a relatively new market, the figures available for the overall furniture market size in China vary, and those for the modern European design sector did not exist. We therefore developed two models from which to determine the market size of the premium and high-end sector for the next 10 years, using differing criteria to enable us to compare their correlation to one another. One common variable existed for both models; this being the ratio of new furniture purchases to replacements. However, both models are based on differing purchasing assumptions to avoid further links between the two.

According to The World Upholstery Market Report 2011/2012, the projected market size just for soft furnishing sales in in China in 2011 was about $16.8 Billion, or approximately 108 Billion RMB. By contrast in 2010, Euro monitor estimated the sales of luxury furniture in China to be 4 Billion RMB, however, there was no specific definition of ‘luxury furniture’ used. Reference to both these figures and those known sales figures from other furniture brands in China are used to benchmark our market size estimations.

In our estimation of market size we used two models, the first was based on home sales from 2005 onward, and the second on consumers who could afford to buy product at a then current conservative premium furniture price point, which is then used as a projection of the future market value. When creating both models, base data was taken from sources such as the China National Statistics office, and other consultancy firms that have studied consumers in China such as McKinsey and KPMG.

Consumer based market estimation model

The growing Chinese affluent class

The basis of this model was the growing affluent population in China and their ability to spend money on home furnishing as a result of either moving home or replacement of their current furniture. The base data for this model was taken from McKinsey’s estimation of the size and total number of affluent people in China between 2010 and 2020. This group included households with a total income of $34,000 or approximately 200,000 RMB and above. This group of individuals were used as a base line because even the lowest income levels within the purchase class they could potentially purchase at least one piece of modern European furniture.

Peculiarities of the Chinese property consumer

Consumer behavior, attitudes and attributes in China often challenge those found in many other parts of the world, which may result in actions at odds with the expectations of the western organisations and necessitates the need for specific localization of products and services.

When evaluating the potential market size for modern European furniture in China, we have to avoid a number of traditional western assumptions and take into account local cultural influences and attitudes:

  • That a relatively low income would exclude some consumers from the market. The fact is that money for new furniture may well come from parents or other family members, and can in many cases have no direct relation to the actual income of the purchaser themselves.
  • Unlike western attitudes, when a Chinese moves into a new home (not necessarily a new build), they are likely to completely refurnish the home, and not bring with them any of their old or existing furniture.
  • Because of the influence Chinese parents have over their children, some purchasing decisions in terms of furniture will be made under direction of the parents (or in-laws) who may have a bias toward more traditional furniture styles, and should not be underestimated in the sales and marketing process.
  • Of all the new builds actually purchased in China, approximately 40% to 50% are actually occupied on completion. The rest stand empty and regarded as a pure ‘investment’ by the owners who often make no attempt to rent them out.

Target consumer groups

McKinsey has in recent years, produced two reports evaluating the consumer market in China, one in 2010 considered luxury consumers in particular, and one in 2011 focused on the growth of the middle and affluent class. In our model, we use base data from both reports to estimate the number and split of households by income and to allocate potential spending patterns for these consumer groups.

The estimated split of the three household income groups over a 10-year period is therefore shown below by number of homes by income group and year.

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Other factors included in the model

Having determined the number of households in each income bracket, it is necessary to consider the frequency at which they might purchase furniture. There have been a small number of surveys that have asked how often consumers might replace their furniture, all of which predict between 5 and 8, or 5 and 10 years. Our own questionnaire used in this research asked this question and 76% claimed they would make a change between 6-10 years. We therefore adopted an average replacement frequency of 8 years.

It is also important to understand why a consumer would replace their furniture. According to a survey by Guojin Stock Research Company 65% of respondents would buy furniture when moving, the other 35% would replace for reasons of breakage, old design or upgrade of the materials used in the current product.

Methodology

One important aspect of the methodology of this methodology is that consumers typically replace furniture on an 8-year cycle. We also believe that

30% of Chinese consumers would choose modern European furniture
A 40% occupancy rate of new build
According to many interior design experts, the typical spend per m2 for furniture in an apartment or villa ranges from 1000 to 3500 RMB. We therefore adopted the following furniture spend values by household income.

  • Household income >1m: spend 200,000 RMB on furniture
  • Household income 300k-1m: spend 150,000 RMB on furniture
  • Household income 200k-300k: spend 100,000 RMB on furniture

The single piece replacement market

In addition to the new home purchase, there will be consumers who want to change a single piece of furniture, or buy one additional item at times in between the major purchase cycle. We therefore adopted three different purchase criteria for each of the three household income groups that are considered both likely and affordable based on McKinsey’s luxury consumer report.

Correcting for other market affects

Based on then current information, we needed to consider corrections to the replacement market figures that would be driven by the following factors:

  • The growth rate of new build property would slow down, and therefore greater numbers of furniture companies would focus on the replacement market
  • As China develops economically and culturally, we can expect a greater adoption of western culture which will result in people being more likely to change their furniture more often
  • The increased ‘westernisation’ effect in China, will increase the number of people with a preference for modern European furniture
  • The implementation of the ‘Furniture Trade Policy家具以旧换新政策’ (similar to the Home Appliance Trade Policy) would take effect

The estimated market value for premium and high-end modern European furniture

New purchases + replacement purchases (premium price point and higher)

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Figures are estimates of market value in RMB

Benchmarking of the estimated market size figures

The figures above represent the ‘potential’ market size for the premium to high-end modern European furniture sector in China; the actual market sector sales value is very difficult to calculate, however we were able to benchmark our estimates against other known points of reference.

The wedding market potential

In the middle and late 80s was the baby boom in China where the annual birth rate reached 21%. The country was entering a 10-year period in 2012 over which it is expected to see the wedding numbers peak as the baby boomers born during this time get married.

Official statistics also predicted that over the next 10 years 14 Million new couples will marry every year. With the continuous improvement in income, the expected increase in consumption within the whole wedding market is therefore large.

According to the most recent National Statistics of Bureau, the expenditure by urban couples getting married on a home purchase, redecoration and furniture was 258.718 Billion RMB in total in 2007.

Actual sales reference examples are:

  • Markor whose stores are all direct in China hit sales of 1.5 Billion RMB in 2011 and they estimated the overall furniture market as worth 118 Billion RMB in the same annual report
  • Qumei that uses a franchisee model had sales of 2 Billion RMB in 2011
  • The Italian brand Natuzzi quoted its retail sales value as 400M RMB, but these figures were unverifiable
  • According to The World Upholstery Report: upholstered furniture consumption in China was approximately 108 Billion RMB

According to jiaju.cc a Chinese furniture website, the scale of China’s high-end furniture market is more than 30 Billion RMB, and still maintaining steady growth.

Home based market estimation

In assessing the potential market size, we developed another model using the home purchases, their frequency and the relative spend per home to estimated the market. The methodology adopted for this model is based on an tested assumption that 5% of all property sold in China is ‘high end’ which means that it is at a price point where the owner could afford to purchase premium to high-end modern European furniture. Considering the factors such as furnishing rates of new property, property occupancy rates, the preference for modern European furniture by consumers and correcting for the increased spending power of Chinese affluent consumers etc our two estimates delivered almost the same figures.

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Summary

Using two different market estimation models, we predicted that the market in 2012 for premium and high-end modern European furniture was worth approximately 6.7Billion RMB. Although both models had no direct coincidence, their estimates indicate a difference of less than 5%. There are very few reliable figures available about the furniture market in China, although sources such as McKinsey are regarded as more reliable than most, hence their usage.

The overall modern European market sector also covers to some extent Chinese brands such as Qumei, which competes at an entry level price point, as well as the imported brands such as Natuzzi and Hulsta. The increase in the size and share of the overall Chinese furniture market within this sector is being driven by younger consumers entering the market, and an increase in the internationalization of China in general.

Since this research was carried out, there has been a swing in the market from purchasing to fit out a brand new property to replacement of furniture in an existing home, but the overall size of the market remains on our projected trajectory. We have seen that the Chinese consumer has become more selective in his spending on luxury, purchasing overseas to save money and access greater choice, but at home they are still investing in their lifestyle and more comfortable living. It is our belief that although premium and luxury furniture has been behind the curve of luxury consumer products, its time to shine has begun and the market will offer great opportunity for those willing to address it.


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