12 May 2015

The Chinese Pecking Order for Luxury Brands

China’s love affair with luxury brands is well known. With incomes rising, consumers are following the well-trodden path of new money that the West went through in the eighties.

New disposable income is being spent on status symbols such as designer handbags, with Chinese consumers now representing a huge market for the West’s luxury brands.

But China is a huge market and not all of its households are at the same stage of economic development, something that’s reflected in consumption patterns for luxury brands countrywide.

To understand this huge country, it’s often divided into ‘tiers’, which describe at city level the status of consumer behavior, in particular its sophistication and values, household income and some other factors such as political influence and infrastructure development.

Tier 1 cities include the big ones, Beijing and Shanghai. These urban areas represent a highly developed consumer market, with higher than average household income, high disposable income and high consumption habits.

Tier 2 cities include provincial capitals, which will have a fairly high household income and rapidly increasing consumer spending habits combined with things such as lower operating costs for retailers compared to the Tier 1 areas. This tier is now considered to be a great prospect for many businesses as there is less competition than the Tier 1 area combined with good opportunity.

The other tiers represent lower levels of economic might and influence. With their lower cost operating environment, Tier 3 cities are usually considered a good place to site operations.

In Tier 4 and 5 cities, representing the majority of China’s urban population, consumption is at a lower stage of development and disposable income may be fairly low compared to higher tiers.

Significantly, the lower tiers may include consumers new to the internet. Online behavior for those who have only recently come online is often different to experienced internet users. For example, people with less than 2 years of internet experience are significantly more likely to click on a banner ad.

How difference is expressed via handbags

The different levels of sophistication in these tiered markets plays out when it comes to brand preferences and consumption patterns. When it comes to interest in luxury brands, it’s fairly predictable that the sophisticated consumers in the Tier 1 cities are fairly advanced in their tastes. Only a few years ago the Louis Vuitton handbag was all the rage. Such a high proportion of women owned these items that consumers wishing to differentiate themselves needed to seek out more obscure, more expensive luxury brands.

Tier 1 middle class consumers are highly segmented, influenced by a range of social forces, and a lot more discerning than in the early days of wealth. There’s an increasing interest in more subtle brand associations rather than just a high price tag, and consumers are increasingly concerned with the quality of the item rather than just its flashy logo.

That’s why cities including Shanghai are now seeing interest in lesser known luxury brands such as Salvatore Ferragamo and Balenciaga. Louis Vuitton may still be China’s most popular luxury brand but it’s now overexposed and suffering from its own success. In Tier 1 cities, Prada is now eclipsing this label.

When surveyed, Tier 1 consumers express interest in avoiding brands that are too ubiquitous and seeking ones that express their own personality.

Consumers in Tier 2 cities are also taking an interest in less well known luxury labels but, with slightly lower spending power, they are often accessing these exclusive brands by purchasing the lower ticket items in the collection such as bags and shoes.

In the lower tiers, consumers are often less brand aware than in sophisticated Tier 1 and 2 cities.

Whilst Tier 1 consumers are increasingly interested in the intrinsic value of the luxury products they buy, such as the amount of sophistication they convey their owner, or the quality of manufacture, outside Tier 1 consumers place higher value on having an impressive logo and generally being a show of wealth.

It’s thought lower-tier consumers may also be more influenced by celebrity endorsement.

How TV influences sales

Korean soap operas and sitcoms are a key way for luxury brands to pick up new audiences and new buyers. It’s an approach that’s already been used by major fashion labels Chanel, Chloe, Celine, Gucci and Louis Vuitton to promote themselves to the Chinese audience.

Brands hoping to promote themselves in this way need to target young and fashionable actresses and also sponsor the popular dramas they appear in. Products are usually showcased as natively as possible, appearing as integral to the storyline as is possible. Brands seek to align themselves with the personality of the various characters rather than repeatedly showing their logo or a particular product.

It’s cheaper to sponsor Korean shows and stars than Hollywood or Chinese ones (although this may change) and in some cases brands haven’t had to pay for product promotion. Production teams have often been so keen to showcase luxury brands on their shows that they’ve often used them for free.

It’s an approach to advertising that seems to gel with the Chinese authorities, who tend to be keen that the media promotes traditional values. These shows also seem to fill a gap in the relatively immature entertainment industry; providing quality content that the viewers are ready for. Wrapping traditional family values in luxury brands seems a winning formula.

Most of China’s successful TV shows come from abroad. Korean drama “My Love from the Star” has a high number of viewers. Actress Jun Ji-hyun has managed to drive a spike in sales of Celine dresses and Jimmy Choo shoes by wearing them during her time on the show.

After actor Kim Soo-hyun wore a Samsonite backpack in an episode, sales tripled and reinvigorated the brand. Customers were coming into the Samsonite store with pictures of the actor on their phone taken straight from the screen. The show has also inspired a craze for eating fried chicken and beer, like the stars do.


With Louis Vuitton now facing falling sales in China after many boom years, it’s clear the market is changing and there’s room for more brands to muscle in. China is too big and complex a country to be able to treat it as one homogenous market.

Brands seeking to market themselves to Chinese audiences are advised to learn the lessons of the luxury landscape as it’s a good reflection of prevailing consumption trends across the tiers.


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