The risky short-term strategy of Louis Vuitton with the new generation of affluent Chinese tourists

Jan. 25, 2012 - PRLog -- Selling entry-level priced Louis Vuitton small accessories to a large number of Chinese consumers may be a good idea from a pure short-term perspective, but is conveys major risks on the long term on the brand image of Louis Vuitton with really affluent Chinese consumers, who may not anymore consider and recognize this famous brand as the ultimate symbol of social status.
Affluent Chinese consumers prefer by far to buy expensive Louis Vuitton products overseas, in London, Paris or New York City, and leave the Shanghai and Beijing stores to the Chinese middle class consumers seeking for a LV keychain.
China Elite Focus, a specialized marketing agency focused on wealthy Chinese outbound tourists estimates that the average affluent Chinese tourist in the U.S. has a $25,000 budget for luxury shopping.  More than half of Chinese luxury spending occurs overseas. Some Chinese tour groups travel to France and Italy for the sole purpose of luxury shopping.
"After decades of deprivation and conformism, Chinese consumers regard expensive consumer goods as trophies of success," reported The Economist magazine. "In public, they show off. In private, they pinch pennies." The demand for luxury goods has increased for a number of reasons, including rapidly increasing disposable income, the increasing sophistication of Chinese consumers, and rapid urbanization and growing wealth in second- and third-tier cities.
Still, the typical Chinese luxury consumer differs greatly from his or her counterparts in more mature luxury markets. Luxury items in China are generally purchased as status symbols and not necessarily because of taste, sophistication or service. In 2010, 16% to 17% of Chinese consumers bought luxury goods as gifts, with handbags, clothing, watches and jewelry being the most popular. Within the accessories segment, 37% of purchases were made for the purpose of gifting, a far greater proportion than in other markets, with only the newest and most expensive products being acceptable.
The average Chinese millionaires are 15 years younger than their counterparts in other parts of the world, and their number has been rapidly increasing -- by 6.1%, to nearly one million in 2010. Finally, China's luxury goods market was previously dominated by men, due to the importance of the gift-giving culture in business. As more women have entered the workforce, the proportion of luxury goods they purchase has risen to more than half the market total.
Despite the increase in Chinese luxury goods consumption, luxury brand boutiques in China attract much less traffic than managers would like. Compared to the crowded Apple store next door, Louis Vuitton's (LV) flagship in Shanghai is empty. More and more, Chinese luxury consumers are choosing to do their luxury shopping abroad. In recent studies, Bain found that more than 50% of luxury goods purchases by Chinese consumers in 2010 were made overseas. A study by PATA/Nielsen found the average Chinese tourist in Europe purchases US$1,359 of goods per trip -- more than any other nationality.

The main reasons Chinese consumers cite for shopping abroad are lower prices due to China's high luxury taxes, better selection and greater "show-off" value. China's import tax for luxury items ranges from 20% for luxury bags to 50% for cosmetics, which, when combined with additional local taxes such as the 17% value-added tax, leads to a significant premium on these goods.
Chinese consumers also prefer to shop outside China due to a perception of greater brand availability and better product selection. Interviews with shoppers at Beijing's China World Mall -- which houses popular luxury brands such as Louis Vuitton, Hermes and Gucci -- showed that many female shoppers prefer to shop abroad because they believe the same store abroad will carry, not only a broader range of products, but also newer products. Many Chinese also believe that the luxury shopping experience is better abroad due to superior customer service and a greater selection of brands, including many not yet available in China, such as Alexander Wang and Christian Louboutin.
Finally, traveling has become part of the luxury lifestyle in China and is considered a status symbol: There is greater cachet in being able to say you purchased your bag at the place of origin in Paris rather than at a branch in Tianjin. The Chinese National Tourism Administration noted that in 2010, more than 57 million Chinese traveled abroad and spent US$48 billion at overseas destinations, a figure that is expected to grow 17% annually over the next decade. Louis Vuitton, in particular, is a favorite shopping destination for Chinese abroad. In fact, Chinese consumers have become LV's largest consumer group worldwide. While this influx of demand has been a welcome growth stimulus for LV Europe, it has also presented its own unique challenges and maybe dangers for the future of the brand: When 1 billion Chinese consumers will have their own LV accessory, where will be the status symbol?
Blistering Chinese demand, combined with factors such as purchasing limits and the high luxury tax at home, has also led to the growth of a large gray market for LV products. Managers at LV's Galeries Lafayette location were recently dismayed to learn that the two young Chinese women who held the top two spots on their VIP list, each spending more than €500,000 (US$700,000) per year, were selling them at a profit on Taobao.com, China's version of eBay.
Going forward, LV and other similar luxury retailers need to continue to focus on their ability to connect with customers in China. LV's segmentation strategy in its brick-and-mortar stores in cities such as Beijing and Shanghai is a good start. For those customers already shopping abroad, LV would benefit from sharing customer data across regions so that a VIP shopper in Europe is recognized when he or she enters a local LV store in China.
LV can further strengthen its ability to connect with young Chinese shoppers via its online marketing efforts. Just as luxury brands in China generally have chosen not to tailor their products or store designs drastically to the local market so as to preserve the perceived authenticity of the brand, they generally have not tailored their online presence to better suit this new media market. However, the role of the Internet is far more important in the young Chinese consumer's shopping process than it is in other markets.
The Shanghai Traveler’s Club, one of China’s most exclusive VIP travel club for wealthy Chinese travelers has now a social media network using the Weibo platform: even Chinese billionaires use social media networks to plan their luxury shopping trip.
The number of Chinese consumers who rely on the Internet -- especially social media such as bbs forums and microblogging -- as a means of researching luxury goods and brands has increased by 30% since 2006. In addition to learning LV's history and brand message, young Chinese shoppers want to know how to use and wear the latest styles and to discuss trends with their peers. Incorporating the educational and interactive components of LV's Maison stores into its websites -- e.g., through a well-designed style guide -- can help LV connect with and influence customers earlier in the purchasing process. Simple directions as to where these items can be purchased locally will also help mitigate the misperceptions of inferior selection and older products at home.
The number of Chinese traveling and shopping abroad will only continue to grow, and LV's global operations should continue to adapt accordingly. With the increasingly competitive luxury market in China, LV China will need to work harder to maintain and grow market share by winning the loyalty of new waves of young Chinese luxury consumers.

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The leading marketing agency for tourism & travel Industry targeting the affluent Chinese Outbound tourists. China Elite Focus builds high impact marketing campaigns on the Chinese web for luxury hotels worldwide, Incoming Tour Operators, Tourism Boards.