Martin Roll: China’s Expanding Middle Class a New Frontier for Luxury Brands

By webadmin on 09:09 pm Dec 04, 2011
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Gone is the era in which the developed economies of Western Europe and North America ruled the global business landscape with their well-developed markets, massive middle class, considerable level of disposal income and continually growing economies.

The current global business landscape is characterized by multidimensional changing paradigms wherein the global core of trade and commerce is shifting toward Asia, especially China and India.

As the erstwhile communist philosophy that ruled China for decades was gradually pushed aside to embrace the capitalist, free market economy, the Chinese market emerged as a global behemoth. It boasted an enormous local market, an ever increasing middle class and gradually growing second and third tier cities, prompting a global rush among major corporations to set up shop.

Today, most young people have spent their entire lives in the free market economy, enjoying hitherto unheard of access to information, money and brands.

Additionally, given the presence of an increasing number of returning affluent Chinese people and an increased presence of global luxury brands, the consumption of luxury brands in China is on the rise. Indeed, a recent McKinsey & Company report estimated that by 2020 China will overtake the United States and Japan as the world’s largest luxury market.

Such is the consumption of luxury brands in China that the current $12 billion luxury goods industry is expected to reach $27 billion by 2015. This massive growth will be spearheaded by the middle class. McKinsey forecasts that by 2015 there will be nearly 76 million middle class households earning annual incomes between $15,400 and $30,800, as against a mere 13 million in 2010. Furthermore, 16 percent of the $27 billion luxury industry will be driven by middle class consumers, making them responsible for a massive 61 percent of the entire consumer base.

Given such impressive growth, mostly driven by an expanding middle class with newfound wealth, it is no surprise that luxury brands are making the Chinese market a key component of their global strategies.

One key factor contributing to such growth is the integration of many second- and third-tier Chinese cities to the mainstream urban centers such as Beijing and Shanghai. As the fruits of Chinese economic development diffuse beyond the erstwhile urban centers, it is allowing new middle-class consumers to aggressively participate in the booming luxury market.

Such growth is almost always accompanied by many challenges for chief executives and brand managers. They must seek to deploy their resources in order to effectively manage the intense competitive rivalry on the one hand, and on the other expand their corporate scope to include new customers from emerging locations along with core segment of urban customers. Two steps become important in this regard.

Unique retail strategy: While the growth of the luxury industry in China has been consistent and strong over the years, an important part of this phenomenon is the role played by cities outside traditional urban centers. For luxury brands to leverage this growth, they will have to change their overall distribution and retail strategy.

While the core urban centers have always been targeted with exclusive brand stores, the second and third tiers may not be ready for such brand stores. As such, luxury brands will have to establish strategic alliances with the leading brands of those particular cities such that the brand equity is protected while gaining access to the local market.

Possible brand extensions: Although luxury brands thrive on their perceived sense of exclusivity in terms of price points, to fulfill the objective of reaching new middle-class consumers, luxury brands would benefit greatly if they create lower-priced fighter brands.

Fighter brands, while belonging to the overall corporate luxury brand portfolio and thereby leveraging its brand equity and resource base, creates a unique brand identity with an underlying value proposition that is attainable to this new segment of customers. Such fighter brands enable luxury brands to test the new emerging segment effectively.

Martin Roll is a global business and brand strategist. His Web site is at www.martinroll.com.