The Up-and-Coming Chinese Luxury Spenders

Yuen, Andrew Chi-lok（袁志樂）

Luxury industry: Take heed! The typical Chinese “big spender” is no longer middle-aged and high-income individuals. Millennials, wealthy or not, are quickly emerging as the consumer group with the greatest spending power and desire for luxury goods

By Louisa Wah

Chinese consumers’ penchant for luxury products is known all over the world, and luxury brands have adjusted their marketing and sales strategies over the years to appeal to their preferences and satisfy their needs. However, the Chinese luxury market is transforming rapidly as the millennial generation (born between 1977 and 2000) has become the most powerful market segment. For its future survival, the luxury industry would do well to understand the psychological and social factors that drive millennials’ consumption habits.

A recent study conducted by a team from the University of South Carolina and The Chinese University of Hong Kong (CUHK) Business School looked into millennial consumers as a distinct market segment and studied their luxury purchasing behaviour. This study differentiates from previous ones that looked at Chinese luxury consumers as a whole. It contributes to new findings about millennial consumers and provides crucial information for the global luxury industry.

Titled Individual and Social Factors Impacting Chinese Millennials’ Luxury Consumption, the study found three key drivers of luxury consumption among Chinese millennials: materialism (individual factor), the need for uniqueness and social comparison (social factors). What was surprising about the findings was that millennials with a low-income background share a similar desire and buying habit for luxury goods as their well-to-do peers.

“Millennials are fascinated by the latest products in the market, and eager to own unique luxury goods that their friends or other people don’t own.” — Dr. Andrew Yuen Chi-lok

The study also found important differences between high-income and low-income millennial consumers. For the former, the main motivating factors are both individual and social, namely, they sought out material wealth as well as a way to set themselves apart from others. For the latter, it was mainly social factors that drive their buying behavior — especially the desire to stand out from their peers.

The findings were derived from a survey of 216 undergraduate and graduate students in Hong Kong. It was conducted by Andrew Yuen Chi-Lok, Senior Lecturer at the Department of Decision Sciences and Management Economics at CUHK Business School, and Prof. Jung-Hwan Kim and researcher Man Man Hsu at the University of South Carolina.

Among the group of millennial Chinese students, 131 purchased at least one luxury fashion item in the previous six months. Almost two-thirds were female, and an overwhelming majority were single, not working and between the age of 18 and 21. Interestingly, the largest share of these luxury consumers (35.7 percent) came from households with an annual income of under US$25,000. The next biggest group — 21.4 percent–came from wealthy households with an annual income of above US$200,000. The percentages of every income group in between were much smaller than these two. This effectively delineates the Chinese millennial luxury market into two major segments — high and low income.

Understanding the needs of the Chinese millennials in general, and the specific needs of millennials from different social-economic classes, is critical for the luxury brands who want to get ahead of the game and successfully tap into this lucrative market. This is important not just for luxury brand companies based in China, but those around the world because of the following reasons:

• Chinese luxury consumers spend more than US$100 billion annually , representing nearly one-third of the global luxury market.
• Chinese millennial consumers are expected to contribute to two-thirds of the global luxury goods market by 2024.
• Millennials make up 25 percent of the total population in China.
• Roughly 50 percent of all luxury goods sales in China come from millennial consumers, and their average age is 28 — 10 years younger than luxury consumers in any other countries.
• Three-quarters of Chinese luxury spending occurs overseas.

The Luxury Consumption Psychology

Luxury fashion and goods are “status goods.” Consumers typically use them to communicate their wealth and social power. In China, this type of communication is extremely common, especially among those who became nouveau riche. These consumers, now in their middle age, view their possession of expensive items as essential to their personal identities. Luxury possessions help enhance their self-esteem and give them a sense of happiness. In addition, these possessions convey their social status in conspicuous ways.

All of these are well-known facts among luxury brands that target the Chinese market. But a new trend is emerging: There is a significant increase in the intensity with which Chinese millennials consume status goods.

“These young people are born to parents who have experienced an exponential economic growth and dramatic lifestyle changes in China. From an early age, they were influenced by their parents’ attitude toward money, materialism, and spending behavior. But having been born with inherited wealth, they take it ten steps further,” says Dr. Yuen, who is also the school’s Academic Director for MBA Programmes and Director of Policy and Knowledge Transfer at the Aviation Policy and Research Centre.

“They tend to be much more indulgent in their spending habits and more sophisticated in their taste, compared with the older generation of luxury consumers.” According to the study’s findings, the need for being perceived as unique is the most crucial factor that influences both high- and low-income Chinese millennials in their desire for luxury consumption.

“Millennials are fascinated by the latest products in the market, and eager to own unique luxury goods that their friends or other people don’t own. This means that luxury retailers in China need to pay very close attention to the product lines they offer,” Dr. Yuen points out.

How to Sell Effectively to Millennials

“Retailers should carefully control the number of each luxury product they sell to prevent over-exposure. This way, the owners of the product will feel special. A good way to achieve this is to offer limited-edition products during a short period,” the academic suggests.

To attract and please high-income millennials, however, luxury brands need to further develop their selling strategy so they develop a sense of exclusivity and happiness through possessing exceptional products. “These products need to be extravagant and affordable by only a few people,” he says.

As for the low-income millennials, they are less concerned with the intrinsic value of luxury goods than gaining status through luxury consumption. In fact, they often engage in extreme forms of social comparison.

“Their desire to own luxury fashion goods is clearly influenced by their social surroundings, such as their peers and the media. They care a great deal about how others judge them. So luxury items take on a significant symbolic meaning for them. They help them feel a sense of assimilation with high-status consumers.”

To satisfy the desire of low-income millennial consumers, Dr. Yuen suggests luxury brands to create numerous variations in product offerings. These products should be affordable and easily identifiable by other luxury consumers. However, he warns against over-exposure as millennial consumers quickly lose interest if a product is owned by too many people.

“Luxury brands need to control their merchandise distribution and assortment across all different price points to prevent over-exposure. Introducing new products frequently with limited inventory would be an effective selling strategy,” suggests Dr. Yuen.