The Pennsylvania State University

Case 7-1: Segmenting the Chinese Luxury Goods Market

Derin Savasan

MKTG 445
 Table of Contents

TOPIC PAGE

Situation Analysis 1

Current Situation Analysis 1-2

Detailed Findings 2-3

Alternatives 4

Appendix 5-7

Bibliography 8
 Situation Analysis
Economic reforms started to take place in China during 1978 where the country shifted
from centrally planned economy to a market economy. As a result of this economic
transformation, a higher and continuous economic growth has been observed compared to other
emerging countries. Between 1980-2015, the average annual growth rate was 7% (Appendix A),
China becoming the second largest economy after the United States, leaving Japan behind. There
has been a significant increase in the living standards and purchasing powers of most Chinese
citizens. Per capita income increased from $313 in 1980 to $4,428 in 2010 and thus China was
included in the upper middle income economy group. Even though income growth significantly
reduced poverty, it initially led to an increase in income inequality between rural-urban areas,
and social groups (Appendix B).
Current Situation Analysis
One of the most important factors affecting China’s consumer trends in recent years is the
high-income consumers which includes over 200 million people. The country has a population of
1.3 billion where the annual income per capita of 400 million Chinese people is $8,000
according to purchasing power parity. It is estimated that revenues of this segment will grow by
an average of 16% per year in the next 5 years. The consumption trends especially in this show a
transition from frugality to hedonism. Luxury lifestyle was used to mean corruption,
governmental collapse and inequality to Chinese society but now it is considered on of the main
characteristics of a wealthy Chinese person. While the Chinese used to prove their belonging in
social life with real estate, and cars, now having luxury apparels, expensive jewelry is part of
their “social status”. Luxury consumption is now regarded as an indicator of wealth and social
belonging. Claire Kent, a luxury goods and retail analyst at Morgan Stanley stated that “The
Chinese were born for luxury consumption. In China moving up in the income ladder means
consuming more luxury products”. At the same time, the dominance of international luxury
brands in Chinese market is drastically increasing. High-income segment, super-elite, newly rich
and government officials prefers highly respected foreign brands , while the middle-income
segment prefers Hong Kong based brands.
Another important factor for determining the consumer trends in China is the young
population. This target group; extravagant, young, well-educated are interested in new and hip
products. Although they are not the children of super-elite group, are able to spend luxuriously
like those in this class. For example they cannot buy a bag for $1,000 but can buy a bag from a
less recognized brand for $300 which provides them the psychological, social satisfaction they
need. This shift in new generations consumer preferences has pushed brand loyalty and luxury
brand need to the background. In the past years, the trend of choice for this young segment has
been for fashionable, innovative, as well as affordable products rather than brand names. In this
respect, it is important to enter the Chinese market with latest hip products at prices that young
people can afford. It could be observed that Chinese young people closely follow fashion and
adapt to new trends quickly and develop their consumption habits accordingly. Companies that
want to have a significant place in the market need to capture the buying behavior of these
consumer segment faster than their competitors and have a more efficient and dynamic market
awareness. Another important dynamic young Chinese customers have is that they value
wearing, owning a product that no one has to create a unique style. Necessary strategic
marketing methods should be adapted to this segment in order for a company to be successful in
this global market.
 Despite the changes in Chinese consumption trends, one of the main determinants of
consumer goods is the price of the product. As it was expressed in the situation analysis, there is
a growing middle class in China that can afford to buy high-priced status products. However,
most Chinese consumers are still very price sensitive. Although in some cases factors such as
after-sales service, product quality are overriding the price factor, it is still the main determinant
factor for most products. A challenge concerning foreign products in Chinese market is
international company’s inability to provide after-sales and support services. This leads to
company’s lost of sales, decreased consumer confidence against these products. In this case
foreign companies need to find local Chinese partners and use them for after-sales and support
services.
Detailed Findings
An increasing number are joining the ranks of the super rich. The number of Chinese
with more than 3.03bn Chinese yuan ($500m) in assets will grow by 6% this year to 535 people,
according to a recent report by Wealth-X, a Singapore-based company that collects data on ultra
high net-worth individuals. With the rise of high income people in China, distinct social
segments arose. Super-elite is the group of people who have been present in China’s economic
development since the beginning. Even though they are not afraid to shop high valued products,
they know the value of money and have manners. They’ve already had their newly-rich phase,
and evolved into a modest segment where they believe that showing off materialistic goods is not
an indicator of a person’s social status. Due to its rapid economic gains, China’s wealth boom
has occurred over the last decade. As a result, most of the country’s richest citizens are young
and experiencing wealth for the first time, this segment is called the newly rich. They believe
that their way of having an important place in the elite, highly respected group is through
extravagant and lavish lifestyle. Government officials include the people who became rich by the
power of their position. In corrupt countries, businesses have to bribe and engage in other
unethical & illegal activities with government officials. A communist or socialist government
believes in the equal income distribution and implements standardized, simple living standards to
its citizens including the government officials. This is ironic due to the fact that government
officials are considered part of the wealth group and their main income source is the increase of
super elite’s and newly rich's incomes. These segments are powerfully interrelated with each
other. Presence and force of government is dominant in China and people who do business in the
country should be related to the government no matter what. Super-elites and newly rich people
who own businesses in China should always be in good “contact” with the government officials
through various ways including giving grease payments, gift exchanges. They also value
education and sending their children to get a better education in foreign universities.
Before President Xi Jinping’s anti-corruption policies and campaigns, bribery, illegal
transactions, money laundering, overall corruption were wide-spreaded in China and constraints
against it were weak. As stated in Global Legal Insights’s 2019 report on Bribery & Corruption
in China “The odds of jail sentence for a corrupt official are estimated to be less than three
percent” before communist party leader Xi came into power. At the end of 2013, he introduced
new laws and regulations for detecting corruption and appropriate punishments. It also targeted
to decrease the corruption within the governmental positions, according to a research called The
Impact of Xi Jinping’s Anti-Corruption Campaign on Luxury Imports in China “the number of
investigations increased by around 30% to 182,000 in just one year. As it was stated in the article
as an example, a private businessman might use his credit card to make the purchase. He then
passes the gift off to a government official, who in turn gives it to the ultimate recipient. Intense
anti-corruption practices were mainly targeting the government officials since in 2009, the
industry experts estimated that gifts to government officials made up nearly 50% of all of
China’s luxury sales.
Governments and individuals are affected by globalization in various segments. With a
high developing structure of the constant-globalizing world economy, migration of qualified
human has gained momentum. If the migration is temporary, it's called ‘brain exchange’ and if
it’s permanent, it’s called ‘brain drain’. Brain exchange is a process involving the exchange of
students, researchers and scientists in order to gain mutual benefit in terms of education,
experience, and knowledge between countries. International “brain exchange” is not a new
concept and has an important meaning in international partnerships, the transfer of private
knowledge to public goods and the dissemination of ideas. The causes of brain drain and
exchange is shaped according to specific conditions each country has, but changes in the
economy, social, political structures have accelerated the migration. The most important reason
for brain drain is the Western countries have high-tech industrialization, where agricultural
production with capital shortages dominate the developing countries. A lot of young people from
developing countries go to foreign developed countries such as United States, Canada, UK for
educational purposes. Families who have a long-run objective in the business wants their
children to gain as much knowledge and experience in those high-tech industries and then return
back to their home country with in-depth information to help their families to strive in their
business and improve China’s economy. At the same time, developed countries employ
international qualified people whose costs are covered by their country due to many factors such
as R&D, wages and social status which makes it more attractive for students to come to
universities in those countries. One significant thing to mention is that in order for developing
countries to increase their capital and labor productivity, they need to retain their intellectual and
qualified people in the long run. They need to provide doctors, engineers, scientists with an
appropriate professional environment in their own countries. With an international compensation
system that returns the education costs of highly skilled students can be a way to attract them
back to their country.
Lincoln Motor Company will achieve a high growth in the China market, they’ve
conducted an in-depth analysis on the demographic and political trends China follows such as
government removing the one-kid policy, wealthy people preferring specific interior designs.
Lincoln Motor company According to the ‘Segmenting the Chinese Luxury Goods Market’
article, “the latest generation of Continental was designed specifically to appeal to wealthy
Chinese who can afford chauffeurs.” As I analyzed the growth China’s economy and future
forecasted increase Chinese consumption of luxury goods which includes cars too, Lincoln has a
competitive advantage in the Chinese car market being a suitable luxurious fit for the wealthy
Chinese people. According to a report by the Chinese Automobile Manufacturers Association,
overall sales fell 1.7 percent while luxury sedans grew 18.8 percent and premium SUVs 3.5
percent. Calculated in total units, in the price segment over 300,000 yuan (US $44,000) about
1.16 million vehicles were sold last year. Lincoln’s highly recognized car type, MKX an SUV
carries a high value for Lincoln’s success in the market due to wealthy Chinese people’s car
preferences.

Recommendations
1-) There is a tremendous demand for luxury goods in China and this is an opportunity for luxury
brands to penetrate. There are three types of high-earning segment groups in China, super-elite
(super-rich) group who are cultured and manners for showing off money, people who are rich
due to their affiliation with the ruling party and people who are rich due to exploitation of the
rural areas. The targeting must be made according to the specific segments in order to meet the
needs of each segment. For luxury brands to successfully penetrate their products and brands to
Chinese market is via creating a belonging feature in their product. This is needed for the people
that are rich due to politics because a certain luxury brand may become the standard or notion of
a particular party, group or thought. For example, in Arabia, women who are wives of the crown
will only wear one brand of hijab. This is made to imply their social status, the same methods
should be used for Chinese elites. At the same time, the vulgar-rich will only care about showing
off their monetary gains and will try to get attention and respect by the tangible goods they have.
In order to satisfy them, certain above-the-line marketing tactics can increase the value of a
certain luxury brand in the eyes of the middle-class. So, the vulgar-rich who lacks the vision and
education will try to get the attention of people by having the most expensive, the newest and the
most advanced goods with them all the time.
2-) Social media is an important marketing tool that’s effectively used to influence consumer’s
preferences and consumption choices. Since global networking platforms such as Facebook,
Instagram and Twitter are banned in China, luxury brands should find expose and integrate their
brands in Chinese national social media platforms. Top three most used platforms are WeChat,
QQ and Weibo (Appendix C), Chinese version of Facebook, instant messaging applications
including gaming, listening to music, reading blogs and Twitter of China respectively. According
to the Chinese government, 802 million people are now actively using the internet, 57.7 percent
of the population. Most interestingly, 788 million people are mobile users, a whopping 98
percent of the country's total user base (Appendix D) which implies the importance of social
media and indispensable factor of everyday lives of Chinese citizens. Over 802 million people
are using these platforms to exhanchange information, product recommendations and expose
themselves to new brands. Luxury brands should create a foreign, Chinese digital marketing
strategy in order to create brand awareness and accessibility for the 98% of the country.
3-) Luxury brands should create incentives for Chinese shoppers such as having Mandarin
speaking employees, an atmosphere (store music) that would remind them of their home and in
order to achieve this objective they need to partner up with shopping tours that are taking
Chinese tourists to malls, stores to satisfy their hunger to extravagantly consume. Chinese prefer
to make their luxury brand purchases abroad due to the inflated domestic prices on foreign
luxury goods. “ Tour buses regularly stop at Galeries Lafayette and other popular destinations in
the French capital. Overall, the average Chinese tourist on such trips spends $5,000.” The tour
buses should be prioritizing taking the Chinese tourists to a place where they would enjoy
spending time at and also make large amounts of purchases. Stated in LATimes “Of the more
than $80 billion in Chinese purchases of personal luxury goods last year, two-thirds were made
outside China.”, luxury brands should be putting more effort into their locations which Chinese
tourists mostly go and extensively researching consumer preferences through the data and
information they gain from the shopping tours. This is the best recommendation because Chinese
shoppers carry high market share (Appendix E) in the luxury brand consumption market and
brands should be using their primary and secondary data to understand their buying habits and
preferences.
 Appendix
SWOT Analysis
Strengths
❏ Fastest growing economy with a bright
future (The Rising Sun)
❏ Advanced Gift and Present Culture
❏ Chinese tourist population is the highest
in the world
❏ Corruption mechanisms are done over
luxury goods
❏ Increasing mobile use; brands can use
social marketing techniques to interact
with Chinese consumers
❏ There will always be a demand for
traditional, well-recognized luxury brands
Opportunities
❏ China is the fastest growing economy
with an annual GDP rise of 9.5%
❏ Extravagant and vulgar lifestyle of a
Chinese
❏ Developing emerging markets (Turkey,
India) that luxury brands could merge in
❏ Growing e-commerce industry that would
benefit the sales of brands
Appendix A
Appendix B
Weaknesses
❏ Strict government restrictions and
censorships
❏ President Xi Jinpig’s anti-corruption
practices hurting luxury brand
consumption among Chinese elite class
❏ Lack of below-the-line advertisements
due to the replication of the social media
all around the world(WeChat, etc.)
❏ Worldwide economic growth has
slowed down, this could create
sensitivity towards price of products
Threats
❏ Trade-war in the world (US-China,
Deglobalization)
❏ Anti-democratic country with media-
closure
❏ Young consumers prefer trendy, unique
brands instead of traditional luxury
brands
Appendix C

Appendix D

Appendix E
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