The biggest opportunity for luxury brands in a generation
Luxury brands can do a mediocre job in every other market and still grow revenues and profits if the firm executes in one market: China. Year after year of double-digit growth has spawned tens of millions of Chinese consumers armed with disposable income and a voracious appetite for luxury goods. In 2009 China surpassed the United States as the world’s second-largest luxury market, and now trails only Japan. In the next five years, China’s luxury consumption is forecast to increase to $14.6 billion, and become the largest consumer market for luxury goods.
“In the next five years, China’s luxury consumption is forecast to increase to $14.6 billion , and become the largest consumer market for luxury goods.”
The numbers are staggering. Swiss watchmaker exports to Hong Kong and China are up 40% to 75% in the first seven months of 2010. An estimated of 75% of luxury watch purchases in China are presents, a manifestation of the ancient custom of guanxi, in which one gives gifts to maintain their network of business and personal contacts. In fashion, the average Chinese female luxury consumer spends an estimated 11% of their annual income on handbags. Luxury automobile brands Mercedes-Benz and BMW doubled their sales in the first half of 2010 versus a year ago, while market-leader Audi registered 64% yoy growth. China is now the second largest market for the majority of ultra-luxury manufacturers including Lamborghini and Ferrari and the largest market for total new vehicle sales.
The China strategy for most luxury companies has followed a traditional path: enormous investments in theater retail in Tier One cities buttressed by lavish public relations events and print advertising. However, in a country with 384 million Internet users (more than the U.S. and Japan combined and growing to 840mm in 3 years), and an e-commerce market that quadrupled from 2006 to 2009, luxury companies should question whether they are fighting tanks on horseback (Exhibit 1). An estimated 80 percent of Chinese luxury consumers are below the age of 45, versus 30 percent in the U.S. and 19 percent in Japan, suggesting a prestige customer that is considerably more digitally native. Furthermore, approximately three quarters the of wealth creation in China through 2015 is expected to take place outside of Tier One cities, creating a massive wrinkle in the retail strategies for most luxury companies as they grapple with expansion2. While many foreign luxury houses stare at their digital navel (i.e., do little), third party sites such as wooha.com cater to a Chinese luxury consumer who values the convenience and access of online shopping. Our thesis is that success in the world’s fastest growing luxury market is inextricably linked to digital competence.
The Digital IQ Index®
This spring L2, Doug Guthrie (Dean of the School of Business at George Washington University and China Expert), and colleagues in Shanghai and Beijing measured the digital competence of 100 iconic luxury brands in China. The Digital IQ Index analyzed brands’ efforts across their site, e-commerce, search engine optimization, digital marketing and social media. Each brand was scored across more than 200 quantitative and qualitative data points and ranked by Digital IQ. The study encompassed luxury brands in Automobiles, Beauty & Skincare, Fashion, Spirits and Champagne and Watches and Jewelry.
While most luxury brands have ignored the digital phenomenon in China, some have embraced digital and are beginning to reap rewards. The disparity is substantial. Of the 100 brands assessed, 20 do not maintain a Chinese version of their website (Exhibit 2), including nine of the 29 luxury fashion brands. Unlike more mature markets, where luxury brands are clustered together in a digital arms race, digital Geniuses in China are developing what looks to be a nearly insurmountable lead. Brands in the Genius category boast digital IQ’s nearly double the average, building large online communities, transacting with customers, and building brand awareness online. However, the majority of luxury brands are barely out of digital diapers. Thirty-eight percent lack simple functionality such as a store locator. More than a third of brands do not offer customers the opportunity to opt-in for email communications.
E-commerce adoption among luxury brands in China is even more anemic. While the size of the total e-commerce market in China quadrupled from 2006 to 2009, only ten of the brands in the study boast sites that are e-commerce enabled. On average, brands that sell boast Digital IQ’s 67 percent higher than brands that do not engage in e-commerce, suggesting that selling online boosts innovation and investment across site, search, digital marketing, and social media. The beauty and skincare category has been among the first to entertain e-commerce with six of the 13 brands selling online. Fashion brand and China first-mover Ports 1961 is one of the few foreign brands outside of the beauty industry that maintains an e-commerce site in China. (Exhibit 3)
While much of the uncertainty around e-commerce in China is the result of online security concerns and limited online payment infrastructure, many luxury organizations are also hesitant to abandon traditional notions of massive brick and mortar expansion as the channel of choice. A closer look at the 28 fashion brands studied suggests dramatic retail expansion is not the only way to build awareness. A comparison of the retail footprint and online buzz (user-generated comments on social networking sites RenRen, Qzone, and YouKu) registered no correlation. Brands like Hugo Boss, Ferragamo, and Ermenegildo Zegna have pursued aggressive retail expansion strategies, including building stores outside of Tier One cities, but generate limited buzz online. Meanwhile brands including Chanel, Givenchy, and Yves Saint Laurent have a limited retail presence on the Chinese mainland but generate substantial fan discussion on popular social networking sites. (Exhibit 4)
While Google’s tug-of-war with the Chinese government is documented in the business press, less ink highlights the fact that social media platforms Facebook, Twitter and YouTube remain blocked after riots in Tibet and Xinjiang in mid-2009. In fact, not a single global Internet commerce or media leader (e.g., Ebay, Yahoo!, Amazon, etc.) has a leadership position in China, calling attention to the need for local digital marketing strategies. Social media is dominated by instant messaging platform, QQ and associated site Qzone, Facebook equivalents, RenRen and Kaixin001, and video site: YouKu. Homegrown giant Baidu rules search, boasting 62 percent market share.
Our research indicates that while luxury brands are eliciting thousands of user-generated comments, video uploads, blog posts, and photos on popular Chinese SNS sites, very few brands are interacting directly with consumers on the sites. Even user-generated uploads suggest a dearth of localized Chinese digital assets as more than 50 percent of the estimated 125,000 videos uploaded on YouKu associated with brands studied are in English. Some digitally savvy brands are beginning to engage directly with users on SNS platforms. Mercedes-Benz, Audi, and BMW host contests on RenRen, while Dior has a page on Qzone. Digital Genius Lancôme boasts an official group on Kaixin with more than 250,000 members.
“In fact, not a single global Internet commerce or media leader (e.g., Ebay, Yahoo!, Amazon, etc.) has a leadership position in China, calling attention to the need for local digital marketing strategies.”
Search engine optimization is another missed opportunity for luxury brands in China. Only 39 percent of brands come up first in organic search results on Baidu when searching for the English brand name. Meanwhile 94 percent of brand sites come up first on Google.cn, which recently exited China suggesting that brands are approaching search strategy with a Google-centric mentality that fails to recognize the Baidu algorithm and local nuances. Chinese brand name visibility is very poor, and approximately 30 percent of brand sites are not returned among the top-3 results on either search engine for Chinese brand name searches, indicating the difficulties of brand name translation for many multinational brands.
Who is doing this well?
The Digital Genius and Gifted ranks are largely dominated by beauty and automobile brands (Exhibit 5). Digital Genius Lancôme, launched an online community, Rose Beauty, in 2006 that boasts four million subscribers. Contests on the Rose Beauty and Kaixin001 generate hundreds of thousands of votes, demonstrating the power of social marketing. The French beauty brand also maintains a robust e-commerce site with a Chinese URL and is purchasing search terms on Baidu. Category competitors Estee Lauder, Clinique and Clarins also show savvy online. Estee Lauder recently became the first global beauty brand to partner with a Chinese face, signing model (and active blogger) Liu Wen in April 2010. Both Estee Lauder and Clarins maintain community sites similar to Rose Beauty and e-commerce sites. Clinique, which also sells online in China, dominates search with a site optimized for SEM and SEO for both Chinese and English searches.
In automobiles, BMW has created a community for the estimated 150,000 BMW drivers in China – MyBMWClub.cn. Meanwhile, Audi, Mercedes-Benz, and Porsche have created simple-interface BBS sites to help facilitate discussions with brand evangelists. Nine of the thirteen auto brands registered Genius or Gifted and only two brands – Lamborghini and Bentley – do not maintain sophisticated Chinese websites.
Domestic luxury brands are also beginning to emerge. The ten brands analyzed of Chinese or Hong Kong origin outperformed their global luxury peers by an average of 11 IQ points. Several local brands are also early movers: Chinese liquor brand Moutai and Hong Kong jeweler Luk Fook are the only sites in their categories to transact online. Chinese Beauty and Skincare upstart, Herborist, and Hong Kong fashion house Shanghai Tang also boast e-commerce capability. Shanghai Tang is also the only brand that features a Chinese language version of its iPhone application. In general, local brands struggle to match the buzz of foreign competitors in Social Media and are not as visible to search engines. However, local brands achieve site scores 50 percent higher, than foreign peers, with content that appeals to locals.
Key Success Factors
1. Understand Digital China: China’s digital landscape is frenzied, and local. Google never understood this. Baidu has established leadership with much more Chinese brand than Google.cn ever aspired to. Although Chinese consumers love foreign brands, in the digital space, they will opt for interfaces that cater to local tastes. Partnering with Chinese technology firms, agencies, and vendors is imperative to recognizing the digital opportunity.
“Although Chinese consumers love foreign brands, in the digital space, they will opt for interfaces that cater to local tastes.”
2. Don’t Forget Mobile: There are an estimated 744.7 million mobile phone subscribers in China, and more than one quarter of mobile users access the internet through their phone. Because China has considerably lower in-home Internet penetration than most developed nations, and many Chinese consumers move directly from no Internet to mobile Internet, it is imperative for luxury brands to develop a mobile strategy. Currently only 42% of luxury brands maintain sites that load on a mobile phone.
3. E-commerce in China = Your Biggest Door: We believe the online market for luxury goods in China will be larger than any other market within three years. A growing market coupled with a more digitally native consumer translates to a revenue line whose growth will eclipse any other growth market for prestige. Luxury brands that are currently selling online are generating triple and even quadruple digit, yoy e-commerce growth. Investing in technology, human resources and fulfillment infrastructure to build out your e-commerce channel in China is critical to long-term success.
4. The Investment Should Match the Opportunity: For luxury brands small successes in the Chinese market will drive more shareholder value than homeruns in other markets. Most brands are still grappling with how to tap into this tremendous well of growth. The greatest risk is not making the wrong decisions, but spending too much time weighing your options.
About the authors
Scott Galloway: Scott is a Clinical Associate Professor at the NYU Stern School of Business where he teaches brand strategy and luxury marketing and is the founder of L2, a think tank for prestige brands. Scott is also the founder of Firebrand Partners, an operational activist firm that has invested more than $1 billion in U.S. consumer and media companies. In 1992, Scott founded Prophet, a brand strategy consultancy that employs more than 120 professionals in the United States, Europe, and Asia. In 1997, he founded Red Envelope, an Internet-based branded consumer gift retailer. Scott was elected to the World Economic Forum’s “Global Leaders of Tomorrow,” which recognizes 100 individuals under the age of 40 “whose accomplishments have had impact on a global level.” Scott has served on the boards of directors of Eddie Bauer (Nasdaq: EBHI), The New York Times Company (NYSE: NYT), Gateway Computer, eco-America, and UC Berkeley’s Haas School of Business.
Maureen Mullen: Maureen leads L2’s research and advisory group and has benchmarked and/or developed digital and social media initiatives for more than 300 prestige brands. She began her career at Triage Consulting Group in San Francisco. At Triage, she led several managed care payment review and payment benchmarking projects for hospitals including UCLA Medical Center, UCSF, and HCA. She has gone on to lead research and consulting efforts focused on digital media, private banking, M&A, insurance industry risk management, and renewable energy economics for professional firms and academics. Maureen has a B.A. in human biology from Stanford University and an M.B.A. from NYU Stern.
The full Digital IQ Index® China and other L2 research can be downloaded at www.l2thinktank.com.
Graphics by: Christine Patton and Jessica Braga, L2
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 Ministry of the Information Industry, People’s Republic of China, August 2009