How to counter the slowdown in the China luxury market?

New data shows that sales of luxury products, which includes upmarket cosmetics and fragrances, fell by 1% in 2014 compared to 2013, to record a value of RMB 115 billion ($19 billion), according to market researcher Bain & Company.

The news follows the publication of data from the China Bureau of Statistics showing that in December national sales of cosmetics grew by 7.2% to RMB 18,200 million, which is part of a gradual slowdown in sales for the category since the beginning of 2014, when year-on-year monthly growth was still in double digits.

Luxury sales underline more competitive environment​

Sales of luxury products, and particularly luxury cosmetics, have been the barometer of China’s growing economy and consumer prosperity but according to Bain experts, the country’s luxury market is undergoing a fundamental shift, “​brought on by evolving customer dynamics, an influx of new, emerging luxury labels, and an economic slow-down”.​

This is manifesting itself in an increasing choice of diverse prestige and luxury brands and means that consumers of such products are becoming less and less loyal to any one brand.

“This creates a new window of opportunity for emerging brands.  At the same time, it is imperative that more established brands don’t grow complacent as China’s luxury market continues to evolve, or they risk falling out of favor with consumers,” ​said Bruno Lannes, Bain Partner and author of the company’s 2014 China luxury market study.

Look out for daigou traders​

Interestingly the study points out that the category for daigou, ​traders who buy and sell luxury good to customers in China, has grown to an estimated RMB 55 – 75 billion, and top of the shopping list is luxury cosmetics.

This reflects the curiosity of China consumers, who want to try out cosmetic and fragrance brands they find hard to get hold of in their own country, and could suggest there is still a burgeoning market for new luxury brands, despite the fact that overall spending is on the decline.

The report also cites that an estimated 70% of luxury brands bought by Chinese consumers are purchased abroad or through daigou agencies, with most of these products being sourced in either Korea or Japan.

What to do to capture luxury consumer spend​

Looking ahead to the future, the Bains study suggests that the trend for spending on foreign luxury cosmetics will continue, particularly as increasingly knowledgeable and sophisticated younger shoppers continue to make their spending power felt in the category.

Strategies that the study suggests luxury brands should follow for greater success in China include focusing on the increasingly sophisticated China consumer, enhancing exclusivity and tapping into luxury dedicated e-commerce channels.

“In this age of brand redefinition, luxury brands in China must shed traditional concepts and channels and follow where their customers lead, or risk losing them,”​ said Lannes.  “This may be a challenge for many, but those that understand how to change with the consumer will reap the rewards.”​