In 2012, Chinese shoppers became the largest group of luxury shoppers in the world and now account for 25% of global revenue for luxury retailers, ahead of the Americans who account for 20%. While already impressive, this share is likely to increase, as the consumption of luxury products by Chinese consumers is expected to grow by a double digit rate annually over the next few years. Nevertheless, despite the increasing demand for luxury products, more than half of the luxury products purchased by Chinese shoppers are purchased abroad. This article explores the main reasons behind this phenomenon.
1. The price discrepancy between luxury products sold in China and the ones sold overseas is arguably the main factor that encourages wealthy Chinese consumers to shop outside the Mainland. According to estimations by the Chinese Ministry of Commerce, the average price of luxury goods in China is 45% higher than in Hong Kong, 51% higher than in the United States, and 72% higher than in France. For some, the price differences are enough to justify the troubles of obtaining a visa and the additional expenses to travel outside the Mainland.
Why is the price so high in China?
The price gap is mostly attributed to the high level of tax imposed on luxury goods in China. What is often called the “luxury tax” is in reality a combination of three types of taxes which vary depending on the category of products:
In addition to taxes, the progressive appreciation of the Chinese Renminbi relative to the Euro and the US dollar continues to widen the gap between luxury good prices, making it even more attractive to shop abroad.
A tax reduction is expected
In an effort to stimulate domestic consumption, the Ministry of Commerce announced last year its intention to reduce import duties on luxury goods. While such a move is imminent, the government is likely to adopt a gradual approach with a succession of small tax cuts instead of one big cut, amid fears that these measures would appear to favour the wealthy population and stir up resentment among the poor. Another option also proposed the creation of special luxury zones – cities with lower taxes on luxury goods.
The price gap is, however, not the only reason why luxury shoppers prefer to buy abroad and the following factors should be taken into consideration to understand this phenomenon:
2. The increase of personal wealth. According to Credit Suisse, the wealth per adult in China more than tripled between 2000 and 2011. In the meantime, the number of Chinese millionaires has increased rapidly. By the end of 2011, the number had already leapt past 1 million (+6% compared to 2010) and is now expected to more than double by 2016 (Credit Suisse). Accordingly, with a greater income, travelling abroad becomes more accessible.
3. The limited product selection: Frustrated by the limited number of products offered locally and by delayed access to the newest collections, some Chinese luxury shoppers often resolve to travel abroad to acquire the product they want. Moreover, as Chinese tastes for luxury goods are rapidly maturing, an increasing number of luxury shoppers express the need to stand out of the crowd and look for more understated and less well-known brands, often only available outside China.
4. The importance of the country of origin. Our research with more than a thousand wealthy individuals in China shows that about two-thirds of Chinese luxury shoppers consider the country of origin of the product to be important. Buying a product in the country where it was crafted adds cachet and prestige. Furthermore, there is a general perception in China that foreign made goods are better than Chinese made ones, which reinforces the idea that buying a product abroad is better – even when identical to the local one.
5. The gift tradition. Social gifting is a practice deeply entrenched in the Chinese culture and buying luxury goods for relatives, friends or business partners when travelling to Europe or the United States remains a must for someone with the financial means.
6. The authenticity of the products. China is notorious for its counterfeits of luxury products and many Chinese consumers prefer, when they can, to buy luxury goods abroad to be sure that they are “genuine”.
7. The visa: The greater ease with which Chinese citizens can now obtain visas for Europe or the United States is also contributing to an increase in the number of trips to these destinations.
Today, more than half of the luxury products purchased by Chinese are bought outside the Mainland and this proportion is likely to increase, at least in the short term, as the share of Chinese luxury shoppers buying exclusively in Mainland China is declining rapidly (see the Chart below).
Source: McKinsey Company – Luxury without Borders
While Chinese luxury shoppers are now diversifying the destinations of their trips, the bulk of their luxury purchases are still made in Hong Kong. According to our survey, 39% of Chinese shoppers still prefer to go to Hong Kong to buy luxury products, compared to 24% preferring Europe, 10% preferring the United States and 7% preferring Japan. Hong Kong offers several considerable advantages for Chinese Luxury shoppers: its proximity to the Mainland – less travel expenses and less time spent traveling, its tax free retail sales, and the ease with which they can obtain a visa. The incentive to go to Hong Kong is such that it is not unusual for Mainlanders to visit the city with the sole intention to splurge on luxury products. In 2011, 28 million Chinese tourists visited Hong Kong – four times the city’s population – and their shopping expenditure accounted for 27.3% of Hong Kong’s total retail sales, almost 6% of the city’s GDP.
Europe and the United States are becoming increasingly popular among Chinese tourists, due, as explained above, to the rise in personal income, easier access to visas, and the appreciation of the Renminbi. However, unlike trips to Hong Kong, trips to Europe or to the United States are mostly for the purpose of sightseeing, and shopping, while still a must, is a secondary factor. Considering the recent data on consumption by Chinese luxury consumers abroad, it is not hard to see how the rise of travels to Europe or the U.S. benefits the luxury sector in these regions. In 2011 alone, Chinese tourists bought two-thirds of the luxury products sold in Europe, according to the World Luxury Association.
Source: Albatross Global Solutions – China Luxury Forecast
Based on our research, the category of products purchased varies significantly, depending on the country Chinese luxury shoppers visit. The chart below shows the top 5 categories of product purchased in the top 5 destinations for luxury shopping by Chinese shoppers.
The categories are: Watches, Jewelry, Luxury Wines & Spirits, Bags, Shoes, Cosmetics and Perfumes, Apparel, Accessories.
Source: Albatross Global Solutions – China Luxury Forecast
Tax cut or not, it is unlikely that we will see major changes in the behaviour of Chinese luxury shoppers any time soon. Mainlanders will continue to make extensive purchases abroad due to increasing incomes and the greater ease with which they can now travel, but also due to the prestige of buying luxury products where they are crafted. The main looser of this tax cut would certainly be Hong Kong, as the number of Chinese luxury shoppers is likely to decline if the price difference is reduced, but considering how large the current price gap is between the city and the Mainland, we can expect the change to be slow.