A Middle-Class Force Awakens pt. 2

Jun 08, 2016

The Sky has Fallen

Why were we ever in a world where an entry-level office worker was so willing to spend a disproportionate amount on luxury?

I think we can argue about cultural reasons including:

•    The importance of face
•    Displays of wealth as a signifier of trust

•    Gift-giving culture

Another way to look at it is that the entire consumption economy was geared toward an elite group of spenders (we can consider this the Top 0.01%).

•    This group has not been doing very well lately. It has been an economy that has been driven by a very small elite and the trickle down effects of this elite consumption.

•    The elite have included government officials and the class that works with them , factory owners who export to foreign markets, real estate developers and entrepreneurs with easy access to capital.

What we have seen in the last two years is a Chinese economy where these old-economy drivers of growth have largely dissipated, and may never again be the key growth drivers in the economy again. From the perspective of hindsight, we will look back at retail luxury market as something of a naive and strange phenomenon.

Why Luxury Retailers are Failing

In 2014 SmithStreet conducted a study for a major luxury conglomerate going into 300 luxury consumer wardrobes across 13 cities in China and talking to luxury spenders on store service, discovering that store service was really great if you were recognized by that store manager as a VIP. If not, you generally received unsatisfactory store service, and this was more pronounced when compared to travelers who have experienced store service abroad.

Another way to think about the previous abnormality of the market is that:
•    Luxury products flew off the shelves despite a lack of luxury buying experience
•    Luxury goods sold themselves
•    Chinese consumers, for a time, were willing to pay more for the same good

As part of a pricing study for a leading American women’s wear brand, a comparison of over 500 SKUs across different brands and categories was built and found that on average the China price was 68% higher for the equivalent product in the US. Fortunately for the consumer, and unfortunately for retailers, the emergence of easy travel and the ecommerce phenomenon spearheaded by Alibaba has made disparate pricing impossible, we have to appreciate the Taobao network (which includes TMall) for what it is: an exchange where sellers can take all the world’s products to one fifth of the world’s consumers with complete market information. 

We also have to rethink what the daigou (代购) or "shopping agent" market is in China.  With a daigou, a luxury consumer in China gets a personal shopper that is always accessible through their smartphones, they know what you previously bought and therefore your shopping preferences, they are a friend who is responsive to personal and commerce conversations that you need to have, and they are someone who is able to curate, explain and introduce you to new products and brands that you do not yet know about. Would you not expect this experience when you are looking to buy a luxury product? Retailers are not able to provide this right now.

And they are stuck with an expensive and extensive physical store network.

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A Middle-Class Force Awakens

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