A brand awareness upgrade Welcoming a new era in the Chinese luxury market. CHINESE CONSUMER REPORT Luxury ROLAND BERGER STRATEGY CONSULTANTS

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1 ROLAND BERGER STRATEGY CONSULTANTS In depth knowledge for decision makers CHINESE CONSUMER REPORT Luxury A brand awareness upgrade Welcoming a new era in the Chinese luxury market

2 Foreword Defining Chinese luxury brand consumers Enhance brand awareness Winning in the luxury market 2

3 Foreword China is close to becoming the second largest luxury market in the world and it is increasingly attracting the attention of major luxury brand producers worldwide. In view of this, Roland Berger conducted a study on the behavior of Chinese consumers when buying and their choice of brands. The aim of the study was to offer those companies that wish to engage in this prestigious and lucrative market with valuable insights about their target consumers. To achieve this goal the study looks at the key factors influencing and determining the purchasing behavior of Chinese consumers: broadly their social characteristics as well as psychological and behavioral traits. Our experts further segmented the entire consumer population into six archetypes, which we call Era Leaders, Wealthy Second Generation, Ambitious Elites, Savvy Investors, Stylish White Collars and Gift Buyers. China has a great deal of consumers who can be characterized as Gift Buyers. In addition, "showing-off" (exhibitionism) is a significant feature in all the other archetypes too, albeit to varying degrees. One in four consumers in China belong to the archetype Era Leaders. One of their strong traits is a penchant to follow others. Given these findings it is not surprising that internationally famous brands are still the top choice for Chinese luxury goods consumers. To better understand the market, Roland Berger closely examined the considerations and actions that culminate in the purchase of. They noticed that the purchase of a luxury good is the culmination of four distinct steps. We call these stages Origin of Consciousness, Selection of Brand/Product, On-site Decision and Final Purchase. Our experts further observed that brand awareness plays a very important role in each of the four stages. Member of Global Executive Committee President, Asia Roland Berger Strategy Consultants The increase in the number of consumers who can be characterized as Wealthy Second Generation, Ambitious Elites and Trendy White Collars suggests that Chinese consumers on a whole are maturing. These buyers unlike most of their peers do not choose certain brands for the sole purpose of "showing off". On the contrary, they are choosing brands that make them feel good, that give them a certain sense of self-satisfaction. There is a shifting preference toward unique luxury brands, which requires a more nuanced understanding of the market. There must be an awareness of more than just the top luxury brands. Today to be successful in China it is often enough for companies simply to have a well-recognized brand. But increasingly brand competition will intensify, especially as a wider range of brands becomes accepted. There is increasing brand awareness among buyers of in China. This is a trend that all brand producers have to address and try to exploit, both makers trying to maintain their leading position in the Chinese luxury market and latecomers striving to quickly catch up to their more established counterparts. When it comes to brands, consumers are upgrading. And makers of need to have a well-defined and focused strategy, particularly when investing resources. Accordingly, Roland Berger experts recommend that players thoroughly consider the following three aspects: 1. Identify brand ambassadors these are the "active information seekers". Marketing activities should target this group of consumers with the aim of having them "fall for the brand". They need to be aware of the brand and promote it within their social groups. 2. Set up an interactive global store network. Given the fact that the Chinese are more likely to buy abroad than they do at home, companies should differentiate in-store positioning both within China and abroad. Activities need to be undertaken to better manage how products are selected, customer service and how stores are assessed. 3. Broaden the core market for marketing. Marketing and distribution activities should be extended beyond first-tier cities. Specifically for this exercise, we identified the key luxury market cities through our proprietary model based on spending power and economic scale. Store expansion should occur in these cities. Moreover these cities will form the main battlefield on which the war for brand awareness will be fought. These are the cities where brand preference and recognition will be built. 3

4 Defining Chinese luxury brand consumers The capacity and increasing speed of the global luxury market [One billion euros] Other countries Other Asia-Pacific countries Japan Chinese mainland America Europe Who are Chinese luxury brand consumers? CAGR New market capacity New market proportion Source: Roland Berger Analysis Gender distribution Age distribution Household income distribution Chinese consumers are displaying a newfound and growing interest in. The wealthy and elite are eagerly embracing the culture of the luxury market and wish to own the same brands that are popular in developed economies. This has not escaped the notice of mainstream luxury brand producers. In recent years they have seen their products become a feature of daily life in China to a moderate but steadily increasing degree. If makers are to capitalize on this trend they should move quickly to acquire and develop a deeper understanding of Chinese luxury consumers. As Chinese luxury consumers are expected to account for 40% of the new luxury market globally between , it is an opportunity that few can afford to miss. Male Female China Source: 2011 Roland Berger s Chinese Luxury Consumers Survey (n=1,393), Germany 2010 Survey; Roland Berger analysis Archetypes of Chinese luxury consumers Archetypes: Western European Consumers Era leader Wealthy second generation Western European Consumers China highest 20% medium 30% lowest 50% Ambitious elites Savvy investors Western European Consumers Stylish whitecollars China Gift buyers Buyers of in China are younger than buyers in mature markets. This can be attributed to a large degree to China's demography. China has a relatively young age population and wealth creation has been mostly concentrated in the young generation since the country's social and economic reform. A further differentiating factor, however, is that Chinese luxury consumers are often found in the top social status group as opposed to the more general across-the-board distribution that occurs in mature markets. Archetypes % Share ~25% ~30% ~10% ~5% ~10% ~20% Social profile Psychological traits Behavioral traits > private business owners, corporate executives (foreign, stateowned, private) > 25 to 40 years old >worship >wisdom >self-cultivation >follow others > recognize top brands > young people from the second generation of the wealthy and officials, including rich men s wives > 20 to 35 years old >innovation >self-confidence >passion > are independent > have strong selfawareness > middle managers of multinational or state-owned companies, professionals, entrepreneurs > 25 to 35 years old >enterprise >passion >challenge > have strong selfawareness > have a good understanding of > real estate speculators, stock traders, freelancers, the unemployed > 25 to 40 years old >trendiness >individuality >luxury > have fluctuating consumption capacity > focus on popularity > fresh to the workforce, have stable income higher than their peers > 20 to 30 years old >beauty >luxury >fashion > have strong selfawareness > have a good understanding of > lack of distinctive features >worship >respect > have a low purchasing frequency > focus on popularity Roland Berger experts segmented Chinese luxury consumers into six archetypes based on their physical, psychological and behavioral characteristics. The six archetypes are Era Leaders, Wealthy Second Generation, Ambitious Elites, Savvy Investors, Stylish White Collars and Gift Buyers. An in-depth appreciation of the uniqueness of these six groups can assist producers of luxury brands to devise more precise brand development strategies for the Chinese market. Source: 2011 Roland Berger s Chinese Luxury Consumers Survey (n=1,393), industry interviews; Roland Berger analysis 4

5 Enhance brand awareness An analysis of the six archetypes shows that makers presently focus their marketing on brand awareness. This arises not only because there is a large number of Gift Buyers in the Chinese market but, more importantly, because there is a lack of understanding of among buyers. Consumers in the groups Era Leaders and Savvy Investors are not yet confident when making purchasing decisions. When buying luxury goods these archetypes do not venture away from the top names. They buy top brands only. Analysis of Chinese luxury consumers purchasing behavior Origin of consciousness Selection factors Observation > reliance on social networks to get brand/product information > only well established brands with deep market penetration command the strong brand awareness of consumers > product selection usually made prior to visiting the channels >risk aversion and trying new brands >limited brand selection Implication > invest in resources to increase brand awareness > invest in resources to increase brand awareness To determine just how important brand awareness is for the segment, Roland Berger experts looked very closely at the purchasing process and saw that it could be divided into four steps. Brand awareness was significant at each of the four steps - origin of consciousness, selection factors, on-site decision and final purchase. Origin of consciousness, selection factors and obtaining information When buying, Chinese consumers are heavily reliant on the recommendations of others and from information gained at physical stores. As such, their purchasing decisions can be described as prudent, cautious and made without much credible information. Clearly, this is a huge obstacle for lesser-known luxury brands. Since Chinese consumers stick to the tried-and-true when buying high-end items, it makes it very difficult for lesser-known luxury brands to become known, recognized and alluring. Compared with consumers of other products, consumers rely more heavily on social networks when obtaining information. This ties closely with the unique social aspect of : they are a proof of social status. On-site decisions Final purchase > effect of brand awareness continues: brand popularity is more important than design/style > proliferation of brands, but the market is relatively concentrated > invest in resources to increase brand awareness > invest in resources to increase brand awareness Source: 2011 Roland Berger s Chinese Luxury Consumers Survey (n=1,393), industry interviews; Roland Berger analysis The main channels of getting information [%] Others recommendation Physical stores Magazines TV commercials Professional online channels of Entertainment news Brand s official website Posters/outdoor events User comment E-commerce websites Source: 2011 Roland Berger s Chinese Luxury Consumers Survey (n=1,393), Industry Interviews; Roland Berger Analysis 5

6 Have you ever tried to buy some unfamiliar brands? Buy unfamiliar brands Never 1 out of 6 or 7 1 out of 4 or 5 1 out of 1 or 2 Almost every time clothing Channel predetermination Q: Would you buy some unfamiliar brands? Q: Do you decide on the brand and product category before purchasing? Source: 2011 Roland Berger s Chinese Luxury Consumers Survey (n=1,393), accurate, Roland Berger Analysis On-site decision factors Determine brands and products Determine specific brand Determine specific product category On-site decision luxury clothing skin care mobile goods phone Chinese luxury consumers are not confident about the credibility of the information they receive. Cautious purchasing behavior is the result. They rarely buy unknown brands and do no buy on the spur of the moment. Purchases are made only after very thorough consideration. Similarly, consumers buying skin care products and mobile phones rarely make purchases on impulse or before lengthy consideration. For makers of this is an important insight: the competitive battle begins at the earliest stage of the purchasing process. Reasons for buying the product Reasons for not buying the product On-site decisions Brand Design Quality Price clothing Q: Which factor do you consider first when choosing the products? Don t know the brand The brand culture/ style doesn t suit me The price is too high Others Source: 2011 Roland Berger s Chinese Luxury Consumers Survey (n=1,393), accurate, Roland Berger analysis Final purchase (taking high-end jewelry as an example) Q: What kinds of brands won t you buy? clothing Nothing is more important than brand for Chinese consumers when purchasing luxury goods in stores. Brand is more important than design, quality or price. When affordability is not an issue, Chinese consumers tend to upgrade to top-tier brands. Whereas it is common for consumers in more mature markets to reject a brand because it "doesn't suit them", this rarely occurs in China. Brands are rejected in China because they are not known. market share [%; 2010] Despite brand proliferation, the market is relatively concentrated due to the presence of certain more established brands. These established brands enjoy high brand awareness. Upgrading brand awareness operating history in China Source: 2011 Roland Berger s Chinese Luxury Consumers Survey (n=1,393), accurate, Roland Berger analysis brand awareness [%] Roland Berger believes that Chinese luxury goods consumers are becoming more sophisticated, evolving into buyers that purchase goods that make them feel good and give them a certain sense of self-satisfaction. 6

7 These purchases are not made to show off. As buyers become more egoistic and rational we predict that brand preference and recognition will be increasingly important in the consumer decision-making process. In the future, the question of "whether a brand suits me" will become a more important factor for Chinese consumers when deciding to buy a luxury good. The rise of consumers that belong to the archetype groups Wealthy Second Generation, Ambitious Elites and Stylish White Collars will go hand-in-glove with more egoistic and independent purchasing decisions. Therefore, the battle of brand preference and recognition of will ensure as the drive for increased brand awareness takes effect. The luxury car market provides a good example of how makers of can position themselves in relation to the intrinsic qualities and associations that the brand wishes to project to Chinese consumers. The brand positioning of the four luxury car brands are significantly different. The brand positioning has been made based on the uniqueness of the Chinese market within the larger framework of global brands. The four brands center around the values "distinguished", "beautiful", "exquisite", "credible", "advanced" and "dynamic". Each brand has a focus on this first level and further differentiates itself from its competitors on the second level. Take "distinguished" as an example: Whereas Mercedes Benz is linked to distinguished origin, BMW is linked to noble sports, and Lexus with implicit style. The pairings in the example of "beautiful" are also telling: Audi fashion beauty, Benz classic beauty, BMW artistic beauty, and Lexus purity and simplicity beauty. The evolution of the psychological demand of Chinese luxury consumers group affiliation (generally recognize) Source: Roland Berger analysis First level Second-level values MB BMW Audi Lexus Distinguished Beautiful Exquisite Credible Advanced Dynamic appreciation (products, service, existence) compare with others lacking taste and emotional demand show off (luxury, status) distinguished classic (eternal) Implicit tasteful (aesthetic, elegant) Attractive Simple (pure) exquisite (serious) caring high quality responsibility (credible) advanced technology (design model) Innovative Original Dynamic Young Athletic egoistic rational individuality (taste, culture) Commentary: Different brand positioning and translation of deluxe car brands In the past: Characteristics of Chinese luxury market -- Consumers had a relatively low level of education -- Consumers valued brand awareness and popularity the most Brand preference of Chinese luxury consumers --Social circle --Befitting status and occasion In the future: Rational demand -- Satisfaction of rational needs, such as quality and comfort --Recognition of value for money Emotional aspect --Focus on whether the brand suits me -- Pay more attention to personal taste, culture and modern values Pleasant Source: Roland Berger analysis 7

8 Winning in the luxury market Comparison of consumers' level of involvement in the decision making process in different product groups Information seeking activity level Often Sometimes Never luxury clothing skin care mobile goods phone Three characteristics of active information seekers luxury clothing skin care mobile goods phone Source: 2011 Roland Berger s Chinese Luxury Consumers Survey (n=1,393), Industry Interviews; Roland Berger Analysis Characteristics of active information seekers The number of brands recognized with/without prompting Often actively Sometimes actively Never actively Information seeking channels Magazines Physical stores Professional online channels of Consult others Official brand websites Online search E-commerce websites Number recognized without prompting Number recognized with prompting Number of brands recognized without prompting Reason for absolutely not buying a particular brand Don t know the brand Brand style/ culture doesn t suit me Price is too high Others Often actively Source: 2011 Roland Berger s Chinese luxury consumers surveyluxury Consumers Survey (n=13931,393), industry interviews; Roland Berger analysis Sometimes actively Never actively 1) They are relatively less dependent on social networks; 2) Though active in getting information, they know a limited number of brands. They know more brands than other consumers with capacity to increase the number of known brands; 3) They believe the important factor of brand should be whether the brand suits them rather than the brand's popularity. Active information seekers, who are also highly receptive of market information, account for 14% of luxury product consumers. Educating this group has the following benefits: 1) Education cost is very low as they actively from relatively fixed information channels; 2) Their social network can be leveraged to influence other consumers. Roland Berger experts believe that Chinese consumers are upgrading from simple brand awareness to a higher level that is accompanied with greater expectations from brands and greater demands. Brands that are capable of recognizing the shift in consumer sentiment will be more likely to achieve success in the luxury market, outmaneuvering their competitors. Strategies need to be devised that cover marketing, sales networking and product portfolio development. Companies that accomplish them will not only have a competitive advantage; they may even disrupt market patterns. Finding the brand ambassador It is important for luxury brands to find people who hold influence in desired consumer circles these people act as brand ambassadors. We observe from our analysis that active information seekers these people are also highly receptive to market information account for 14% of luxury product consumers. This is about the same percentage as those who consume relatively complex products such as skin care and mobile phones. Combined, this indicates that a significant number of consumers involve themselves heavily in purchasing process considerations at least with respect to these product groups. An earlier analysis conducted by Roland Berger experts also revealed that a higher proportion of active information seekers were found to exist among Stylish White Collars, Ambitious Elites and the Wealthy Second Generation luxury consumer archetypes, than elsewhere. Active information seekers display three key characteristics: For those deeply involved in the purchasing process, the thought that a "brand's style/culture doesn't suit me" is now more likely to be the primary reason for not 8

9 purchasing a product and no longer "I don't know a brand." For active information seekers it is vital that brands appear frequently in information channels. Not only does this reinforce recognition, it also enables preferences to be formed. Brands that wish to speak to this segment of the market must intensify their marketing initiatives in magazines and online channels. More importantly, they must win the active support of active information seeks. It is critical for makers to strengthen the relationship and increase the level of intimacy between the brand and active information seekers through events and VIP publications, allowing them to take part in the brand development process through word-ofmouth. Setting up a global store network 3) About 10% of the consumers who buy purchase these goods at the request of relatives and friends Given the interconnectedness between domestic and international purchases, physical stores of luxury brands in China should not just be points of sale. They should rather view themselves as display windows, highlighting to consumers the potential of worldwide sales. Considering that many consumers examine products at home and then shop abroad, stores in China should become the marketing ground for products sold only abroad. As well as carrying SKUs that drive sales volume, stores in China should also display designs and products that are available in Hong Kong, Singapore and Tokyo through the use of product catalogs, leaflets and samples. At the same time, stores abroad should be better prepared to cater to Chinese demand. Sophisticated consumers demand services that are consistently good. More and more astute consumers expect and require "friendly", "professional" and "unpretentious" in-store services. These values should be clearly communicated with consistency to ensure that the consumers' shopping experience is positive and maximized. To ensure that sales staff act in accordance with the brand's intentions, more attention needs to be paid to store assessments. These should extend beyond the analysis of sales figures and incorporate indicators such as store image, number of store visits and consumer satisfaction rates. Many Chinese frequent luxury stores worldwide, especially in places close to home like Hong Kong and Macao. According to a survey Roland Berger conducted in 2011, over 50% of consumers purchased luxury goods outside of mainland China in Nevertheless, the consumption pattern inside and outside of mainland China is closely related. Chinese consumers consumption behavior inside and outside China Chinese consumers luxury consumption location Chinese consumers purchasing behavior abroad Our survey shows that: In China Abroad 1) Over 70% of consumers who buy outside of mainland China have also bought products from the same brand inside mainland China 2) Over 20% of consumers who buy outside of mainland China make their purchasing decision when in mainland China % of global sales Total Mainland China Hong Kong, Macao and Taiwan Outside Greater China Knowing the brands through others recommendation or through retail outlets, leading to low number of preferred brands High price confirms the brand exclusivity, leading to cautious purchases Often first time purchases of some brands Leverage brand awareness developed in China More reasonable prices lead to rather liberal purchase behavior that is based on developed brand awareness Repeat purchase - about 70% of the consumers abroad have made purchases from respective brands in China Source: 2011 Roland Berger s Chinese Luxury Consumers Survey (n=1,393), industry interviews; Roland Berger analysis 9

10 Luxury market capacity in different tier cities Luxury market penetration and average spending in different tier cities Population [million] Average spending [thousand/year] Penetration of luxury goods: first-tier, secondtier, third-tier, fourth-tier Number of cities Source: 2011 Roland Berger s Chinese Luxury Consumers Survey (n=1,393), industry interviews; Roland Berger analysis 58 key battlefield cities for Chinese luxury brand market spending power Battlefield for consumer spending power third-tier Total spending in in different tier cities [100 million] fourth-tier Key battlefield for luxury companies first-tier second-tier Source: 2011 Roland Berger s Chinese Luxury Consumers Survey (n=1,393), China City Statistical Yearbook, National Development and Reform Commission, Yearbook of China Retail Corporations in Chain; Roland Berger analysis #city Spending on Population (million) City Luxury brand population consumers population Key battlefield coverage #city City population Target consumer group of Spending on Broaden the core market for marketing There is untapped potential for sales in China's segment. Although most luxury companies have opened stores in China's first and/or second-tier cities, buyers from third and fourth-tier cities account for nearly 40% of total sales. This proportion is expected to further increase in the future. Consumers from second-tier cities have contributed a higher percentage of sales than those from first-tier cities. Consumers from third and fourth-tier cities together have also contributed a higher percentage than those in first-tier cities. In our view, there are many key battlefield cities for luxury companies in China. As it is unrealistic to cover all third and fourthtier cities, we have identified the key cities of the luxury market through our proprietary model, which is based on spending power and economic scale. In this model, which follows the 80/20 rule, we aimed to cover the largest consumer population with the fewest number of cities. According to our model, 70% of luxury goods consumers can be reached by covering 58 cities. Leading international brands have not yet reached this coverage level. In the near future, the growth of China's luxury market will still be driven by store expansion from multinational luxury companies. Low-tier market coverage by international companies is still low but considerable market capacity exists for network growth. The key question for international luxury brands is how to effectively reach that large pool of potential buyers in third and fourth-tier cities. 10

11 Beijing 20/F, Tower A, Gateway Plaza, 18 Xia Guang Li, Dong San Huan North Road, Beijing, China, Tel : Shanghai 23/F, Shanghai Kerry Centre, 1515 West Nanjing Road, Shanghai, China, Tel: Guangzhou 10/F, 8 Linhe Zhong Road, Guangzhou, Guangdong, China, Tel: Hong Kong 16/F, Nexxus Building, 41 Connaught Road, Central, Hong Kong Tel: Taipei 37/F, Taipei 101 Tower, 7 Xinyi Road, Section 5, Taipei, Taiwan, 110 Tel: infochina@rolandberger.com Roland Berger Strategy Consultants 2012, all rights reserved