LUXURY INSIGHTS CHINA TM Thank you for downloading this complimentary article from Luxury Insights China, we hope that you find it of value to your business. Why subscribe to Luxury Insights China? This is how our subscribers describe it to us " Reading Luxury Insights China is like having an expert member of staff to brief me for an hour each month about the Chinese luxury market and its consumers. The opinions and factual data it contains help to stimulate my thoughts as to the ways we address this critical market. Excellent! The content of Luxury Insights China is exclusively written by the research and consultancy team and is based on their expert local knowledge, practical experience and face-to-face discussion with professionals working in China. " Each report reviews market activity over the previous month, and issues currently affecting the sector Luxury Insights China is issued ten times per year, in addition to which are four special reports covering specific sectors of the market. Subscription Subscription to Luxury Insights China costs 500 per year. Further Subscription information and payment information can be found here http://www.fdkginsight.com/luxury-insights-china/subscription/ lic@fdkginsight.com 14 FDKG Ltd.
LUXURY INSIGHTS CHINA TM October & November 14 Sample Publisher's opinion It's a case of hotdogs and noodles Business Review City Report Chongqing Sector Focus The market for modern European furniture in China Tan Lun Government policy begins to drive the price of new vehicles lower
TM Introduction Welcome to a combined October and November issue of Luxury Insights China. In recent months, the majority of luxury brands have focused their energies on converting consumers to customers and have therefore decreased their store opening and event activities. There is certainly less interesting news from the brands than in the past, but we are all interested in the changing consumer and their attitudes, so in this issue this is our focus. In particular we assess the increased revenues luxury brands have benefited from outside of China as those with spending power are drawn overseas to increase their life experiences, see new things, and of course buy luxury items. Now of course, to the less initiated than you, the fact that Chinese consumers are now spending more money outside of the country than in it might suggest that spending marketing budget in China is a thing of the past. Far from it! Now its even more important than ever to be seen in China, to be understood and to be adopted and sought out by the traveller. The competition is greater, but even newcomers have a good chance of success if they promote themselves in China well, and in some cases, they don t need to open physical retail space here. The landscape has changed, and we hope that what you read in the following pages helps your understanding of this and informs your next moves. The Chinese consumer is evolving; growing in knowledge and experience and still a moving target that you cannot afford to take your eyes off of for even a second! The increase in interest in lifestyle is the basis of our sector focus report related to the opportunity to sell modern European style furniture in China. People here have and continue to adopt more western habits and are learning that entertaining at home, or just relaxing in a comfortable well designed space is pleasant, hence the increase in spending on home decoration and furnishing. This feature is adapted from some research we carried out in 12, but brought up to date. At the time we carried out this work, there were no projections for market size or value, so we created models to define these, more of which you can read about. Luxury products maybe sold in greater volume overseas, but furniture is a domestic purchase. Lastly, car prices; regarded by everyone here as to high and those outside of the country as ridiculous. The historical cause of the issue was ill considered government policy that finally appears to be being adapted and changed. This may increase the volume of vehicles sold, or just make consumers feel less abused by the brands. Read more in Tan Lun this month. Happy reading. Tom McLean Editor 2 LUXURY INSIGHTS CHINA
Sector Focus The market for modern European furniture in China Anti corruption activities and greater spending on luxury products and services have hit the premium and luxury sectors in Mainland China over recent years, but as they say, 'every cloud has a silver lining' and one cloud in particular that we have seen deliver positives has been a greater focus amongst Chinese in general and especially those with money, on a better lifestyle. Today its not so much about just the ownership of a nice car or bag, the consumer is looking for things that make their life better and more enjoyable. Another cloud with a silver lining is the slowing of property sales as we see more people investing in creating a more enjoyable home environment for their own benefit, and as a place to entertain friends and family rather than always going out to do so. We therefore took some previous work we had done to evaluate the market for modern European furniture in China and refreshed it as it represents a sector with huge growth potential if we consider the number of people and private residences there are in China; the following makes very interesting reading. Overview The overall market for furniture in China is still by most estimations growing at between % and 30% per year and has been for the past five years, our figures for the premium and high-end modern European sector of the overall market indicate a 17% growth rate per annum. Therefore in principal, any brand operating within the Chinese market needs to expand its business each year at this rate in order just to maintain their current market share. Although we have seen a slowing in terms of expansion of stores in response to a general decline in the economy, furniture purchases are still being made in large numbers. In a country where consumers are often influenced by those brands arriving early an opportunity in T2 and T3 cities still exists for newcomers to enter China and position themselves appropriately in the sector even without a track record in the larger cities. Similar to those working in the luxury sector, furniture brands with a foothold in the market had been expanding their footprint across the country particularly in 11 and 12. More foreign furniture suppliers had started to enter China, and many Chinese furniture brands had both expanded their geographical coverage and their product lines in order to offer the growing number of Chinese consumers a wider choice of product for their homes. According to PWC in a report released in early 12, they expected the demand in China for home appliances and furniture to demonstrate continued growth for the following two years, but naturally the decline in late 12 will have and did affect this projection to some extent. However, our prediction at that time was that this growth would continue during the ten year long baby boom period that the country was just entering. 18% 16% 12% 8% 4% 0% The increase rate of appliance and furniture need in China 11 12 13 14 15 October & November 14 FDKG Ltd. 3
TM Overview Chinese luxury consumers are younger than their western counterparts, from about 25 upwards, rather than 40 in Europe and the USA according to the Hurun Report. The growing upper middle class and affluent consumer group follows the same dynamic. Many are more international in attitude and have some study experience overseas or work for international organisations within China. There increased appetite for western design and products therefore represents greater opportunity for modern European brands, but also a challenge as these consumers are being offered an even greater range of furniture choices. Household disposable income has grown consistently over the years. Growth has been most prominent in the highest income segment, followed by the high income and upper middle-income segments, all registering double-digit compound annual growth rates (CAGR) of 14.5%, 12.7% and 12.0%, respectively from 00 to, and are expected to continue to grow at a similar rate. CAGR (00-)(%) 16% 12% 8% 4% 0% Population % Growth in household disposable income, 00 - Lowest Low Lower Middle Upper High Middle Middle The definition of modern European furniture The Oxford Dictionary defines contemporary simply as, 'following the latest ideas.' This fails to grasp the essence of contemporary furniture design. Contemporary furniture, which is often also called modern contemporary furniture or just modern furniture, is furniture created after the 19th century and was heavily influenced by the modernist art movement. The concepts of modernist art were translated directly into the world of furniture. Instead of creating substantially visual furniture, furniture evolved into simplistic visual design. Contemporary furniture design uses the furniture, and the area it resides in, as part of an overall design theme for a person's dwelling. Highest The main players in the high-end modern European furniture market in China are Boconcept, Flexform, Moroso, B&B Italia, Natuzzi, LigneRoset, Roche Bobois, Hulsta, Camerich, Qumei, I&D, Markor and Da Vinci. Estimating the size of the premium and high-end modern European furniture market As a relatively new market, the figures available for the overall furniture market size in China vary, and those for the modern European design sector did not exist. We therefore developed two models from which to determine the market size of the premium and high-end sector for the next years, using differing criteria to enable us to compare their correlation to one another. One common variable existed for both models; this being the ratio of new furniture purchases to replacements. However, both models are based on differing purchasing assumptions to avoid further links between the two. According to The World Upholstery Market Report 11/12, the projected market size just for soft furnishing sales in in China in 11 was about $16.8 Billion, or approximately 8 Billion RMB. By contrast in, Euro monitor estimated the sales of luxury furniture in China to be 4 Billion RMB, however, there was no specific definition of 'luxury furniture' used. Reference to both these figures and those known sales figures from other furniture brands in China are used to benchmark our market size estimations. In our estimation of market size we used two models, the first was based on home sales from 05 onward, and the second on consumers who could afford to buy product at a then current conservative premium furniture price point, which is then used as a projection of the future market value. When creating both models, base data was taken from sources such as the China National Statistics office, and other consultancy firms that have studied consumers in China such as McKinsey and KPMG. Consumer based market estimation model The growing Chinese affluent class 4 LUXURY INSIGHTS CHINA
The market for modern European furniture in China The basis of this model was the growing affluent population in China and their ability to spend money on home furnishing as a result of either moving home or replacement of their current furniture. The base data for this model was taken from McKinsey's estimation of the size and total number of affluent people in China between and. This group included households with a total income of $34,000 or approximately 0,000 RMB and above. This group of individuals were used as a base line because even the lowest income levels within the purchase class they could potentially purchase at least one piece of modern European furniture. Peculiarities of the Chinese property consumer Consumer behavior, attitudes and attributes in China often challenge those found in many other parts of the world, which may result in actions at odds with the expectations of the western organisations and necessitates the need for specific localization of products and services. When evaluating the potential market size for modern European furniture in China, we have to avoid a number of traditional western assumptions and take into account local cultural influences and attitudes: That a relatively low income would exclude some consumers from the market. The fact is that money for new furniture may well come from parents or other family members, and can in many cases have no direct relation to the actual income of the purchaser themselves. Unlike western attitudes, when a Chinese moves into a new home (not necessarily a new build), they are likely to completely refurnish the home, and not bring with them any of their old or existing furniture. Because of the influence Chinese parents have over their children, some purchasing decisions in terms of furniture will be made under direction of the parents (or in-laws) who may have a bias toward more traditional furniture styles, and should not be underestimated in the sales and marketing process. Of all the new builds actually purchased in China, approximately 40% to 50% are actually occupied on completion. The rest stand empty and regarded as a pure 'investment' by the owners who often make no attempt to rent them out. Target consumer groups McKinsey has in recent years, produced two reports evaluating the consumer market in China, one in considered luxury consumers in particular, and one in 11 focused on the growth of the middle and affluent class. In our model, we use base data from both reports to estimate the number and split of households by income and to allocate potential spending patterns for these consumer groups. The estimated split of the three household income groups over a -year period is therefore shown below by number of homes by income group and year. Split by Household income Household income >1m Household income 300k-1m Household income 0k-300k 05 180,440 1,339,300 686,900 06 216,528 1,540,195 8,542 07 259,834 1,771,224 956,440 08 311,800 2,036,908 1,128,599 09 374,160 2,342,444 1,331,746 449,000 2,694,000 1,571,500 11 538,800 3,098,0 1,854,370 12 646,560 3,562,815 2,188,157 13 775,872 4,097,237 2,582,025 14 931,046 4,711,823 3,046,789 15 1,092,000 5,460,000 3,276,000 Other factors included in the model Having determined the number of households in each income bracket, it is necessary to consider the frequency at which they might purchase furniture. There have been a small number of surveys that have asked how often consumers might replace their furniture, all of which predict between 5 and 8, or 5 and years. Our own questionnaire used in this research asked this question and 76% claimed they would make a change between 6- years. We therefore adopted an average replacement frequency of 8 years. It is also important to understand why a consumer would replace their furniture. According to a survey by Guojin Stock Research Company 65% of respondents would buy furniture when moving, the other 35% October & November 14 FDKG Ltd. 5
TM The estimated market value would replace for reasons of breakage, old design or upgrade of the materials used in the current product. Methodology One important aspect of the methodology of this methodology is that consumers typically replace furniture on an 8-year cycle. We also believe that 30% of Chinese consumers would choose modern European furniture A 40% occupancy rate of new build According to many interior design experts, the typical spend per m2 for furniture in an apartment or villa ranges from 00 to 3500 RMB. We therefore adopted the following furniture spend values by household income. Household income >1m: spend 0,000 RMB on furniture Household income 300k-1m: spend 150,000 RMB on furniture Household income 0k-300k: spend 0,000 RMB on furniture The single piece replacement market In addition to the new home purchase, there will be consumers who want to change a single piece of furniture, or buy one additional item at times in between the major purchase cycle. We therefore adopted three different purchase criteria for each of the three household income groups that are considered both likely and affordable based on McKinsey's luxury consumer report. Correcting for other market affects Based on then current information, we needed to consider corrections to the replacement market figures that would be driven by the following factors: The growth rate of new build property would slow down, and therefore greater numbers of furniture companies would focus on the replacement market As China develops economically and culturally, we can expect a greater adoption of western culture which will result in people being more likely to change their furniture more often The increased 'westernisation' effect in China, will increase the number of people with a preference for modern European furniture The implementation of the 'Furniture Trade Policy 家具以旧换新政策 ' (similar to the Home Appliance Trade Policy) would take effect The estimated market value for premium and high-end modern European furniture New purchases + replacement purchases (premium price point and higher) unit: Billion RMB 30 25 15 5 0 13 14 Total market size 15 16 Figures are estimates of market value in RMB Benchmarking of the estimated market size figures The figures above represent the 'potential' market size for the premium to high-end modern European furniture sector in China; the actual market sector sales value is very difficult to calculate, however we were able to benchmark our estimates against other known points of reference. The wedding market potential In the middle and late 80s was the baby boom in China where the annual birth rate reached 21%. The country was entering a -year period in 12 over which it is expected to see the wedding numbers peak as the baby boomers born during this time get married. Official statistics also predicted that over the next years 14 Million new couples will marry every year. 17 18 19 6 LUXURY INSIGHTS CHINA
The market for modern European furniture in China Comparision of two market estimation models With the continuous improvement in income, the expected increase in consumption within the whole wedding market is therefore large. According to the most recent National Statistics of Bureau, the expenditure by urban couples getting married on a home purchase, redecoration and furniture was 258.718 Billion RMB in total in 07. Actual sales reference examples are: Markor whose stores are all direct in China hit sales of 1.5 Billion RMB in 11 and they estimated the overall furniture market as worth 118 Billion RMB in the same annual report Qumei that uses a franchisee model had sales of 2 Billion RMB in 11 The Italian brand Natuzzi quoted its retail sales value as 400M RMB, but these figures were unverifiable According to The World Upholstery Report: upholstered furniture consumption in China was approximately 8 Billion RMB According to jiaju.cc a Chinese furniture website, the scale of China's high-end furniture market is more than 30 Billion RMB, and still maintaining steady growth. Home based market estimation In assessing the potential market size, we developed another model using the home purchases, their frequency and the relative spend per home to estimated the market. The methodology adopted for this model is based on an tested assumption that 5% of all property sold in China is 'high end' which means that it is at a price point where the owner could afford to purchase premium to high-end modern European furniture. Considering the factors such as furnishing rates of new property, property occupancy rates, the preference for modern European furniture by consumers and correcting for the increased spending power of Chinese affluent consumers etc our two estimates delivered almost the same figures. unit: Billion RMB 30 25 15 5 0 11 12 Summary 13 14 15 Home based market estimation Consumer based market estimation Using two different market estimation models, we predicted that the market in 12 for premium and high-end modern European furniture was worth approximately 6.7Billion RMB. Although both models had no direct coincidence, their estimates indicate a difference of less than 5%. There are very few reliable figures available about the furniture market in China, although sources such as McKinsey are regarded as more reliable than most, hence their usage. The overall modern European market sector also covers to some extent Chinese brands such as Qumei, which competes at an entry level price point, as well as the imported brands such as Natuzzi and Hulsta. The increase in the size and share of the overall Chinese furniture market within this sector is being driven by younger consumers entering the market, and an increase in the internationalization of China in general. Since this research was carried out, there has been a swing in the market from purchasing to fit out a brand new property to replacement of furniture in an existing home, but the overall size of the market remains on our projected trajectory. We have seen that the Chinese consumer has become more selective in his spending on luxury, purchasing overseas to save money and access greater choice, but at home they are still investing in their lifestyle and more comfortable living. It is our belief that although premium and luxury furniture has been behind the curve of luxury consumer products, its time to shine has begun and the market will offer great opportunity for those willing to address it. 16 17 18 19 October & November 14 FDKG Ltd. 7