China may be touted as the third-largest market for luxury goods, and some even believe it will beat out Japan in the near future for the number two spot, but the fast-rising Chinese luxury market may need to overcome a few critical issues.
1. Real Size of the Market
China Daily reports that the real size of China’s mainland luxury goods market is about the same size as Britain’s. Most of the purchases are being made elsewhere. In 2010, Bain reported that luxury customers spent 24.5 percent of their luxury budget abroad and 34 percent in Hong Kong and Macao – leaving just 41.5 percent of transactions on the mainland. Even that small number was down from 43.5 percent in 2009. Much of this has to do with the elevated prices of luxury goods in mainland China. Even if taxes decrease as planned, luxury brands will need to nix the tradition of overcharging in China. According to the University of International Business and Economics in China, luxury watches are sold for 161 percent of retail prices overseas, a trend that is seen for many luxury products.
2. Luxury Brands Overdeveloping
Despite the fact that less than half of China’s luxury market is on the mainland, luxury brands have been inundating the country, racing to build more stores. Because of this, many brands once considered elite now risk slipping into the middle-tier. Boss keeps 114 stores in China, and both Dunhill and Armani have 104 each. Dunhill, particularly, is facing the consequences of rapid expansion: “They are going downhill. They are either going to have to close some stores and become top tier or just have a lot of stores and go for sales. We consider them a second-tier brand. They are everywhere; they have lost their exclusivity,” said an executive at one of China’s leading high-end department stores.
3. Staffing Shortages
The demand for quality salespeople to work in this plethora of stores cannot be supported properly. About 3,000 new salespeople are needed each year to fill the 150 luxury stores that open annually in China. And for the Chinese, exceptional service is a must. It is said that up to 30 percent of applicants don’t even show up for their interviews. To rectify the lack of ambitious, talented, and loyal sales clerks, luxury brands are starting to create schooling programs for employees. The Richemont Group maintains a retail academy in Shanghai, and Starwood has begun developing a mentorship program from its employees.