Demand for Luxury Goods Spilling Over Into China’s 2nd and 3rd Tier Cities

By Jennifer Park

Mar. 18 – Japan is still the largest luxury goods market, but it won't be for long as the sustained influx of high-end stores continues to spread across China.

According to research conducted by CLSA Asia-Pacific Markets, China is forecasted to become the world's foremost luxury goods market by 2020, with total expected sales amounting to US$100 billion. In 2009, annual sales were US$9.4 billion, accounting for 27.5 percent of global luxury goods consumption.

While high-end goods were previously concentrated in the country's major cities like Beijing and Shanghai, the desire to acquire luxury items is starting to spread throughout China, spilling over into 2nd and 3rd-tier cities. In just five years, there will be more than 60 cities boasting luxury consumption of more than 50 million RMB (US$76 million) and cities such Qingdao and Wuxi will experience three times more luxury consumption than current levels.

Over the next few years, projections estimate that the wealthy will only account for 22 percent of all purchases of luxury goods. Currently, those with annual incomes ranging from US$45,000-US$152,000 account for 45 percent of the consumption of luxury goods in China, but that percentage is expected to decrease over time. As it stands, even those with annual incomes ranging from US$5,325 to US$37,888 are spending as much as 14 percent of their household income on luxury goods.

The average household income of the Chinese middle-class nearly doubled over the past five years, and incomes across the board are slated to grow even more in the future, freeing up room to spend on non-essential items.

Recent findings by McKinsey & Company's show that about 80 percent of the individuals that buy luxury goods are under the age of 45, whereas only about half of the luxury goods consumers in the United States fit that age category. Roughly 45 percent of luxury goods consumers in China are under 35, whereas only 28 percent are in the same age bracket in Western Europe. Members of younger generations tend to be less timid in spending their incomes on luxury goods, according to research by McKinsey.

China's Commerce Minister Chen Deming recently predicted that China is to replace Japan as the world's largest market of luxury goods by the year 2015. Sales of luxury goods increased 23 percent and overseas consumption of luxury goods increased 30 percent last year, the minister said.

According to the report released by McKinsey, China will overtake Japan as the largest luxury goods market, with consumption growing 18 percent year-on-year to amount to US$27 billion in five years.

With such lucrative market, it is not surprising that foreign companies are rushing to China.

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Source: 2point6billion.com - Foreign Direct Investment in Asia