Tier-3 cities are the new battleground for luxury branding: Starcom

Over a period of three months, the Luxe study interviewed 1,002 respondents aged between 25 and 44 located in 43 tier-one to tier-three cities. The criterion for the selection of respondents included stringent conditions such as a minimum monthly personal income of more than US$3,165 (RMB20,000) and yearly luxury spending of at least US$1,582 (RMB10,000) to ensure targeting the right affluent crowd.

The booming Chinese economy has brought thousands of beginners to luxury consumption, according to Jeffrey Tan, SMG China’s national research and insights director. These beginners are constantly evolving as they become more affluent and exposed to luxury brands.

"We see a very distinct shift from external validation (showing off) to a more internalised appreciation (buying luxury goods for quality and brand heritage) in higher tiers," he said.

The level of sophistication and discernment among tier-1 consumers in China is similar to that found in mature luxury markets like Japan, Hong Kong and Singapore, and tier-3 consumers may take between three to five years to reach that level.

Lower-tier consumers are currently having their first taste of going into “obvious luxury" with prominent and socially accepted status symbols, Tan explained. These consumers are hungry for brand knowledge in an attempt to move beyond price comparisons, making tier-two and tier-three cities the new battlefield of luxury brand expansion.

"The trend of luxury consumption is no longer just a tier-one domain but has fast trickled down to the lower tiers," Bertilla Teo, SMG's Greater China CEO added. Tier-three cities surveyed include: Fuzhou, Hangzhou, Changsha, Xian, Suzhou, Xiamen, Zhengshou, Changchun, Foshan, Yantai, Harbin, Kunming, Wenzhou, Jiaxing, Taiyuan, Urumqi, Nanning, Haikou, Ningbo, Lanzhou, Hohhot, Guiyang, Wuxi, Quanzhou, Shaoxing.

The behavioural mindsets of consumers in different city tiers is one point to note. As mature luxury consumers, most tier-one shoppers tend to focus more on the quality of the goods and their inherent brand stories, choosing to buy more unique and less well-known brands.

In contrast, since luxury brands are relatively new to lower-tier cities, consumers there wear luxury goods as “badges of success” to show to others that they have made it. Price is still the main barometer to judge the desirability of a luxury brand.

"The more expensive, the better," said Ouyang Kun, CEO of World Luxury Association China, citing the example of Hermès, which saw its sales spike in China in the aftermath of the Guo Meimei incident, because lower-tier consumers "now realise there is a luxury brand even more expensive than Louis Vuitton".

In particular, 72 per cent of tier-three males greatly over-index in watches and work-related luxury items, since these are outwardly recognisable by others. The average amount per watch purchased by a tier-three male is up to US$2,405 (RMB 15,210). The implication for brands is to push "classic" product lines with visual brand connections that may be more logo-centric and flashy.

The study also revealed how lower-tier youngsters are now becoming early adopters of luxury brands, especially entrepreneurs who "strike gold" at ages 25-34. These younger consumers seek to copy their friends, but do not know much about the brands themselves. Brand loyalty for this group is shallow as they are still testing out brands.

Testament to this, across ages in the lower tiers, they are still hesitant about shopping online and are sticking to searching for luxury top-ten lists on Baidu or finding information on brands' official product sites.

In line with this, print magazines, airport ads and branded entertainment on TV that can act as 'educational tools' work better in lower-tier cities. In-store environments should also be played up with product displays and staffed with knowledgable sales associates for maximum awareness, according to recommendations by SMG.