Conspicuous Consumption - Research Paper Example

Conspicuous Consumption Conspicuous Consumption Introduction Thorsten Veblen in 1899 was the first to describe the concept of conspicuous consumption as the behavior of individuals of purchasing expensive consumer goods so as to display their wealth and income rather than to satisfy their needs. Veblen proposed that individuals spent significant portion of money and time on unproductive expenditures and therefore describing the behavior as conspicuous consumption. Individuals exhibit conspicuous consumption so as to gain higher status in the society. It was a means of demonstrating superiority in societies as individuals seek to impress others, whether rich or poor so as to gain social advantage. People will consume a given type of goods, or appear not to need work, so as they could gain esteem of others and show their wealth status in society. Veblen divided human behavior into two opposing categories, pecuniary and economic. Conspicuous consumption is an extensively discussion in the field of economics. The Veblen effect indicates demand for consumer goods increase as its price is higher than that of other related goods (Leibenstein, 1950). During Veblen’s time, conspicuous consumption was motivated by the desire to gain prestige through accumulation of wealth. In modern day conspicuous consumption, behavior has been more subtle and sophisticated (Trigg 2001). Definition of conspicuous consumption has changed with evolution of consumption value and societies. Its main component varies today as consumers associate product value with their social interaction. It does not only mean the ostentation of wealth, but also ostentation of symbolism to specific groups to gain recognition and prestige. This study focuses on accessing conspicuous consumption of luxury goods in China. China’s consumers make up of at least 47% of expenditure on luxury goods. China is among the largest consumers for luxury goods. Out of the total 217 trillion Us Dollars, Chinese people spend 102 trillion US Dollars on luxurious commodities. Most of china’s luxurious consumption comes from imports of these commodities, which generate 74 trillion US Dollars, The difference are from local purchases representing a yearly increase of 3%. Review of Literature Conspicuous products are classified them in two types: a visually conspicuous commodity, which can be easily identified as a luxury item, and a verbally conspicuous commodity that can be interesting when describing to others. They also added that conspicuous products that reflect individuals’ social status are more likely to be consumed with a particular reference group (Schiffman and Kanuk, 2004). Conspicuous consumption represents an efficient way for the consumer to impress others, show wealth, gain self-esteem, as well as improve social status (Veblen, 1918). Conspicuous consumption is the motivation behind which individuals strive to improve their social status through consumption of consumer goods, which symbolize status to the individual and surrounding others (Eastman, Goldsmith and Flynn 1999). Conspicuous consumption has been given a sociological explanation that individuals consumer product so that they can create an impression of wealth. Consumers tend to use conspicuous products so as to impress and display their wealth to others (Coleman, 1983). Conspicuous consumption is a behavior, which increasingly cannot be dismissed, any longer as trivial but with felt instinctively uneasy (Roger, 1998). Conspicuous consumption includes of respect and envy from others as a representation of the society (Mihaly and Eugene, 1981). Modern evidence of conspicuous consumption trends is widely available in current literature. Conspicuous consumption has also been investigated globally. In the Korean population, research shows that adolescents have a significant tendency towards conspicuous consumption (Kim, 1998). According to the economist, there is a tremendous increase in conspicuous consumption in china over the last few years (2004) than in Korea even though the Chinese consumers are more price-conscious. Conspicuous consumption can generally be defined as the consumption of luxury items (e.g., jewelry, cars, etc.) that target the up market and some particular segments of consumers (Schiffman and Kanuk, 2004). However, the trend of conspicuous consumption has been noted among unusual territories. For instance, it has been noted among consumers with little financial resources (Frank, 1999). This international trend is particularly observed among emerging economies such as China, India, and Brazil where the luxury market growth rate is 20% to 35%, (Krauss, 2008). The theoretical rationale explains that conspicuous consumption can be linked to different factors such as personal to wider social and cultural motives. Modern theorists pose different ideas as to why conspicuous consumption occurs. Some theorists have described relative consumption effects, in which a person’s satisfaction depends on how much others are consuming (Samuelson, 2004). Some theorist point out to that consumption is based on what other people consume(bandwagon effect) and some consumers will avoiding a popular good to maintain apparent individualism (snob effect) as a sign of status, and conspicuous consumption (Corneo and Jeanne, 1997). One particular interesting concept is the concept of two kinds of utility derived from consumption of goods and service: the utilitarian, which consumers derive utility from enjoying a commodity while satisfying their needs, and conspicuous, which is the utility gained by a consumer as a result of being seen consuming a product or service (Basmann, Molina, & Slottje, 1988). This concept adds to the development of conspicuous consumption ideas, because it provides measurable utility for conspicuous consumers, rather than being an end to the ways of appearing wealthy. Conspicuous consumption research has numerous literature review materials; one particular material remained relevant to this research paper. Robert Frank’s (1999) provides theoretical insight on conspicuous consumption. He points out that spending has gone up in the last few decades while not all spending are tremendous. He further notes that those around them influence people and that influence is evident in modern consumption. Most studies try to explain and bring insights on conspicuous consumption in the society. However, they do not try to explain how the composition of conspicuous consumption affects the development and growth of the economy. The study will focus on china’s economy and how its conspicuous consumption contributes to the growth of the economy. China has largest consumer expenditures on luxury commodities. It accounts for almost half of the world total expenditure on luxury goods despite it being an emerging economy with an average growth rate of 8.04%. Method The study used literature review and document analysis as a method for data collection. The nature of the study comprises of a large population of the Chinese country due to the researchers limitations and constraints, literature review and document analysis method seemed relevant for this study. The researcher observed various literature materials that are relevant for study as a means of data collection. The study used data from secondary materials and those collected because of document analysis. Limitation encountered during conducting the study is the lack of availability of data and finding sources. Another limitation is that which is eminent in document analysis such as errors made by previous researchers. However, data collected was examined for consistency by comparing against other data found. Findings Over the past years the GDP of china has had an annual average growth rate of nearly 10 percent. The rapid rise made China an economic power state in a time span of at least three decades and being described as the greatest economic success of the 21st Century by analysts. Due to the rapid increase, it has been estimated that 500 million people were raised out of extreme poverty. It’s one of the world largest merchandise exporter and manufacturer. A third of the world market is accounted for by the Chinese country it is anticipated that luxury consumption in china will grow at a rate of 18% annually from US Dollar 12.23 to US Dollar 27.51 in 2015. In 2012, China’s expenditure for luxury goods stood at US dollars 175 billion despite the decline in internationals economies this is due to Chinese salaries was rising. While income was rising, the middle class were adopting unattainable high-end lifestyles and changing from saving to a spending culture. The middle class which is sophisticated and more westernized has large income that aid in their sophisticated and international life style .During the same year china had 1,020,000 millionaires and 7500 billionaires. Almost 14% increase in billionaires from the previous year. China has a higher number of millionaires compared to Canada, which has 560,000 households with US Dollar 1 million and more in wealth and more. However this is expected to grow over years, 638,000 Canadians households have an annual income above US Dollars 200,000 representing at least 4.3 % of the total households in Canada. The study reveals that most males compared to females constituted a higher percentage of people who consumed expensive goods. According to KPMG, in 2003, 60% of Chinese millionaires were men. China’s luxury market is male-dominated given the workforce demographics. The age bracket of Chinese consumers of luxury goods lies at the 39 years old bracket and they are exposed to international lifestyle. The study shows that Chinese millionaires are younger compared to their international peers. The results indicate four major subcategories of millionaires who exist in china who are emerging these are the stock market investors, salaried executives, private business owners and the real estate investors. They consume luxury goods so as to sustain their professional relationship and keep a personal image. The Chinese people are keen in showing their achievement and position in the society. They view luxury as heritage that takes years to build. The Chinese culture hold high regards for success, wealth, and social status therefore displaying them through expensive watches, jewelry, cars and wine to garner respect. They expect to be treated as VIP; as well as acknowledged through personalized products and services. The Chinese high middle class consists of about 150 million people of which 13% of the individuals are consumers of luxury goods. The middle class are the top consumers of luxury goods and constitute the highest composition in the social class of luxury consumers in china. It is noted as it is with the Chinese that also the Canadians below the high middle class also spend on luxurious goods and commodities, therefore making conspicuous consumption an emerging trend in modern economies. However, Canada’s luxury consumption constitute of mostly immigrants from Southeast Asia and Europe who end up in Canada looking for new opportunities. Another reason that contributes to this phenomenon in china is the China’s little emperors. These young consumers are because of the one child policy that was adopted in the 70’s. Those born in that period are without cousins and siblings therefore being the center of attention of parents and grandparents that buy for them everything. It is for this reason most college students in china even the underprivileged ones owns an iphone or ipads which exceed their capacity. Even though they are pampered, many luxurious companies target them. As they are pampered, they research on the best luxury goods for themselves as they are strong social symbols in china. 25 – 30 year old Chinese consumer luxury products there for labeled as the primary consumers by the International association for luxury goods. Motivation for consumption of luxury goods differ from men to women as shown in the graphs below Figure 1 Luxury Motivator Differ By Men (%) Figure 2 Luxury Motivator Differ By Female (%) From the figure 1, Self-reward is the main reason as to why most Chinese would buy branded luxury products. It could be noted that the men would buy luxury goods mostly for social dimension while figure 2, shows women would enjoy ownership of luxurious goods. Women in china have become more independent thus having high spending power. Majority of the women seek to reward themselves with luxury goods. Psychological factors have effect on luxury consumption in china. Chinese consumers stereotype countries by their specialty for instance they stereotype Germany for its productions of car as quality. They associate quality for goods with the countries specialty. Chinese recognize France for its luxury goods for example Ricard being French company imports whisky in china, which is more, preferred despite china producing its own whisky. Over the past few years whisky sale has gone up by 30% annually to US Dollar 115 million in 2006, this made china to be among the top ten countries for whisky sales. This highlights the changing of Chinese luxury brands on the luxury market. The country of origin greatly influences the sale of luxury products. However, with the dynamics in play sophisticated consumers will seek to be unique rather than using luxury to show off their wealth thereby embracing a unique and differentiated brand of high quality and artisanship. Table 1 Attitude towards Country by Category. Mainland China Hong Kong France UK Switzerland US Japan Italy Germany Spain Clothes 12 9 37 7 2 8 4 18 2 1 Bags 9 5 31 10 5 11 2 21 5 1 Footwear 13 6 22 10 2 10 2 27 5 1 Watch 7 3 6 4 69 3 1 2 5 0 Jewelry 13 21 25 8 9 7 1 11 3 1 Cosmetics 7 6 62 5 2 7 4 3 2 1 Alcohol 33 2 33 10 3 6 0 5 3 3 Automobile 8 1 4 7 1 14 4 4 57 0 SPA 19 11 23 6 5 6 20 2 3 2 Hotel 15 10 15 8 16 15 7 6 2 3 Restaurant 33 8 27 6 3 5 3 11 2 2 Source KPMG luxury Study 2013 A factor that influences conspicuous consumption in china is that Chinese associate certain luxury brands with the country of origin. From Table 1, Switzerland toped in luxury watches while France toped in cosmetics and perfumes and Germany for cars. There is a strong association with European heritage brands for these categories, as there is an increase in Chinese brands; a tough completion is eminent from European luxury brands that have a heritage extending to hundreds of years. Therefore, Chinese have to position and differentiate themselves in the luxury market. Personal care products, cosmetics, menswear, and womenswear are among the major product categories that were resilient in 2012. They went up by 15%, 15%, and 12%, year on year respectively. On the other hand, watches and jewelry had a notable deceleration in the year 2012. Watches recorded a -5% year on year growth while jewelry registered a 5% year on year growth. Table 2 Year on Year Growth Rate by Category 2009 – 2010 2010 – 2011 2011 -2012 Accessories 15% 20% 10% Womenswear 27% 35% 15% Footwear 20% 20% 10% Jewelry 22% 20% 5% Menswear 24% 30% 12% Leather goods 30% 30% 10% Cosmetics 22% 22% 15% Watches 45% 49% -5% Source KPMG luxury Study 2013 Another factor noted to contribute to china’s conspicuous consumption is that Chinese consumers prefer to shop overseas for luxury goods. In 2012, Luxury goods from overseas constituted around 60% of the Chinese spending on luxurious items with jewelry, leather goods and watches winning the top positions. From the period of 20 January 2013 to 20 February 2013, the Chinese consumers used approximately US Dollars 8.5 billion on luxury goods. The consumers spent on expensive watches, leather goods, cosmetics, apparel, and perfumes. This tendency for overseas spending is partly due to the ease of travelling abroad, as well as for the difference in prices between china and abroad for luxury goods. The main reason for Chinese preferring overseas shopping to mainland shopping for luxurious goods is to save on prices. According to Fung Business intelligence Center, there is a substantial difference in price between different brands and types of commodities. Ranging from 11% to 40% (see table 3 below) Table 3 Price Comparison between luxury products sold in Hong Kong and Shenzen Brand Product Price in Hong Kong (RMB) Price in Shenzhen(RMB) Price Difference (% change) Burberry 100% Cashmere scarf 3,205 4,500 40.4% Dior Lady Dior Handbag Median 24,439 29,000 18.7% Dior Lady Dior Handbag, Large 27,243 32,500 19.3% Hermes 100% Silk Scarf 3,045 3,750 23.2% Cartier Tank Watch, median 26,763 36,400 36.0% Cartier Love bracelet 34,855 47,300 35.7% Louis Vuitton Wallet, Sarah Monogram 4,127 4,850 17.5% Louis Vuitton Wallet, Alexandra Monogram 4,808 5,350 11.3% Bottega Veneta Handbag, Maxi Veneta Hobo 20,392 25,480 24.9% Chanel Handbag, classic, median 32,211 41,000 27.3% Source KPMG luxury Study 2013 The difference in price gap of luxurious goods sold in china and those from abroad has led to luxury consumption outflow. Import duties and tax levied on consumption of luxury goods have pushed prices up in china. A weak Euro against the RMB further deepens the price gap. Labor and rental costs as well as inefficient distribution and logistics systems are among factors attributing to high prices for luxury goods in china Table 4 Attitudes towards Luxury Germany Mainland China Hong Kong France UK Swiss US Japan Italy % % % % % % % % % Free 15 14 63 45 28 29 77 15 38 Fashion 15 13 70 58 28 29 46 28 43 Long History 46 80 13 40 58 45 15 18 44 Romantic 11 9 30 89 26 29 23 12 53 Precise 72 26 9 8 41 38 11 54 11 Luxury Design 16 6 30 52 24 39 23 9 45 Fashion Design 12 7 45 56 24 26 32 21 45 Industry Design 68 17 10 8 36 39 35 40 14 Culture Heritage 38 69 19 43 51 41 16 21 44 Famous for Arts 17 16 19 54 31 30 16 15 56 Total 310 257 307 452 346 345 293 237 393 Source KPMG luxury Study 2013 Chinese have different perception that depends on which country luxury brands come from. Figure 4 shows that At least 70% of the respondent s attributing Hong Kong as the most favorable in luxury fashion, while 69% perceives Germany as leaders of industrial design and 52% associate luxury design with France. Discussion Regardless of the economic slowdown experienced across the world and its impact on the luxury market, China’s consumers sector shows continuous growth as well as increased share in global sales for some world largest luxury brands. Demand for luxury goods in china is booming as income rises. The household disposable income has grown consistently over years. Household’s disposable income in highest income segments remain prominent, followed by high income and middle-income segment. These groups are the biggest spenders and have a voracious appetite of luxury goods. China leaders should focus on domestic consumption, which represents opportunity for players in the luxury market to establish operations within the country. Players of foreign origin who consumers tend to favor as long as they have long history and unique heritage dominate the luxury market. Currently in china, only a few local brands have gained international recognition. The domestic brands have not established a foothold in the international luxury arena, further fragmentation of demand and behavior would open up doors for domestic brands. Some international brands are seeking for opportunities to invest in local industries which have growth potential as well as strong identity. In December 2012, French group PPR acquired a majority stake in a Chinese jewelry brand and L capital Asia acquired 10% stake in Ochirly, a top fashion brand in china. The Chinese enterprises are looking for ways of gaining share in the luxury market to establish strong foothold. They resolve in acquisition stakes of international luxury brands for example, Fosun International acquired 9.5% equity in a Greek jewelry positioning itself as one of its largest strategic investor. In March 2011, Peter Woo and his family bought 8% stake in Italian fashion house Salvatore Ferragamo. Digital media has also contributed to the success of china’s luxury brand consumption. Chinese consumers engage in online forums for researching luxury brands. Potential consumers at least 70% of them search for luxury brands online once in a month. Despite maturing of its online retail market, consumers put more confidence on purchasing goods online. Mckinsey and Company indicate as small growing number of shoppers purchase goods online. The survey shows that online purchases rose from 2% in 2010 to 8% in 2012 and amount increased from 1% to 3% in total expenditure. Despite the growth in online luxury market, it is not very well regulated. Fraud, transaction security, and counterfeited luxury goods remain a major concern. The Chinese government has focused on promoting development of small and medium towns and cities. The smaller cities are the major force that is driving china’s economic growth for the next two decades and form strong cluster of huge economic potential. They will create a huge demand in luxury goods, many companies are already stepping into these cities for example Gucci, Ermenegildo Zegna and Burberry has already opened stores in Taiyuan. The luxury retailers have already set up store in tier1 and tier two cities. With the urbanization, rapid development and increased income level have made lower tier cities to be competitive and appealing for luxury companies and retailers. Most luxury retailers have gained entry into lower tier cities. The expectation is that tier 3 and tier 4 towns will be significant growth drivers in the coming. Despite the market for conspicuous consumption is booming in china it has its challenges that new companies entering the booming market need to be aware of. Competition is increasing as consumers travel further overseas and broadens their knowledge about products and expectations for better consumer service as well as service experience. Therefore, companies need to maintain their heritage and have synergies with their marketing and product differentiation in both overseas and china to cater for the traveling consumer. Some firms are concerned with over exposure in the market, while others are strengthening their brand strategies by tailoring them for the Chinese market. Recently Global Luxury retailers are cutting down on expansion in china because of slower growth in luxury sector. Some of them are improving productivity of existing store showing a shift from expansion. Conclusion In conclusion, the main force behind rich consumption of luxury goods in china is attributed to high disposable income and their perception of luxurious goods to social status. The Chinese perceive luxurious commodities as a symbol of wealth, respect, and social status. Conspicuous consumption has evolved from being just a show off wealth to a mode of lifestyle that most people envy. From the study majority of Chinese people do not purchase luxury goods for show off but for other reason such as rewarding themselves or just enjoying having collectible luxurious items. The study has described the various phenomenon’s that contribute to conspicuous consumption to be eminent among economies focusing particularly the Chinese economy by providing statistical findings. Among the major reasons that conspicuous consumption exists among economies would be that of individuals wanting to show off and belong to higher socio-economic class than their peers. As an economy grows, disposable income grows thus increasing marginal propensity to consume. Therefore, individuals consume more by purchasing luxurious commodities since they have more to consume. Conspicuous consumption is not only for the rich but for other classes as well. The middle class are the most spenders on luxurious goods and commodities. The theory of relative income hypothesis could apply to conspicuous consumption that consumption pattern exhibited could be influenced by individuals income in relation to the surrounding individuals. When people live in a neighborhood of wealth individuals, they will exhibit consumption traits as their neighbors. Therefore, people may inevitably generalize conspicuous consumption as relative income hypothesis by which in reality they are two different things. Conspicuous consumption deals with the fact that individuals will purchase expensive commodities just to show off to the society even when their income is low. The society may not be necessarily the individuals around him. For example, a plumber buying expensive set of golf clubs. He is contributing to the luxury market yet he is neither high net worth nor has high-income. For relative income hypothesis, it is affect by ones location. If the above plumber lived in a high-end environment, his consumption of goods as of the given example will be seen as a case of relative income theory as opposed to that of conspicuous consumption. This research and other researches will contribute to the knowledge of conspicuous consumption and even the effects it has on the economy. From this study majority of Chinese purchase luxury goods abroad, future researches should access the impact this has on foreign exchange as well as the effect of foreign goods in the local market. References Basmann, R., Molina, D., Slottje, D. (1988). A note on measuring Veblen’s theory of conspicuous consumption. Review of Economics and Statistics, 70(3), 531-535. Coleman, R. 1983. The continuing significance of social class to marketing. Journal of Consumer Research 10 (3): 265–280. Eastman, J. K., R. E. Goldsmith, and L. R. Flynn. 1999. Status consumption in consumer behaviour: Scale development and validation. Journal of Marketing Theory and Practice 7 (3): 41–51. Frank, R. H. 1999. Luxury fever: Money and happiness in an era of excess. Princeton, NJ: Princeton University Press. Kim, J. (1998). Assessing the causal relationships among materialism. Consumer Interests Annual, 44, 155. Krauss, C. 2008. Worldwide luxury goods market growth projected to slow substantially by end of year and head into recession in 2009. Mason, R. (1999). The economics of conspicuous consumption: Theory and thought since 1700. Journal of Economics - Zeitschrift fur Nationalokonomie, 70(1), 95-98. Schiffman, L. G., and L. L. Kanuk. 2004. Consumer behavior. 9th ed. Englewood Cliffs, NJ: Prentice Hall. Veblen, T. B. 1918. The theory of the leisure class. 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