Why is luxury market growing so rapidly comparing to Japan and U.S - Essay Example

? Why is luxury market growing so rapidly comparing to Japan and U.S.? Team Irsjad Team members: Tania Irsjad Young Min Kim Ivy Wang MGMT 320 Spring 2011 Executive Summary The objective of this paper is to know what is the reason Japanese and the people of the United States have stopped buying luxury products, the amount of sales made by these two countries have tremendously went down. At the moment, these luxury market industries have set their eyes on a newer and bigger target, which is China. By comparing China to Japan and the United States, we will be able to track since when it is this started happening and see if China is going to strive even more in the luxury products market. When these large luxury market industries started to move to China, this shows that; First of all, it shows China’s rapid growth of economy. Second, increasing purchasing power led to higher consumption. And third, luxury items became a symbol of wealth and social status, due to the emerging middle class. But many for the Asian countries, these luxury products also symbolize power in their social class. With luxury products on high demand and not only the rich buying them, these industries will strive further and greater in Asian countries. The enhanced consumption of luxury goods in China has also to do with the altering demographics. Since China has one child policy, so at present the Chinese population comprises of a large number of young people being raised by an average of six adults. Thus these young people constitute a pampered lot who have access to a large purchasing power, which they afford to spend on luxury goods. Besides, the young generation is also better connected with the outside world, courtesy the internet, affordable air travel, overseas education and the media. So the young people in China want their consumption patterns to be in tandem with the rest of the world. Hence, the market for the luxury goods in China is expected to grow on a steady pace over the years. The companies that first took advantage of this rising consumption of luxury goods were the already established European brands. The young consumers in China associated these brands with status and power. In a contemporary context, the luxury retailers are spreading throughout China like a wild fire, eager to cash in on the buying power of the well settled young consumers. The scope for a luxury consumer market that was unthinkable 20 years ago has now emerged as a viable future with immense possibilities for research. Table of Contents Title Page…………………………………………………………………………………………………………… 1 Executive Summary…………………………………………………………………………………………….. 2 Table of Contents…………………………………………………………………………...…………………… 3 Research Question..…………………………………………………………………………………………….. 4 Contributions of Research…………………………………………………………………………………… 5 Literature Review…………………………………………………………………….…………………………. 6 Research Methods………………………………………………………………………………………………. 7 Analysis……………………………………………………………………………………………………………… 8 Conclusion………………………………………………………………………………………………………….. 9 References…………………………………………………………………………………..……………………. 10 Appendices……………………………………………………………………………….……………………… 11 Research Question Q: why is luxury market growing so rapidly comparing to Japan and U.S.? Why it is important: We think this question is important, because it involves China’s growing economic. Luxury market is a growing market, and China’s fast growing economic hastens the growth of luxury in China. Moreover, China’s growth of wealth among people and its large population helped the luxury market to have a huge demand for the Chinese. This market is different than the others because of its high profit rate, so we think it is worth to investigate what happened in China now with that market. In addition, the purchasing power can be an indicator of the country’s financial and economic status. The increasing demand for the goods caused the prices to increase, but the demand remains the same. As a result, China’s consumer power is increasing, and it is important to understand what is currently happening in China and why their consumer power is increasing. It also can be an indicator of why the other countries, which used to be in the top buyers for luxury products, are decreasing in buyers or in sales. Such as, the Japanese and the United States. Literature Review Current research on the increase of luxury market in China generally indicated three distinct areas. First of all, it shows China’s rapid growth of economy. Second, increasing purchasing power led to higher consumption. And third, luxury items became a symbol of wealth and social status, due to the emerging middle class. China has been growing rapidly for the last decades in both economical and political aspects. In 2009, when the world suffered from the financial crisis, China still managed to increase their luxury market by 12 percent compare to 2008 (Zhao, 2010). Additionally in 2010, Chinese consumers who were eager to buy luxury goods chose to purchase them oversea, and they spent about $12 billion on luxury goods (Alini, 2011). Why is this happening? While the top two luxury markets, U.S., and Japan’s market size is decreasing, followed by the economic crisis, China is not only remaining high demand for luxury goods but also, increasing their spending on luxury brands. Also, the age of the consuming group is young compared to U.S. and Japan, and the research shown that 80 percent of the China’s wealth classes are under the age of 45, compare with merely 30 percent in the U.S. and 19 percent in Japan (Zhao, 2010). For a better understanding of China’s luxury market, our group compared China’s market with the U.S. and Japan. Japan is one of the biggest and strongest markets in the world. For the last decade, Japan’s economy had to suffer from their economic bubble. Due to the long-term downside economy, Japan faced a serious financial problem. Recent earthquake and tsunami in Japan had negative impact on economy. With the current crisis, the Japanese has not only reduced the discretionary spending of consumers but also accelerated the fundamental shifts in the attitudes and behavior. China’s luxury goods sales will increase up to 25% , which is almost to $17 billion, while Japan will see a 5% decrease in their luxury goods market (Junqian, 2010). Even though China is trying to overtake Japan as world’s second largest luxury goods market, Japan is still a huge market for luxury goods. Almost everyone purchases luxury brand items and remain high purchasing power. The U.S luxury market is the number one largest market in the world. For the last decades, the luxury category has grown anywhere from 20% - 32%. In the U.S. alone, luxury is a $400 billion market. Authorities estimate that it will grow at a rate of 15% (Nucifora, 2005). The recession did hit U.S luxury market hard but, luxury spending has come roaring back, helped by rising consumer confidence and stock markets. After suffering large sales declines during recession, U.S. luxury department stores such as Saks and Neiman Marcus Group Inc. have outperformed their down-market rivals. At the same time, those retailers, as well as Coach and Nordstrom Inc, are expanding their outlet store chains to cater to the "aspirational" luxury shoppers. Retail executives in the United States at the Summit will look at whether such initiatives, which may be profitable in the short-term, will damage their image long-term (Wendlandt and Phil, 2011). China’s luxury market has expanded from first-tier cities such as Beijing and Shanghai to its second-tier cities such as Shenyang and Chengdu (Black 2007). More and more people from those cities are willing to spend their money on those luxury goods. The financial crisis declined the luxury market in Europe, U.S. and Japan, but luxury market increased the sales in China in which indicated that the impact of financial crisis in China is limited (Ding, 2009). The reason why Chinese luxury market became the world’s second largest is the rapid growth of the economy. China’s luxury market has grown rapidly through the past ten years, and the statistics from the World Luxury Association released on December 2, 2009 showed that luxury purchases in China had increased $9.4 billion US dollars annually, making up 27.5 percent of global luxury consumption (Zhao, 2010). Now, China has surpassed U.S. and became the second largest consumer of high-end goods. Also, the customer’s purchasing power increased due to the rapid growth of economy. According to Tian Dapeng, a rock singer who has been a luxury consumer for years, three generations of wealth accumulation will help foster a true class of luxury consumer. He said, “The first generation that build up from nothing is not likely to consume luxury goods and the second generation who witnessed the hardships their parents encountered in building up wealth are sensitive to prices of luxury goods. Only the third generation who have grown up with a golden spoon and begun to know a number of luxury bands since their childhood, are less price-sensitive and display a high loyalty to certain brands” (Ding, 2009). Finally, luxury brand became a symbol of wealth and social status. China’s emerging middle class aspires to have more and better designer items a symbol of social status, wealth, personality and taste, but their consumer behavior is not mature and need education and guidance. Chinese younger shoppers are excited to own a certain amount of luxuries, but few of them know the history about the luxury the brand and the lifestyle they are pursuing. Research Methods For the analysis of this paper, we decided to look at the data available from secondary resources. Most of our data are obtained from the database in the Lumiex Library website. We planned to look at the numbers available in the data and do further research on why are the numbers increasing or decreasing at a specific time period. We divided our research into three different parts because we are comparing China to Japan and the United States. Therefore, we researched on China, Japan and the United States separately and only after we found all the data that we need, we will then compare them with one another. Our research will not just be focusing on the luxury market itself, because we feel that their growing economy might be one of the reasons that more people in China are buying more luxury products. First, we wanted to look at the past growing economy of Japan, because they are the first country in Asia that is one of the top countries to be in the successful luxury goods markets. We then analyze the available data on why is the luxury goods markets shifting to China. Second, we look for the data for the United State’s economy, since the United States are the second top countries in the luxury market sales just next to Europe. After finding all of the data needed, we started to compare the data for China to Japan and the United States to make the analysis for this paper. We will be comparing their economic growth and what happens in that country during the shifting of the luxury goods markets. Such as, natural disasters and the changing of government. Analysis From the data that we found, we know that Japan used to be striving in their luxury products sales just next to the United States and Europe. From our research, the reason that the luxury market is shifting to China is because of the recent tsunami and earthquakes that hit Japan. With their economy going down, less Japanese are buying luxury goods. To avoid the downturn sales in the luxury products, these luxury industries are looking at China, especially Shanghai. The reason that these big industries chose China is because; they see a potential economical and political growth. With China’s economy is doing better than ever now. Based on our research, there are at least three different reasons on why the luxury market industries are shifting to China. First of all, it shows China’s rapid growth of economy. Second, increasing purchasing power led to higher consumption. And third, luxury items became a symbol of wealth and social status, due to the emerging middle class. China has surpassed U.S. and became the second largest consumer of high-end goods. The financial crisis has jeopardized the world’s economy, and the luxury market assumed that there would be a decline of 8 percent in 2009, but China surprised the luxury market with its 12 percent growth of luxury purchasing. This shows that China did not get that much effect through the financial crisis and the purchasing power is still increasing. The age of the consuming group is young compared to U.S. and Japan, and the research shown that 80 percent of the China’s wealth class are under the age of 45, compare with merely 30 percent in the U.S. and 19 percent in Japan. This means that the main purchasing power for luxuries good in China is the young age under 45, and this group would remain the status for the next ten years. Since China has the one-child policies, the young people who would like to consume luxuries might increase when their age grow. If the majority consumer age remains the same in China, which are under age 40, then the growth of the market would remain the same growth maybe surpassed in the future. Now, we need to why the young people in China are willing to spend a lot of money on luxuries. Many of them think the luxuries are good representation of the taste and economic status of the users, and they can be used as a special and distinctive indicator of a person. A lot of young Chinese shoppers are excited to own a certain amount of luxuries, but they lack of the knowledge about the history and life styles that the brands are pursuing. This might be a lack of brand loyalty, and it might cause a burden of luxury market growth in China. Conclusion In the context of the consumption of luxury goods, the primary leader happened to be Japan, followed by Europe and the US. However, in the current times, the situation is no more the same. The Japanese and the American have largely succumbed to the constraints imposed by the housing bubble bust and the following recession, resulting in a fall in the luxury goods consumption. In contrast, due to varied economic and demographic factors, China has emerged as the new leader in luxury retailing. The research under consideration identified three main factors that are China’s rapid economic growth, increase in the average spending power and the emerging perception that the luxury goods are symbols of status and power that have led to the growth in the demand for luxury goods in China. This trend was further strengthened by varied accompanying factors like the existence of a number of single child households, in which the young not only have a large spending power, but who are also well connected with the global trends in consumption and retailing. Hence, in the times when the luxury goods consumption is fast contracting in the earlier retailing heavens like Japan and the US, China is a possible ray of hope for the luxury retailers. The undertaken research points towards a rich possibility for future research in the varied aspects of luxury retailing in China. There is a grave need to analyze the Chinese luxury retailing sector to find out as to whether the boom in luxury consumption in China is primarily supported by a rapid economic growth and an increased spending power, or there exist varied accompanying minor factors that need to be looked into and researched. The research also identified that there exists a large scope for research in the Chinese luxury retailing sector in a demographical context. The other aspect that needs to be looked into is the role played by the traditional Chinese culture and values in the rising consumption for luxury goods and to find out as to how the retailers can benefit from this by customizing their products as per the Chinese aspirations and preferences. References Alderman, Liz. "Less Appetite for Luxury." The New York Times. 25 Mar. 2011. Web. 24 May 2011. Alvstam, Claes G., Patrik Strom, and Naoyuki Yoshino. "On the Economic Interdependence between China and Japan: Challenges and Possibilities." Blackwell Publishing, Aug. 2009. Web. 24 May 2011. Junqian, Xu. "China Set to Overtake Japan as World's 2nd Largest Luxury Goods Market." The China POst. China Daily, 9 May 2011. Web. 23 May 2011. Atsmon, Yuval, Brian Salsberg, and Hirokazu Yamanashi. "Luxury Goods in Japan: Momentary Sigh or Long Sayonara?" McKinsey Asia Consumer and Retail, May 2009. Web. 23 May 2011. Cooper, William H. "U.S.-Japan Economic Ties: Status and Outlook." 27 Aug. 2003. Web. 23 May 2011. Danziger, Pam. "The U.S. Luxury Market Continues to Boom." UNITY MARKETING. UNITY MARKETING, 24 May 2006. Web. 26 May 2011. Mostovicz, Isaac. "US consumers start to spend again." Janus Thinking. N.p., 28 Feb. 2011. Web. 27 May 2011. Wendlandt, Astrid, and Phil Wahba. "China and U.S. to spur luxury sector." Reuters. SAP, 23 May 2011. Web. 26 May 2011. Appendices Read More