The rapid growth of the luxury goods market in China in recent years has slowed appreciably as sales plateau among the wealthy in tier-one cities, like Beijing and Shanghai – yet it would be a mistake to assume that demand has fallen off as the country faces economic challenges. It’s just not where it used to be. 

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New research indicates that mid-income Chinese in economically thriving lower-tier cities with populations larger than London appear to be bullish about their earning potential in the coming years and have a strong appetite for premium products. And, significantly, they are willing to pay ‘top dollar’ to acquire them. Such is the aspirational drive of China’s provincial middle-classes, seemingly as motivated as their wealthier peers by the status afforded by prestige goods.

Together with our colleagues at FrontierView, a global market intelligence and advisory consultancy, we recently conducted a nationwide study of 10,000 Chinese consumers from low- to high-earners to better understand their product perceptions, purchasing habits and motivations. We discovered that medium-income householders expected the largest rise in their incomes by 2028.  Most respondents revealed a willingness to spend more, but this was particularly evident among the middle-class – a high percentage of whom were prepared to pay up to 50% more on premium products.

These are significant findings because they suggest there’s a potentially huge market for high-end goods outside the country’s principal urban centers, which over the past 15 years have been the focus of major brands’ marketing efforts. Latest sales and economic data indicate that for top earners in tier-1 cities, luxury goods spending growth is slowing. But among middle-income consumers, its growing quickly, the data shows. With their traditional, high-income customers seemingly ‘maxed out’, global luxury retailers should start pivoting towards the new consumers of luxury in previously unchartered parts of the country. 

Several high-end brands have recently moved their Asia headquarters from Japan and Hong Kong to mainland China, apparently re-orientating their business towards new consumer audiences. It comes as numerous luxury goods stores are launched in lower-tier cities, highlighting the growing levels of demand.  In other words, we are witnessing a kind of doubling down by some multinational retailers in China, at a time when so many are shifting parts of their China-based operations to other regions of Asia amid geopolitical and trade tensions.

Aspiration drives demand

At a time when the country is experiencing economic doldrums, and consumer confidence has only recently shown signs of recovery after the pandemic, why are middle-income householder expressing a propensity to buy high-end goods? One of the main reasons is that many Chinese, not just higher earners, like to present themselves as successful and ambitious. And the purchase of luxury goods is an important way of giving that impression, even if the cost of those purchases is very high relative to their salaries. China-watchers have known this for some time, but only a few international brands have in the past tapped this society-wide aspiration beyond the largest conurbations. Those that have, have been pleasantly surprised.

When Apple launched the iPhone in China in the late 2000s, many buyers had saved 2-3 months of salary for their purchases, such was the desire to acquire what many Chinese perceived as an attractive status symbol. And while few gave Starbucks a chance when it entered China at the end of the nineties, it succeeded in large part because it understood that consumers would derive social cachet from sipping exotic-sounding beverages in nicely designed stores and, perhaps more importantly, being seen to be spending time there.

Lack of reliable data a hindrance

So, why haven’t global luxury brands paid more attention to middle-income Chinese? One reason is that they have been of secondary importance, with affluent consumers the priority. There’s also a paucity of market research studies on their incomes, purchasing habits and other socio-economic characteristics. Another problem is the unreliability of government data on this and other consumer groups. And with western business consultancies increasingly finding it hard to operate in China, it’s now even harder for top brands to acquire the market intelligence needed to start capturing middle-income consumers. As well as becoming increasingly challenging, the luxury market is now more competitive than ever before.

Nonetheless, signs of some luxury firms doubling down on China suggests that despite the obstacles there’s a recognition that the commercial opportunity the new profitable market audience presents justifies dedicated teams and bespoke strategies. Brands looking to reach these emerging new consumers of high-end goods must seek to develop marketing and sales tactics that are specifically focused on them. They are not an amorphous group and will need to be clearly defined and segmented based on the findings of on-the-ground research. This is vital because only a relatively small percentage of the population of lower-tier cities will be interested in luxury products, though of course as a whole their numbers are substantially greater than more affluent buyers in the big metropolises.  

Brand authenticity key

In terms of marketing strategy, one priority is clear: preserving the perception of premium in the eyes of these consumers is paramount. Western brands will face significant competition from Chinese companies selling often much the same kind of merchandise, and of similar quality. They need to realize, therefore, that their advantage in this marketplace is not necessarily around the product that they are selling – whether it’s a leather bag, face cream or perfume – but their brand, as it is the authenticity and perceived status of the brand that will most appeal to middle-income consumers. 

Just like top-earning Chinese in tier-1 cities, middle-income consumers in provincial capitals will want to experience this authenticity, whether through high-value advertising, attractive stores/showrooms or experiential marketing that reflect and reinforce brand personality and identity. For although their cities are much less western-influenced and more Chinese than the likes of Beijing and Shanghai, China’s provincial middle-class demonstrably share the same aspirations and appetite for high-quality purchases as high-income consumers in the principal metropolitan areas have expressed, until recently.

Clearly, for international luxury brands there is real opportunity in China’s hinterland. Some have already recognized this and begun to reorientate their businesses towards the emerging centers of demand, as sales amongst their traditional customers in tier-one cities plateau. Attracting and capturing the new consumers of luxury, though, will not be without challenge as they are more dispersed and domestic competition for their custom is intense. But for those who get their sales and marketing strategies right, the commercial gains could be sizeable.

Tom Macdonald is the managing director of FrontierView in London. Ana Maria Samper is an analyst in FrontierView’s London team.