Submitted by Experience Not Logic Blog

A recent article at Knowledge@Wharton, High Risks and High Rewards: China’s Fast-changing Luxury Market, examines many facets of China’s luxury goods market. China’s luxury market is difficult and expensive to break into, sales are low, and the customers are fickle, but last year’s sales growth in luxury goods in China and this year’s predicted sales growth are the highest in the world.

The article presents two reasons for why China’s luxury market is difficult to break into: “unpredictable consumers and rising costs.” Chinese consumers purchase luxury goods for two main reasons: “as markers of their success; and because of the high quality.” This recent rise of demand for high quality is explained by the author as a result of both the maturing of the Chinese market and anxiety in the China over purchasing luxury items. This anxiety is somewhat demonstrated in the taxes levied by Beijing on luxury goods: 10% consumption tax + 17% VAT + 24% luxury goods tax. The anxiety is even better demonstrated by a hesitancy to refer to luxury goods as such, preferring to call them high quality goods.

Costs for luxury retailers are increasing for the standard bundle of reasons: the rising cost of land, labor and construction, as well as the appreciation of the RMB. With China only accounting for 5% of worldwide luxury sales at €9 billion, the cost of entering the Chinese a major hurdle for lower-tier luxury goods that are unable to afford entering China without a quick return on their investment. Given the scope and rapid growth of the Chinese market, the return for those who make the investment is likely to be huge.