Navigating the Chinese Luxury Space in 2022: The View from TONG

Written by Adam Knight of TONG

China is currently undergoing one of the most profound periods of economic and social change since the country opened up in the 1970s and 80s, with 2022 looking likely to just as significant as 2021.

GDP growth fell to just 4% in the fourth quarter of 2021, its slowest rate since the beginning of the pandemic. After years of hyper expansion, China’s ecommerce space grew just 12.5% annually, putting it on par with the rest of the retail market. Online sales in 2021 made up 24.5% of total goods sales, slightly less than the 24.9% it accounts for the year before.

This slowdown has been driven by a number of factors, from longer-term issues such as a 12% decline in births, as well as the government’s pursuit of a “zero Covid” policy and the resulting impact of rolling lockdowns.

Some of this drop can also be ascribed to structural and cultural reforms being implemented by the government as part of its push for “common prosperity”, broadly defined as a campaign to reduce inequality, even if that is at the expense of economic growth. What started as a cap on real estate borrowing in the Summer of last year was quickly followed by a series of crackdowns across at least 19 different industries, including finance, culture, education and big tech.

How should brands interpret and adapt to this changing landscape? This question is at the heart of much of the work we do at TONG – here are some of our predictions for the year ahead.

Brands will be forced to think more creatively (and authentically) about how they approach the market.

China’s consumer retail space has received significant attention as part of the drive towards “common prosperity”, with many of the standard practices that brands have long relied on to reach their audiences currently under pressure.

Social media sites have been tightening the rules around how brands market to users. In December, Xiaohongshu (or RED) banned 29 companies for “deceitful advertising” practices. The brands (including Dove, Neutrogena and Nivea among others) stood accused of “astro-turfing” – fake grassroots tactics – wherein users are incentivised to post positive reviews of products through gifting and cash payments. Platforms have also been warned to control the “chaos” of celebrity culture and fan clubs, with new rules on recommender algorithms introduced in August.

Viya, China’s livestreaming Queena

Influencer marketing more broadly is undergoing significant reform as the government restricts overt displays of wealth. Perhaps the biggest surprise came when China’s leading live-streamer, Viya, was issued a record 1.34 billion RMB ($210m) fine for tax evasion. Viya’s rags-to-riches story became closely associated with China’s online shopping revolution. On the first night of the Singles’ Day shopping festival last year, her team sold $1.3bn worth of goods in a 14-hour session, more than the entire annual revenue for Wangfujing Group, one of China’s largest department store chains. Her removal from Chinese social media was just one of several high-profile incidents last year, sending shockwaves throughout the industry and spooking brands who suddenly found their (rather expensive) brand ambassadors censured.

Prada Chinese New Year 2022

Brands have already begun to adapt to these new realities, reining in their usual Chinese New Year marketing campaigns. This has been driven by a shift in emphasis towards their China and APAC teams to make decisions that typically would have been made in Western HQs. An increasing number are integrating local talent and ideas. Prada launched a competition that asked emerging artists to submit their interpretations on the theme of tigers. In a move away from the typically garish CNY promotions, the campaign was linked to local charities, including one dedicated to safeguarding tigers in the wild. Bottega Veneta went for a simple installation along the Great Wall, pledging a donation towards the monument’s renovation.

Bottega Veneta takes over the Great Wall for Chinese New Year

Bottega Veneta Chinese New Year 2022

As typical (and more transactional) platform and influencer strategies are squeezed further, brands will need to consider more nuanced approaches that emphasise the building of equity.

Emerging counter-cultures will create opportunities for innovative newcomers.

One of the biggest trends of 2021 was that of “lying flat”. In stark contrast to their parents’ generation, many of today’s youth feel that their hard work to stay afloat in China’s unrelenting economic rat race isn’t paying off. The “lying flat” movement – not dissimilar from youth counter-cultures found the world over – advocates a minimalist approach to life, foregoing marriage, children, work and consumption.

While most Gen Z consumers are unlikely to embrace “lying flat” in its most extreme sense, the desire for a decelerated life has garnered great interest online and in a host of sub-cultures that are increasingly rejecting long-held social norms. China has long been treated as a homogenous mass, divided along overly simplistic and generally unhelpful demographic lines. The companies that will perform best are the ones able to create the most meaningful connection to the issues that these emerging sub-cultures care about.

This is creating exciting opportunities for niche brands in particular. The first decade of Chinese luxury consumption was dominated by an obsession with logos and brand recognition. A growing number of consumers, however, often members of the Gen Z cohorts, are using clothing and luxury purchases to differentiate themselves from their peers. Purchases are less motivated by the older generation’s paradigm of “status” and more influenced by elements such as “identity statement”. This has opened the way for edgier brands to provide a point of difference from their more established competitors.

Tapping into these audiences requires humility, empathy and creativity. Brands cannot enter the market resting solely on what they think will work based on their experiences at the global level. They must first take the time to listen and engage with communities, understanding how their offering can meet their needs. Content and consumer strategies must then be built around these insights, leaning on local talent to produce experiences that resonate.

The biggest challenge will come from domestic competition; brands should be watching and learning.

Whether in beauty, fashion, athleisure or otherwise, 2022 will mark the year that local Chinese brands cement their positions as leaders in their respective product categories, eroding the long-held dominance of their Western counterparts. There are three core factors underpinning this.

Firstly, the crushing of global supply chains, increased cost of doing business in China and repatriation of Chinese tourism spending brought about by the pandemic have all created breathing space for local businesses that historically have struggled to cut through the foreign competition. Coupled with major central government initiatives to encourage an economic model that prioritises domestic spending, ongoing trade tensions and data security issues, international brands are coming under serious pressure.

Secondly, an increasingly toxic blend of (justified) cultural confidence with a volatile online space is causing endless headaches for brands that fail to properly adapt to local sensitivities. “Market nationalism” continues to shake up the consumer sector in a dramatic way. Last year, the likes of H&M and Nike among others suffered most after their statements about Xinjiang cotton led to widespread boycotts. Chinese alternatives such as Neiwai, Li Ning and Anta were ready to step up and capitalise on their counterparts’ misfortune. This cancel culture with Chinese characteristics is not reserved exclusively for foreign brands, however. Its runaway nature has already shown some signs of self-implosion, targeting Chinese brands and their choice of models, generating significant online discussion.

Thirdly, local brands are simply best-placed to understand and meet the needs of their target audience. As Chinese shoppers become increasingly discerning, demanding more from their brands, the most innovative – and thereby successful – case studies are coming from homegrown players.

Price history & Review on Florasis Eye Shadow Makeup Palette Natural  Handmade Beauty Glazed Eyeshadow Pigment Pallete China Cosmetics Flower  West Original | AliExpress Seller - Good Chinese Goods Store | Alitools.io

Emerging beauty brand, Florasis

In the beauty space, brands such as Perfect Diary, Herborist, and Proya have made huge gains in market share over the last three years. By the Autumn of 2020, skincare brand Winona ranked No. 9 in Alibaba’s Tmall beauty category, becoming the only Chinese beauty brand to reach the platform’s top 10. In 2021, startup Florasis outsold all other Chinese beauty brands on Tmall. Florasis is part of a new wave of brands appealing to Gen Z through the introduction of traditional Chinese elements into their designs, a trend known as “China chic”, or guochao. Many of these brands are innovating not only through their products and marketing, but are creating entirely new business models. Online fashion platform ICY vertically integrates designers, influencers and retail supply chains in its bid to challenge more established foreign competitors.

British brands looking to cut through must be realistic about the applicability of their global strategies in the Chinese context. Yet, wholesale outsourcing of responsibility to a local partner or team is also too simplistic. Competing ESG agendas and consumer sensitivities such as in the Xinjiang cotton case reveal the perils of leaning too heavily on one audience. A key priority for all brands in 2022 should be to raise the “China literacy” of their senior management, learning from the examples of Chinese competitors, so as to empower them with the critical skills to make informed and nuanced strategic decisions, rather than relying solely on the advice of third parties.

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Adam is the cofounder of TONG, a cross-cultural agency closing the gap between brands and people in and out of China from their offices in London and Shanghai. To find out more, please visit tong.global