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Luxury Brands Must Take Action to Navigate the Now in China: McKinsey

Tianwei Zhang
·4 min read

LONDON — McKinsey & Company on Tuesday will release a special report, “Understanding Chinese Consumers: Growth Engine of the World,” highlighting perspectives on the trends that are defining the “next-normal” in post-pandemic China.

The report stresses that China’s economy is unique, and is set to retain its pre-eminent role as the engine of global consumption growth post-pandemic.

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“Companies will require a focused strategy if they wish to continue playing a part in what many would argue is the world’s most exciting consumer story,” said Daniel Zipser and Felix Poh, partners at the consultancy firm.

In addition to laying out key trends shaping the post-COVID-19 Chinese economy, shopping and consumption habits, the importance of rethinking digital strategies, and finding new pockets of growths, the report offers a perspective on luxury goods companies during and after the pandemic.

The report recommends two sets of priorities for industry executives: short-term actions for “navigating the now” and longer-term considerations for shaping the future.

According to McKinsey, the immediate priorities for luxury executives include: review 2020 inventory and rethink 2021 collections; enhance digital engagement; manage for cash; take a “clean-sheet” view of demand planning; assess the strength of the supply chain, and adjust merchandising plans.

Strategic actions to consider taking during the recovery are: putting digital at the center of your operating model; building competencies related to resilience and transformation; boldly reshape the ecosystem, including through M&A; anticipating shifts in consumer sentiment and behavior, and digitizing the end-to-end supply chain.

The report also advises that brands need to accelerate their transition to a vertically integrated distribution model and avoid aggressive commercial and discount policies, as wholesale Darwinism emerges.

With travel restrictions still in place, brands will need a new approach to attracting luxury shoppers. “To reactivate Asian luxury consumers in their home countries, brands can focus on creating tailored local experiences, strengthening their digital and omnichannel offerings, and engaging more deeply with consumers in tier-two and three cities,” the report said.

McKinsey also believes that the luxury industry should explore alternative ways to deliver the same kind of magic that physical events offer when there are restrictions on international travel and large gatherings, and consider pushing for a coordinated revamping of the fashion calendar.

The report also forecasts that acquisitions that were once forbiddingly expensive could become viable in the post-crisis period, and such developments could result in further industry consolidation or even the formation of new luxury conglomerates, such as the recent alliance between Alibaba, Farfetch, Compagnie Financière Richemont and Kering’s Pinault family.

On the importance of rethinking digital strategies in China, the report said digital marketing can increase the size of a brand’s target audience by 20 to 40 percent; boost click-through rates by two to five times; raise marketing return on investment (MROI) by 20 to 30 percent, and grow average revenue per user by as much as 10 percent, when done effectively on China’s mega-platforms, such as Alibaba, JD.com and Tencent, and new platforms such as Douyin, the Chinese version of TikTok and video site Bilibili.

Harnessing the power of social commerce is also key to fuel growth in China. “Brands will need to be agile; developing a new playbook and acting on data to scale up,” and “be prepared to disrupt their existing norms and business models,” the report said.

The last part of the report lists key trends that define China’s Gen Z as a unique cohort of consumers. According to McKinsey’s 2019 Gen Z Survey, China’s Gen Z are twice as likely to buy products spontaneously compared to Gen Z in South Korea, and they demand personalization of products and services more than their peers in Japan, South Korea and Australia.

In order to engage with Chinese Gen Z, the report suggests that brands should invest in data to drive a deeper understanding of Chinese consumers and develop unique product and service offerings; tailor brand proposition and build loyalty; double down on both online and off-line channels (new social media formats in particular) to ensure a consistent omnichannel experience; identify and partner with the right influencers, and adjust positioning to resonate with attitudes to technology.