Localization has long been an imperative in industries such as fast-moving consumer goods. But does it make sense for luxury products? Part of luxury’s appeal is its foreign provenance: consumers enjoy the cachet of French couture, or German engineering. 

 

While a degree of localization can be helpful for some luxury products, the process is tricky. Handled incorrectly, localizing luxury products can erode brand equity and hurt the bottom line. 

Nowhere is this point more important than in China, where many luxury brands now earn half their revenue. 

 

The situation is further complicated by the complexity of the China market. A degree of localization that resonates with consumers who have never gone abroad may differ sharply from what is appealing to a Chinese who returns to Shanghai after getting an MBA in Brussels. Geographic variation, distinctions between first-tier and lower-tier cities, generational factors, gender preferences – all must be taken into account if localization is to be intelligent and profitable.

 

 

China’s luxury market has been affected by the country’s slowing economy and a government effort to fight corruption by curtailing the purchase of luxury goods by officials for use as gifts. But the underlying numbers remain strong: the market is growing 30% a year, and is projected to be the world’s largest luxury goods market by 2015, generating more than 20% of all global luxury sales.  

 

The localization of certain luxury products is already underway, often occurring through the creation of new products, product lines, or limited-edition designs. In 2009, Montblanc launched the diamond-studded Fortune Number 88 fountain pen aimed at Chinese, who regard the number eight as lucky. At about the same time, Hermes created the ShangXia brand for the Chinese market, a line "nurturing Asian craftsmanship and creative talent" in clothing, accessories, and home decorations.

 

Localization is especially prevalent in China’s luxury auto industry. Because many wealthy Chinese drivers have chauffeurs, in 2005 Audi designed the A6L, a model with an elongated wheelbase that gives backseat passengers 10cm of extra legroom. Aston Martin, Ferrari, and Bugatti have produced limited-edition models with Chinese design motifs. Toyota, whose luxury brand Lexus aims to strengthen its foothold in China, has built an R&D facility in Jiangsu Province scheduled to go online this year. 

 

As foreign brands acquire Chinese characteristics, they are simultaneously competing with a growing number of local luxury brands, many of which tap into national pride or the allure of Chinese culture. Designer Guo Pei, for example, makes the "Made in China" label a selling point for her designer dresses, while Herborist, a $300m company based in Shanghai, uses what it calls Chinese herbal science to create high-end cosmetics sold in hundreds of department stores in China and abroad. Moutai, a fermented sorghum liquor dating back to the Qing Dynasty, has used its long history in a successful rebranding effort, with some bottles having become so expensive they are sold at auction. 

 

Analysts say that while older Chinese consumers may associate local products with lower quality, those born in the 1980s and after will be less influenced by outdated notions of Chinese quality. This will pave the way for further localization of luxury brands.

 

 

Unlike consumers in many western markets, Chinese have few emotional ties to luxury brands. This means that appeals to classic tradition and brand heritage, which tend to work well in other countries, may fall flat in China. 

 

One solution is to create a customer experience that overcomes this lack of emotional connection. In some cases, this is relatively straightforward. Louis Vuitton, for example, knows that luxury buyers in China’s lower-tier cities enjoy being treated like VIPs. It creates "a VIP experience" by closing selected stores for half a day and arranging private showings for customers who spend more than 200,000rmb (US$32,000). 

 

On a more fundamental level, the challenge for foreign luxury brands may be to construct a local version of what, until now, has been a much more international type of brand experience. There is a growing trend toward "curating" a luxury brand experience, an approach that may require a larger investment but can deliver a far greater impact. British drinks company Diageo, for example, chose Shanghai as the site of the Johnnie Walker House, a "brand experience space" designed to foster appreciation of Scottish whisky among Chinese drinkers and create a clear association between whisky and a sophisticated, luxurious lifestyle.

 

 

Another distinct feature of China’s luxury market, and one that requires a localized approach to customer outreach, is the disproportionate power of the internet, particularly social media. Some luxury marketers have avoided social media for fear of brand erosion, but given China’s embrace of all things digital, this attitude has changed. An article inCampaign magazine, an advertising trade publication, said that "social media adoption by prestige brands is now ubiquitous" in China. 

 

It is especially critical that brands focus on e-commerce. China’s market for online luxury goods is on track to exceed US $3.2 billion in 2012, up 13% from the prior year; and within two years, China will add more than 200m new Internet users, bringing its total user base to 700m users – more than that of the United States, India, Japan, Russia, and Indonesia combined. 

 

What all of this means, according to a McKinsey report, is that "marketers will need increasingly sophisticated web strategies; for example, they can work with social media agencies to monitor and shape online conversations among consumers or to identify influential bloggers and help educate them about brands."

 

Western companies historically have viewed emerging markets as places to sell their products, and as incomes have risen, this has come to include luxury goods. But soon, fast-growing markets will begin exporting their version of luxury overseas. This two-way dynamic – foreign brands entering China while Chinese brands go abroad – will make local context and relevance critical to luxury brands. 

 

To preserve their value, luxury brands must manage how they are perceived. In China, this will center more on imagery, pricing, and availability than on issues such as product quality or brand heritage. Product design, in-store promotions, and brand communications are key elements in ensuring that the evolution toward "more Chinese" luxury goods does not diminish the brand equity of luxury products. The good news is that this gives all luxury brands an opportunity, no matter how late they may have come to China – as long as they project a locally compelling image of their products as novel, desirable, and scarce.

 

 

Alex He is General Manager of China Business Development and Senior Vice President at FleishmanHillard China. He has been an advertising and PR veteran in Omnicom and WPP, and for nearly six years was a senior strategy consultant leading marketing and retail work at McKinsey & Co.