Taiwan needs to reinvent itself, and one potential solution is to develop a luxury goods market that is the envy of the region.
This is part of a 6-part feature story on luxury goods in Taiwan:
Aiming to be Asia’s Luxury Shopping Destination
From Bags to Riches
The Jewelry in Taiwan’s Crown
Luxury Watches: More Than Just Telling the Time
Upgrading to First-Class
Chinese Aesthetic with a Contemporary Style
Only the select few will ever enter Taipei 101’s Prestige Club lounge, tread on its thick, golden-tan pile carpet, and admire the bronze-beige décor. Reserved for that elite group is the pleasure of sitting in the luxuriously upholstered chairs and looking out through expansive plate-glass windows on the marbled 101 mall atrium below.
To become a Prestige Club member, it is necessary to spend NT$1.1 million – not in a year, but in one day. And to retain membership, the feat must be repeated every year.
A special electronic card is required to access level six, where the lounge is located. Refreshments are gratis, and the attentive service is butler-like. Guests feel like they have arrived in a different world – certainly far removed from the cheap and cheerful night-market clothes, food, and trinkets that make up the usual image of Taiwan.
But that contrast is entirely the point. Taiwan once more needs to reinvent itself and move up the value chain if it is to continue to thrive. It is therefore striving to position itself as “Asia’s shopping destination,” an emporium for luxury goods and superior service.
To effect such an image makeover is not an easy sell, concedes Taipei 101 Mall Manager Thomas Tai, who is well aware of the stiff competition posed by Hong Kong, Singapore, Seoul, and even special economic zones in Malaysia. But he regards the goal as achievable. “We set the luxury benchmark,” he says of Taipei 101.
To become a Prestige Club member, it is necessary to spend NT$1.1 million – not in a year, but in one day. And to retain membership, the feat must be repeated every year. This exclusive club has some 1,300 to 1,500 members, which indicates the extent of the wealth residing in Taiwan. Even though Chinese tourists are a significant part of Taiwan’s luxury goods market, as are other Asian and international visitors, the business must rely on a solid domestic customer base.
At Taipei 101, 70% of customers are, in fact, local. “We think this is constructive and positive,” Tai confides, noting that it largely insulates the market from the vagaries of external political and economic conditions. He expresses confidence that this solid foundation will assure further expansion in Taiwan’s luxury market for at least the next two years.
Taiwan’s people, the report continued, place “increasing importance on status, image and wealth, resulting in younger consumers pursuing lavish lifestyle choices, such as indulging in luxury goods rather than saving money or investing.”
In its Luxury Goods Report in Taiwan, published in July last year, the London-based market intelligence firm Euromonitor was equally bullish about prospects here. The report noted that “affluent consumers in Taiwan remained unaffected by the sluggish economy and continued with steady demand for luxury goods.” Taiwan’s people, the report continued, place “increasing importance on status, image and wealth, resulting in younger consumers pursuing lavish lifestyle choices, such as indulging in luxury goods rather than saving money or investing.”
This sea-change in traditional attitudes is driven by the enhanced exposure of luxury brands in the media, particularly through linking them with the power of celebrity. Later marriage and lower birth rates are also factors. Taiwan’s youth would prefer to enjoy life, it would appear, rather than settle down and start families.
One of the advantages of the luxury goods market is its relative immunity to the plague of financial malaise. While portions of the national economy have been slowing down or even dying off, this sector has boomed. Those who can afford luxury goods don’t need to curb their purchasing, a fact that is unlikely to change in the near future.
Share prices worldwide of exclusive merchandise companies have risen by 6% annually on average over the past 20 years, according to a study by Bain & Company, which describes itself as “the world’s leading advisor to the global luxury goods industry,” in collaboration with Fondazione Altagamma, the Italian luxury-goods manufacturers’ industry foundation. Taipei 101 Mall’s retail sales figures share this positive trend. While the country’s department stores registered a relatively anemic growth rate of 3.1% in 2013 compared with the previous year, retail sales figures at 101 rose 5.5% to reach NT$9.9 billion, compared with the previous year’s NT$8.7 billion and NT$7.4 billion in 2011. Although final 2014 figures are not yet available, they are expected to continue the upward trajectory.
One of the advantages of the luxury goods market is its relative immunity to the plague of financial malaise.
Taipei 101 has also been receiving more visitors – 9 million in 2014, a big jump over the 6 million in 2013 – partly because the Xinyi MRT line began operations, bringing riders practically to its door. This year a record 10 million people are expected to make the pilgrimage to 101’s hallowed halls.
The Cross-Strait factor
Chinese visitors account for up to a third of the spending at 101. They are immediately recognizable, as most travel in groups led by guides waving pennants. In 2014, Taiwan received 2.8 million China visitors, and the number is expected to rise to 3 million this year, according to the Tourism Bureau. For all “overseas Chinese,” the number of arrivals in Taiwan in 2014 was 5.2 million. As Euromonitor notes: “Rising numbers of (mainland) Chinese tourists with high spending powers and a strong desire for luxury brands also attributed to growth of luxury goods in Taiwan.”
While the Taipei 101 management is focusing primarily on the domestic market, it is fully aware of the power of the yuan. It is therefore welcome news that well-to-do Chinese tourists seem to be gravitating to Taiwan for their shopping and leisure rather than to Hong Kong or elsewhere.
Hong Kong, in fact, is becoming more of a low-cost destination for its mainland compatriots, with budget-conscious day-trippers trailing around suitcases full of infant milk powder and elbowing out wealthier tourists. Luxury retailers in the Special Administrative Region are reporting weaker sales, even though the total number of mainland visitors is climbing, reaching a staggering 47.2 million last year. The wealthy are instead heading in this direction, or to Japan and South Korea.
Hong Kong, in fact, is becoming more of a low-cost destination for its mainland compatriots, with budget-conscious day-trippers trailing around suitcases full of infant milk powder and elbowing out wealthier tourists.
One company seeking to cash in on the flow of Chinese visitors is Ever Rich. It runs the duty-free stores at Taiwan’s principal airports, harbors, and offshore islands, such as Kinmen and Penghu, plus a flagship, six-story outlet in Taipei’s Neihu district.
Stand in the spacious lobby and watch as coaches disgorge excited Chinese tour groups. The group members stampede toward the impressively long escalator up to the sixth floor, where they get a couple of hours to select from more than 500 major brands on offer before eventually descending to the first floor to pick up Taiwan snacks and tea to carry back as gifts for relatives and friends.
Most of the goods are on a “pre-order” basis, meaning the merchandise is actually picked up at the airport departure gate so as to qualify for the duty-free tax allowance. While customers also include outbound Taiwanese travelers, some local nationals buying locally sourced goods, and significant numbers of Japanese tourists, the emphasis is definitely on the Chinese. They are the most numerous (90% of the total) and also the biggest spenders.
Recently, however, there has been some fallout from Beijing’s anti-corruption drive. “Our luxury market did not grow quite as much as expected in 2014,” says an Ever Rich spokesperson. “There were more Chinese travelers but actually not as much boutique or luxury shopping.” Perfumes continue to sell well, but ostentatious gifts not so much, though some manufacturers have been reducing the size of the logos on branded goods to make them less conspicuous.
Ever Rich’s latest initiative to rake in the yuan is the luxury Golden Lake Hotel and Asia’s biggest downtown duty-free plaza, in Kinmen, opened this past December. Just a 10-kilometer ferry trip from the Chinese city of Xiamen, the complex provides significant incentives for China’s brand-hungry hordes – at least those in Fujian Province – to choose Taiwan’s outlying island over Hong Kong.
“Taiwan customers have become more brand-conscious and aware,” Chen says, noting a corresponding shift in emphasis to the experience of luxury, rather than just the goods themselves.
The Taiwan government has done its part to facilitate matters by easing regulations on landing visas for Chinese. The new rules came into effect on January 1 and apply to residents of the country’s major cities, who are allowed to travel to Taiwan independently. Entry and customs formalities can be completed in about two minutes, and visitors can stay for 15 days.
While Ever Rich is certainly doing its part to try to turn Taiwan into Asia’s shopping destination (for its efforts, it was given the 2013 DFNI Asia/Pacific Award for Travel-Retail Excellence in 2013), another company leading the way is the Gloria Hotel Group. “There is no denying that Chinese tourists contribute tremendously to the Taiwan market, but the full-price market still heavily relies on local customers in Taiwan,” says John Chen, the company’s chairman and chief executive. (See the accompanying story in this section for details about Gloria’s new outlet mall project in Taoyuan).
“Taiwan customers have become more brand-conscious and aware,” Chen says, noting a corresponding shift in emphasis to the experience of luxury, rather than just the goods themselves. “As expressed in our slogan, `Luxury, Authenticity, Value,’ these core values are exactly what the majority of customers look for. We aim to provide a luxurious shopping experience in which consumers will find authentic branded products at value prices.”
This assessment matches a Boston Consulting Group report suggesting that the new generation of shoppers is “geared to pleasure rather than to possessions.” Marketers view this transformation as more of a challenge than a problem. Shoppers still have the time, money, and desire to spend, but to convert those factors into actual sales the retailers and brands need to find ways to be more creative – and also more digital, especially to reach the generation of millennials (those born in the 1980s and 90s). Burberry, for example, communicates internally and with customers through social networks, and two-thirds of its staff members are under 30.
Chen is upbeat about Taiwan’s prospects for becoming Asia’s premier shopping destination, despite forecasts indicating that 65% of the customers at Gloria’s outlet mall will be local “Although there are also outlet shopping centers in Japan, Korea, China, and even Malaysia,” he says, “the prices in these outlets are comparatively higher due to tax regulations, which is yet another huge incentive for shoppers to visit us.”
“[Taiwan customers] seek value rather than prestige, and have loyalty to a brand but will also wish to buy during a promotional period. It is more difficult to manage the luxury market in Taiwan, as goods need a selling point.”
Talk of price points for luxury goods may seem to be a bit of a contradiction in terms. This market segment is not supposed to be for the price sensitive, and also to be considered is the Veblen effect (named after economist Thorstein Veblen), who posited that some goods become more desirable as their cost rises.
Yet everyone appears to love more for less money, and at the same time the nature of the market has been changing. Thomas Tai divides 101 Mall’s clientele into three types: prestige, white collar, and potential. Since 2013, the customer profile has shifted slightly toward younger people, and 101 has an ongoing project to cater to this entry-level or “light luxury” segment, encouraged by a Unity Marketing report that concludes millennials will soon be the main consumers of luxury goods.
“Taiwan consumers are price sensitive because the market is competitive and they also want to know whether a certain product is limited (edition),” Tai says. “They seek value rather than prestige, and have loyalty to a brand but will also wish to buy during a promotional period. It is more difficult to manage the luxury market in Taiwan, as goods need a selling point.”
In the long term, however, this factor could work to Taiwan’s advantage, as Chinese and Southeast Asian shoppers gradually become more like Taiwanese in that it is not just the super-rich that make up the luxury goods market. If Taiwan’s experience with domestic consumers gives it a reputation for being the best place to buy luxury goods in terms of guaranteed authenticity, service, and price points, it will naturally attract shoppers from the rest of the region as well.
In terms of government policy, Taiwan has a “luxury tax” system in place, but it is aimed primarily at big-ticket items like yachts and real estate, with little impact on consumer goods. In fact, the brands and retailers hope the government will do more to assist the luxury goods market, especially by simplifying the Tax Refund Shopping scheme for tourists to Taiwan. Under that program, travelers who spend at least NT$3,000 are eligible for get back the 5% VAT on their purchases by applying at the airport or other point of departure. Michael Chia-Hao Liu, Taipei 101’s corporate spokesperson, suggests improving the system by giving the refunds at the retail counter so tourists can keep spending, removing the NT$3,000 threshold, and making the system electronic for greater efficiency.
Liu says the government is considering permitting Global Blue, which operates one of the world’s biggest tax-free shopping networks, to operate. By using their Global Blue card, non-resident shoppers can have VAT deducted from their purchases without the hassle of having to fill out various forms.
Earlier this year the European Chamber of Commerce (ECCT) in Taipei produced a position paper called Luxury Goods: Promoting Taiwan as a Luxury Shopping Destination. The report credits the government with having done a decent job of increasing the number of tourists, particularly from China, but expresses concern about the “lack of focus on Taiwan as a luxury shopping destination.” In particular, it complains, “it is difficult to attract high-spending visitors without superior hospitality facilities, which are currently lacking in Taipei compared with the competing cities in neighboring countries.”
The report’s suggested immediate solution is better promotion of Taiwan to prospective international tourists, meaning a shift of emphasis from night markets and low-end sightseeing to targeting high-value visitors.
While agreeing that much remains to be done to build Taiwan as an ideal environment to be an Asian shopping hub, Taipei 101’s Liu says that a strong foundation has already been put in place. “This is why major European brands want to set up shop here,” he notes. “We offer visibility, good foot traffic and well-established standards. Service industries like us are the future for Taiwan.”