Click below to listen to this week’s Alicast podcast with Adam Najberg. A full transcript follows.

Adam Najberg: Let’s get to it. I want to ask you, luxury has been a bright spot globally in what’s been a fairly miserable year. And luxury has done especially well in China. Your study foresees China’s share of the global luxury market will have nearly doubled this year climbing about 50% to around 346 billion yuan. What do you see in terms of consumer confidence and luxury consumption in China now? Does the bounceback in retail there signal to you that it could or will happen somewhere else in the world? Or is this just one of these “China is bigger” or “China is unique” things?

Bruno Lannes: We should we should start by looking at the global situation. And as you pointed out, the global situation for luxury is actually not that great. We estimated that the luxury sector will decline by 23%, globally in 2020 versus 2019. And so that’s a very sharp decline, 23%. And on the contrary, you need to look at the China performance, which sees growth of nearly 50%, as you mentioned, so a very contrasted view. And you could see, of course, the effect of COVID. And the fact that many of the countries where luxury is on sale, people have been on the lockdown and so therefore, it was difficult for consumers just to go shopping.

And that has been the driver, of course. China has been recovering much faster than the other countries. That is, in part, driven the growth of the of the China market for luxury, as you know, in previous years, up to 2019. According to our estimates, Mainland Chinese were buying mostly luxury outside China, we estimated in 2019. It was one-third in China two-thirds outside the mainland.

Of course, that trend has completely reversed in 2020 because people could not travel. And so, one of the drivers of the growth in China has been what we call in the report “repatriation,” which is the fact that Chinese consumers inability to travel abroad, has led them to buy the luxury products that they wanted to buy in the country, in the mainland.

AN: Just on that topic, after COVID when things are more normal again sometime next year, let’s say, will we see that that was just a bulge that the online was satisfying the ability or the inability to travel somewhere else to do the shopping? Will it kind of even out? Or are we now looking at sort of a higher base?

BL: A couple of points maybe to answer your question. One is we should also reflect on the point that in 2020, Chinese people actually bought less luxury globally than they did in 2019. So they bought more in China. But the increase in China has not been able to compensate for the decline of their purchases in the rest of the world. And so, Chinese this year have actually spent less on luxury than other nationalities, for example. And so that’s one aspect. And so, as the world goes back to normal, we estimate, as you know, that it’s not likely to be in 2021, more likely to be in 2022, when Chinese people feel more comfortable traveling. Then, of course, we’ll see a rebalancing of, you know, whatever is purchased in China versus whatever is purchased outside China by Chinese.

Having said this, I think the experience of 2020 or 2021 will have some longterm effect and we don’t expect this proportion of one-third in China, two-thirds outside China to continue we in our forecast, we expect that ultimately Chinese will buy more than 50% of their luxury products in China in the mainland, compared to outside China, which, of course, is much higher than the one that they have done in 2019. And I think this is the result of many things, but in particular, the results of the experience of buying in China and finding the experience quite enjoyable.

But also, the development of domestic duty-free with Hainan Island, which has been, of course, a very bright spot for luxury this year. And we expect there’s going to be more of those domestic licensew to be granted, and therefore more opportunities to buy duty-free in the country. And so that’s going to drive repatriation even more.

AN: We’re seeing the acceleration of the importance of the online channel inside China, as well as offline channels in China for luxury. But on the brand side of things, how are they adapting themselves to succeed there? We have changes in consumer habits and expectations, where you just kind of flip a switch and it changes overnight. Is that true in luxury, too? And what are some of the behavioral changes we’re seeing that’s happening among luxury consumers in China, as their business experience moves more online?

BL: Because we have been able to work with the Tmall Pavilion this year, and we have had access to some consumer data and consumer behavior information from the Tmall Luxury Pavilion. What is interesting to look at, to answer your question, is to look at who are the consumers and what they do. And of course, Tmall is a great source of information for this. And in particular, when you think about Gen Z, and when you think about Millennials, they’re the driver of luxury spending in China.

The average age of consumers purchasing luxury in China is much younger than the average age of luxury purchases in the US or in Europe, for example. And this is driven by Gen Z and Millennials. And where do Gen Z and Millennials spend their time? Where they spend their time is online and you know, on Tmall and other platforms, of course. And so, to answer your questions, if you want to address your consumers, and especially the young consumers, which is the core of the of the luxury purchases, again, in China, then you have to be online, you have to have your marketing and communication and content and channels in moving gradually online. And you could say, and see that over time, brands have invested a lot more in digital marketing. And so the engagement, their strategy of engagement, is making content available to Chinese consumers more and more online. And today, luxury brands will tell you that more than 50% or 60% of their marketing budget has shifted online. That’s one aspect because that’s where the consumers are. That’s where they expect to be contacted and connected with the brands, and so luxury is no exception. What is true for consumer goods is also true for luxury, they have to be online as well to engage with consumers, because that’s where the consumers are.

Now, if you think of channel, that has been a bit slower, with buying. You know, if I say, let’s say 60% of marketing spend today is on digital across different platforms and channels. But only as you see in the report, you know, a bit more than 20% of luxury purchases have been online. So there is, of course, a gap between, you know, digital as a channel versus digital as a marketing vehicle or marketing platform…(Consumers) will have more and more opportunities to buy luxury products online. And of course 2020 has seen a huge jump. We estimated it was only 12% to 13% online in 2019. And it’s 23% in 2020. So 10 points of increase in penetration in just one year. Which is of course quite spectacular.

AN: If we had been having this conversation three years ago, it would have been very, very different. I expect that was around the time the Tmall Luxury Pavilion launched. Many of the top brands were very skeptical or wary of joining or even about moving online. Today, it’s very different. We have over 200 brands on the pavilion. I get that the concern was about diluting brand equity or downgrading the exclusive experience that you tie to luxury brands. But let me ask you, why did it work? What’s changed in the market? Or in the mindset? Was it purely necessity? Or was it something else?

BL: I think it’s very simply the fact that that’s where consumers are. And if you know brands, again FMCG brands, have done that a long time ago, and luxury brands have to do that as well. And I think they realize that this was a necessity to really be connected to the consumers, especially the target consumers for luxury, which is again, Gen Z and Millennials. And so you need to be online. And then the question is where…Do you put your brand on scene? Or on Tmall Pavilion? Or do you do other alternatives? And I think what has happened over the last three years is what brands have realized is that doing brand on scene is actually tough, it’s actually a hard job to do your unique capabilities to be able to satisfy consumers, because consumers’ expectation when they go online, in many ways, have actually been dictated and formatted by their experience on Tmall, and of course, other platforms as well. And that’s the expectation they have when they go online, and if the brand is not able to deliver that experience, then of course, they get frustrated, and they are not very happy with that experience.

And so, so it’s not like it’s easy to become a, you know, a digital player overnight, when you don’t have the expertise and the experience to do that. So I think that’s, that’s one aspect. The other aspect, of course, has been, I would say the simplification of the of the platform’s environment. You know, three years ago, when the pavilion was announced, there were other alternatives of multi-brand online platforms available. Now, you know, three years later, essentially, you know, one can say that there is only one left, which is the Tmall Pavilion, of course, they are different form of access, you could have your flagship store, or you can go to Farfetch now, or you can go to main.com. So there are different ways you can engage with with the brands. But there is a single platform that allows you to do that, which is the pavilion and so that was also helping, I think, consumers and brands to have a simple life. And again, the simple question about, you know how to go online, because essentially, there is only truly one multi-brand platform that is left.

AN: What you’re talking about is is how platforms have made it easier to appeal to consumers and drive growth has been good for brands, your report, going back to the number that you mentioned earlier, the online share, the luxury market has doubled. You know, it’s up to 23% from last year, still a lot of room to grow. And on that note, around 40% of the people responding to your survey said they’ll do even more luxury shopping online in the future. If you’re a brand, what does that signal to you?

BL: It signals that the you know, this is a this is a trend that is not going to stop, it’s a trend that is going to continue. We see that, you know, we published a couple of weeks ago, our shopper report, which is looked which looks at the FMCG categories. And we see that, you know, development of online channels also accelerating in in 2020, of course, because of COVID.

But also what there was a general trend of acceleration across categories, and so luxuries, again, one of those categories that and I think consumers feel a lot more comfortable buying luxury online, they feel comfortable with of course, the fact that they get genuine products, they feel comfortable by the fact that the service, the experience will be great. And so you know it becomes second nature for them just like waiting for the categories to do that, as well for luxury.

And so we expect, of course, a big a big gross of online channel development for luxury. But, you know, as discussed, there will be multiple forms to do that. And we can talk about, of course, the flagship stores, which is the main, you know, the main way of doing that on Tmall. But there are other ways of course, that are available. And I think that will be the breadth of this offering of online platforms will actually generate even more attraction, I think for the consumers.

AN: I mean, of course Gen Z shoppers besides wanting this great experiences exclusive experience online, they’re also very focused on sustainability. I wanted to ask you, where does sustainability fall with these luxury brands? How do they address sustainability?

BL: It is becoming as you know, it’s becoming a global priority for these brands. And so So China is no exception. And, but it’s coming from from the top is coming from their headquarters in Europe or elsewhere, and this has become developing a brand with a purpose, it’s great to have a purpose which is, which is, you know, quality, quality of fabric, quality for material and craft, handmade, etc.

And an exclusive environment in which you can sell those products, which is a broad definition of what luxuries, but but at the same time I think consumers are now looking for what is the purpose of that brand? What is the purpose and to what extent this is contributing to the global planet? And, and so, so I think these questions have become a lot more prevalent in the minds of consumers in China, just like anywhere else in the world. And therefore, brands have engaged into programs to explain to consumers what they are doing in this respect and, and why, you know, they should they should trust these brands and buy these brands.

And so that’s a trend that’s a longterm trend, which is defining not just luxury again, but every category that I work with, that we work with has this has to have that purpose, and that purpose has to be visible to consumers.

AN: You talked earlier about how things have just become more simple on the platforms, a lot of that has to do with integration of different technologies. What digital technologies are really mattering to brands these days, I know you can’t talk about China e-commerce without mentioning live streaming. So I’m happy to hear about that. But what else are we seeing things like 3D or virtual reality or augmented reality, omnichannel experience and all that catching on? Or is it still just a one horse race?

BL: I think a new development this year, and of course, Double 11 just happened. And we have seen luxury brands using live streaming not so much as a as he was actually used livestreaming in a different way he was used livestreaming as a brand-building way. So it was not so much about promotions or having a having a good deal through livestreaming. It was more introducing the brand, inserting the content of the brand and engaging with consumers and building brand equity, which I think was a an interesting development on livestreaming and an unusual one, given you know, what has been going on with livestreaming in general and what consumers expect.

And it worked very well for the brands that I’ve used this year. So I think that’s going to continue. And I think thanks to that we will see the different use of livestreaming, which I think is interesting. And consumers have reacted very positively again to that development.

I think the other one I would mention, which we see a lot is brands are working a lot in more online to offline I think, this notion of consumer journey, and providing with the consumers with the best experience, regardless of where they shop and how they shop. But also recognizing that consumers spend a lot of time online, but then end up doing their purchases offline or vice-versa. And being educated by the content that they see online. But ultimately, it’s one experience.

And so I believe the development of online to offline will continue. And you know, when you see pop up stores, for example, and the brands have been creating these and studying even a couple of years ago, and combining these with an online way of showcasing what whatever happens to in that pop-up store for a few days. I think that’s the development that we that we’re going to see more of because that’s the way again, Chinese consumers are looking at the experience of shopping in general, which has an online component and an offline component. And those are interchangeable. And so I think we would expect a lot of development in that area as well.

AN: You’ve talked about really only seeing global recovery in 2022, perhaps but in China, what do you expect Chinese consumers to be spending on next year in 2021.

BL: In the report as your bread we make a forecast that the market the luxury market will continue to be very, very well oriented, I think we estimate the growth for next year to be around 30% on the back of nearly 50% this year, mostly driven by the same drivers that we have mentioned in the reports.

One is, of course repatriation because we don’t think that a lot of Chinese people will travel next year 2021 and that may restart on in 2022. And in the meantime, of course domestic travel retail will expand even more. And so that’s going to create an alternative for Chinese shoppers to stay here and shop duty-free without having to go abroad for that. We’re going to see of course the same driver on Millennials and Gen Z. The same drivers are on digitalization and having a very very convenient experience enjoyable experience online and and of course, all of these will contribute to a very positive orientation for the market next year.

I think where we’re going to see maybe some rebalancing between planning in China versus spending outside China is going to start in 2020 to 2023. We expect, as you know, that ultimately, as I mentioned at the beginning of our discussion, that Chinese will spend ultimately by 2025, more than 50% of their luxury purchase domestically. And so that’s, that’s too big, of course, opportunity for everyone working in the luxury sector in China, the you know, the shopping mall, the platforms the brands, of course, and the agencies that work for those brands, because that’s going to be a fast-growing market.

AN: Bruno, thank you so much for spending the time and educating us really appreciate it.

BL: Thank you very much for having me. I enjoyed our conversation. Thank you.