On a recent flight from Shanghai’s Pudong airport to Hong Kong, I noticed that almost all the younger travelers around me were dressed in Gucci, Balenciaga, Off-White, or Burberry, all showcasing the logos prominently. I spotted several Dior and Hermès handbags and several gold watches by Audemars Piguet and Patek Phillippe. And all of it was worn by people that looked to be under the age of 40.

How did these people make their brand choices? What drove them to decide between Gucci and Balenciaga? How do they know what within their favored brand was a “hot” item? Conversely, how can companies understand what is trending in China versus what is fading? How can they identify sentiment? And how can they see the early warning signs that consumers are losing interest in a particular item?

Traditionally, Western companies have relied heavily on market research surveys. An iconic luxury brand recently told me about their experiences with these studies in China. In short, they called them a disaster. They tried surveying customers in China using conventional market research methods, but they generated almost no actionable insights, and they weren’t sure if the results were even relevant, because they couldn’t cover enough cities in China. They received results, but they didn’t know if those results were representative at all. It was a slow process that didn’t allow for changes in the sentiment or trends. Frankly, most brands tend to struggle with this same challenge in China.

It is why most Western companies underperform in China. Even if they have initial growth, few can stay profitable over time, and the luxury companies leaving China because they couldn’t hit their targets even include quality businesses like the French retailer Carrefour and the Japanese retailer Takashima. It was reported that Takashima lost money in China in the three years before its departure — a closure that was estimated to have cost them approximately $30 million. In an article on June 28, 2019, the South China Morning Post cited a spokesperson of Takashima who said, “Rapid changes in the consumption structure and fierce industry competition have exceeded our expectations.” Like others, they were too slow to generate insights into the rapidly changing consumer sentiment/habits/trends in the Chinese market. By the time they understood what was happening, it was too late.

I am confronted with stories like these almost daily. Companies do not invest in an appropriate operating model for China. Many believe they can launch in China with approaches similar to the ones they use in other regions and fail as a result. The ultra-dynamic, vast, and fast-changing Chinese market requires a sophisticated, data-driven management approach. While many companies talk about digitization, very few are applying it sufficiently today. Most have a standard CRM and use basic social media listening tools, however, very few companies build an infrastructure that offers them actionable insights created from available data. This is where AI is a game-changer.

It is important to note here that A.I. is an often-overused term. It’s only one part of advanced data querying technologies used to help organize big data, identify relationships and trends, and help companies take the guesswork out of decisions. Hence, companies need to combine AI with machine learning and other appropriate tools for different situations. Most importantly, the company’s entire data infrastructure needs to be structured in a way that connects all data sources so relationships between them can be identified and understood.

But why exactly is AI so important, and how can luxury brands apply it in China? Imagine this typical challenge many luxury companies face: A luxury brand in China has an aging consumer profile and isn’t appealing to Millennials and Gen Zers. Its flagship stores in Shanghai, Beijing, and Hong Kong don’t have enough foot traffic and can’t generate enough revenue to cover their costs. Brand loyalty is decreasing, and market shares are eroding. What needs to be done?

This is where many companies simply rely on gut feeling. They may switch their advertising agency, run promotions that just erode brand equity, or try out new campaigns or influencers. They may even develop a WeChat Mini Program. But, if they lack fundamental insights on what’s wrong with the branding, there is a high probability that all those measures will change nothing or even compound their problems.

Instead, a company should use machine learning and a sophisticated AI engine to analyze all available data points, including the millions of conversations consumers have about the brand online, which can be challenging because of the firewalled Chinese internet. Afterward, the brand should understand the precise consumer sentiment about itself, and, more importantly, the changes in that sentiment over time. This analysis goes beyond simple social media listening because it gathers data across several brand touchpoints (from store foot traffic to online sales) to create a model of how changes in sentiment impact purchase patterns. Only then can a brand identify the real reasons for its negative performance, which could be anything from weak brand positioning to inefficient communication campaigns. Only then can a company develop precise strategies to strengthen its brand and its performance while also identifying significant marketing savings and efficiency gains.

China is one of the most attractive markets for luxury brands today, but it is also one of the most challenging. The sophistication and expectations of luxury consumers in the country are among the highest in the world, and their youngest consumers expect the most while also driving the most market change. AI allows brands to identify patterns and insights from real-time data that wouldn’t be identifiable otherwise, which is why it’s become a critical enabler for success in China’s new economy.

 

Daniel Langer is CEO of the luxury, lifestyle, and consumer brand strategy firm Équité. He consults some of the leading luxury brands in the world, is the author of several luxury management books, serves as a regular keynote speaker, and holds management seminars in Europe, the USA, and Asia. Follow @drlanger





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