CHAPTER 7. SEGMENTATION, TARGETING, AND POSITIONING 261 CASE 7-1 Continued (refer to page 236) Segmenting the Chinese Luxury Goods Market Despite-or because of-their humble origins, members of this group sometimes engage in freewheeling spending and conspicuous consumption. The term tuhao is a popular way for Chinese to mock this type of consumer behavior. Tu literally means "dirt," but in common usage it has taken on the connotation of "vulgar" or "unrefined." Hao's translation of "rich" is an extension of its original meaning as "bullying" or "despotic." In sum, tuhao is a pejorative term that roughly translates as "uncultured rich" and is sometimes applied to mi laoban and oth- ers with a penchant for profligate spending tied to uncouth behavior. With these definitions in mind, imagine witnessing the following scene: A Chinese couple is shopping at the New York City flagship store of French luxury goods marketer Herms. The man is a mi laoban, the woman his Xiao San (Chinese slang for the third woman in a marriage, usually a young woman seeking money from an older married man). The couple is shopping for Hermes's iconic Birkin bag, a limited-production item priced at $10,000 or more. The Xiao San has a Birkin on each arm, and can't decide which one she likes better. The mi laoban says, "Buy both, buy both, it's just another truck of coal, it's nothing." Tod's, has witnessed firsthand the luxury sector's explosive growth in China. In a recent interview, Della Valle noted that China has upended traditional models of the way luxury markets evolve. In the "waterfall" or "cascade" model, a luxury brand's reputation would mature over the course of many years. The reason is simple: Elite, wealthy customers would be the first to purchase high-quality, high-end brands. The middle class would aspire to own those same brands, but only at a later time would they acquire them. In a similar manner, lower-income consumers would aspire to the luxury goods that the middle class had acquired; later, some in the lower-income tier would be able to buy select luxury brands. Today, Della Valle notes, huge numbers of Chinese consumers are simultaneously demanding luxury goods. The challenge is to main- tain an image of exclusivity in the face of exploding popularity. Tod's and other luxury goods marketers are working hard to understand the Chinese luxury consumer. One thing the marketers have discovered is that the millions of newly wealthy Chinese consumers can be divided into several segments: the super-elite, the newly rich, and government officials Super-Elite The first segment, the "super-elite" or "extremely rich," consists of individuals who seized entrepreneurial opportunities in the 1980s when Beijing instituted economic reform policies and began to open China's market. A typical member of this segment is educated, influential, and well respected in Chinese society. These individuals started businesses and now, decades later, number among China's economic elite. For example, 61-year-old Jianlin Wang has a net worth of more than $15 billion. He is chairman of the Dalian Wanda group, which is a powerful force in Chinese real estate. Wang is the richest man in China, and ranked No. 56 in Forbes magazine's 2014 rankings of the world's billionaires. His company currently operates dozens of shopping centers, and is developing plans for a new theme park. Yan Jiehe is another member of the super-elite, a former high school teacher, he rose to prominence by restructuring some of China's poor-performing state-owned enterprises. Pacific Construction Group, the company he founded, is China's largest privately owned construction company Newly Rich The second segment, the "newly rich," consists of Chinese whose wealth, like that of the super-elite, dates back only one generation. In contrast to the super-elite, however, the newly rich typically grew up in rural areas and do not have college educations. While in their 20s, some members of this group moved to large cities seeking new opportunities. Largely self-taught, this group improved their skills by reading and immersing themselves in self-study. After joining the urban workforce, they climbed the corporate ladder and ultimately rose to leadership positions. Not as affluent as the super-elite, this segment spends selectively as well as splurges. A variation on the newly rich were those Chinese who exhib- ited little desire to move to the city. Instead, they stayed in the prov. inces, where they exploited the local natural resources and thereby accumulated wealth on a par with the super-elite. The term mi laoban ("coal boss" or "coal baron") was coined to describe rich mine owners from Shanxi Province, where abundant coal reserves are found. Both types of newly rich invest heavily in their children's educa- tions, due in large part to the fact that they themselves did not go to college. (In fact, the term "rich redneck" is sometimes applied to this segment as a put-down.) There is a sense among the newly rich that they neither command the respect nor have the influence of the super- elite. Anxious for their children to earn respect, parents in the newly rich segment aspire to send their children abroad to attend college. In 2017, there were 350,755 Chinese students enrolled in U.S. educational programs, including secondary schools, undergraduate studies, and graduate school. Chinese students represent one-third of the total international student population in the United States, and their numbers have tripled over the past decade. The most popular programs for these students are STEM ("science, technology, engineer- ing, mathematics") and business administration and marketing. The University of Southern California is currently the number 1 destination for students from China, India, South Korea, Saudi Arabia, and Canada also send tens of thousands of students to the United States each year, Government Officials The third luxury subsegment consists of government officials, ranging from senior officials ("tigers") to petty bureaucrats ("flies"). Gift-giving is deeply embedded in 5,000 years of Chinese culture and history. His- torically, there is a sales spike in demand for luxury goods each March, when thousands of Communist Party delegates converge on Beijing for annual meetings, Lower-level officials seek favor with superiors by giving Herms scarves, handbags from Louis Vuitton or Gucci, or Montblanc pens. Overall, government officials account for an estimated 50 percent of luxury goods sales. Chinese businessmen seeking government con- tracts, business licenses, or tax breaks also buy luxury gifts for govern- ment officials. In addition, cash gifts enable the recipients to buy Swiss watches, jewelry, designer clothes, or imported sport utility vehicles The result of this behavior has been rampant corruption in China's bureaucracy. In recent years, President Xi Jinping has targeted this group by cracking down on lavish spending, which has dampened 262 PART 3. APPROACHING GLOBAL MARKETS demand for some luxury goods. Although bribery is against the law in China, the law is not enforced consistently. To protect their customers, luxury goods companies are discreet. Managers at some stores keep special accounts and use code names for government officials. Some- times a middleman, rather than the gift-giver, makes the purchase. For example, a private businessman might use his credit card to make the purchase. He then passes the gift off to a government official, who in turn gives it to the ultimate recipient. Thus, the purchase process is sometimes a two-person activity: One person, the gift-giver, selects the gift; the second person pays for it. the vehicle of choice for U.S. presidents and Hollywood stars. Accord- ing to Kumar Galhotra, former group vice president for Lincoln and chief marketing officer for Ford Motor Company, focus groups in China repeatedly use the word "presidential"-for example, referring to John F. Kennedy-when describing Lincoln's heritage and image. The latest generation of Continental was designed specifically to appeal to wealthy Chinese who can afford chauffeurs. Interior options include premium materials such as Alcantara suede. Now that Beijing has lifted the one child per family limit, some buyers are looking for a vehicle that can carry children as well as grandparents. And, with the Chinese government restricting the number of cars on the road in an effort to reduce pollution, the decision a first-time luxury car buyer makes becomes critical. Galhotra notes that managers at Lincoln's Chinese dealerships are always on the lookout for ways to enhance the customer experience and build relationships with buyers. One observation: The name of Lincoln's top-of-the-line SUV, the MKX, is hard for Chinese speak- ers to pronounce. Therefore, starting in 2019, the name will be the Lincoln Nautilus. The localization approach is clearly working: Lincoln's sales in China increased from 32,558 in 2016 to almost 50,000 in 2017 Shopping Behavior Varies by Segment The extremely rich favor luxury brands that reflect the buyers' superior taste. For example, a Louis Vuitton handbag with its iconic monogram would be too commonplace. Instead, this customer would prefer a handbag from Bottega Veneta that offers renowned Italian craftsman- ship but signals the brand identity more discreetly. The extremely rich consumer also shops for luxury goods abroad while on business trips or when vacationing. This segment was an early adopter of Apple's iPhone; even before Apple established stores on the mainland, the extremely rich purchased the phones in Hong Kong, the United States, and the United Kingdom. The newly rich shopper, by contrast, is not as knowledgeable about luxury brands and does not seek out information about them. Com- ing from a frugal background, this shopper is aware that less-exclusive brands can be purchased for reasonable prices, even so, newly rich shoppers also want a reward for years of hard work. "Practical" luxury brands such as Louis Vuitton, Gucci, and Chanel are the right choice. The exception would be the tuhao variant of the newly rich, who would be more status conscious and more likely to make extravagant purchases. Government officials, the third segment, must be strategic, officials can't flaunt purchases that they can't afford on their state salaries. "Accessible luxury" brands such as Coach are the ideal purchase for this group. This segment also favors group shopping trips arranged by travel agencies. The agency takes care of transportation, accommoda- tions, and other logistical issues; the tourists get to focus on shopping. According to the Paris Tourism Office, nearly 2 million Chinese tourists visited Paris in 2016, where they spent more than 1 billion. Tour buses regularly stop at Galeries Lafayette and other popular destinations in the French capital. Overall, the average Chinese tourist on such trips spends $5,000 Discussion Questions 7-6. Compare and contrast the various segments of Chinese luxury consumers and customers profiled in the case. 7-7. How have luxury goods brands responded to President Xi Jinping's crackdown on corruption? 7-8. Why do so many Chinese parents want their children to study at foreign universities? 7-9. Assess the prospects for success for the Lincoln Motor Company's entry in the China market. Sources: Phoebe Wall Howard, "Lincoln's Leader in China Adapts to Selling Luxury SUVS," USA Today (December 15, 2017), p. 68; Brook Larmer, "The New Kids." The New York Times Magazine (February 5, 2017), pp. 4045; Brian Groom, "Fears over Loss of Billions from Overseas Students," Financial TimesFT Special Report: Destina- tion North of England (April 15, 2016),p. 2; Te-Ping Chen, "China Curbs Elite Programs Aimed at Overseas Study." The Wall Street Journal (December 21, 2015), p. A19; Bill Vlasic, "Chinese Tastes and American Heritage Inspire New Continental," The New 30, 2015), p. B2; Laurie Burkitt and Alyssa Abkowitz, "Corruption Crackdown a Boon for Lingerie." The Wall Street Journal (February 1415, 2015), B4: Scott Cendrowski, "China's Baddest Billionaire Builder," Fortune (July 7, 2014), pp. 105-114, Joseph B. White and Mike Ramsey. "Ford's China Beachhead for Lincoln." The Wall Street Journal (April 18, 2014), p. 36; David Gelles, "Bringing Luxury, Fast, to China's Cities," The New York Times (September 11, 2014), pp. B1, B8; Amy Qin, "Yet Another Way to Mock China's Rich," The New York Times (October 15, 2013), p. 14; Tim Higgins, "Chinese Students Major in Luxury Cars," Bloomberg Businessweek (December 23, 2013), pp. 23-25; David Barboza, "For Bribing Officials, Chinese Give the Best, The New York Times (March 14, 2009), p. A4. p. Lincoln's Focus on the Chinese Market Executives at Ford and the Lincoln Motor Company acknowledge that the Chinese market is critical for the revitalization of the Lincoln name plate. The Lincoln Continental, out of production since 2002, was once