Chinese men buying gifts for their "second wives" may be among the best customers for global luxury goods companies, although they may not want to admit it. But that trend could be changing.
A recent research note by HSBC analysts covering consumer brands & retail highlighted the risks for the industry from a change underway in Chinese society.
According to HSBC, it is not uncommon for married, wealthy Chinese men to have "second wives or girlfriends (xiao san - literally "little three", meaning the third person in a relationship)."
But, HSBC says such social practices of wealthy men taking mistresses now appear to be on the wane.
The change could have an impact on luxury goods companies because China has become the new promised land for the sector. Failure to mark and harness an increasingly complicated market could make it difficult for companies to match the stellar growth of recent years.
In general, Chinese men tend to buy "flashier, more logo-driven luxury goods" for their mistresses, such as the more obviously-branded Louis Vuitton (:MC.FR) handbags.
"A mistress is a way of projecting power in Chinese society, and power projection is very important," Tom Doctoroff, chief executive of JWT North Asia and author of What Chinese Want, told CNBC.com.
"For the second wives, the luxury brands tend to be much more flashy and bling. Mistresses want to show themselves off."
Close to half of luxury sales, and up to 75 percent of sales in the watch category in China are driven by gift-giving, Radha Chadha and Paul Husband argue in The Cult of the Luxury Brand: Inside Asia's Love Affair With Luxury.
Another huge factor in China's luxury landscape - the only market for luxury goods in the world driven by men - is corporate gifting.
Guanxi or relationships are key to growing your business. Mont Blanc and Burberry (:BRBY.LN) have done well out of this trend.
However, this too is under threat as there seems to be less official tolerance for flamboyant gifting.
China's government has issued an increasing number of anti-corruption warnings to local authorities, and officials have been banned from accepting gifts like tobacco and alcohol.
"If you are seen to be rich and successful, you can attract more business deals, and you win approvals faster from officials who know you have the means to make appropriate gifts and donations," Chadha and Husband wrote.
But as companies have gotten to the size where this starts to look a little like corruption, this has generally tailed off, though these companies are usually replaced by other smaller firms.
"As business becomes more sophisticated and conforms more to international structures, then the role of gifting will go down," Doctoroff said.
Those who are struggling may just not have adapted quickly enough to a savvier Chinese buyer, who is increasingly unlikely to fork out for goods plastered in logos, and more enthusiastic about items which will show their designer origins subtly - but still clearly to those in the know.
Chinese consumers are increasingly sophisticated when it comes to luxury goods, according to Doctoroff, who argued that luxury goods companies ignore this trend at their peril.
"The Chinese are extremely savvy buyers relative to the length of experience they have in the consumer world. They pay a high price premium so really look for value, not just in quality, but what it says about the buyer. What they buy is increasingly understated - they want to show off, but discreetly," he said.
Written by Catherine Boyle, CNBC. Twitter: @catboyle01
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