luxury goods

China’s luxury good market – down but not out

November 26, 2014 by Andrea Park

The gold rush in China’s luxury goods market seemed to come to a halt when President Xi Jinping announced austerity measures last March. In a country notorious for government officials who gladly accept lavish gifts in exchange for favours, the news came as a shock. No longer were party officials permitted to luxuriate at grandiose banquets or accept Rolex watches in exchange for greenlighting construction projects. Instead, Xi instructed officials to lead by example and live humbly.

The common practice of gift giving in China has a significant impact on the luxury market; it is not unheard of for Chinese people to buy extremely high value gifts, such as Louis Vuitton accessories or a rare bottle of Kweichow Moutai, for business associates or government officials. Some considered the culture of gift exchange to be the backbone of China’s luxury market.

Indeed, after the austerity measures were enacted, the luxury market took a hit. Bain reported that during 2013, sales dropped and year-on-year growth dropped from 7% in 2012 to 2%. The categories with the biggest slowdowns were watches and menswear, whose compound annual growth rates declined by 11% and 1% respectively, two categories that have strong ties to gifting. An Economist Intelligence Unit (EIU) report estimated that China’s wealthy spent 15% less on luxury goods and 25% less on gift-giving in 2013 than in 2012.

Department stores and shopping malls especially suffered as a result of the austerity measures, according to Bain. Several provinces requested the officials return any gift cards they had received and government officials even verified with department stores to check for gift card consumption.

The stunt in growth, while significant, does not necessarily signal doom for the luxury market in China. Independently, China’s GDP growth slowdown has inevitably precipitated a fall in spending. The overall retail market still saw 11.8% year-on-year growth in February 2014, lower than expectations but higher than most other markets, according to the EIU.

In fact, Chinese consumers have proven themselves to be among the most voracious luxury spenders. The EIU reports that the Fortune Character Institute estimated luxury spending by Chinese shoppers at $102bn in 2013, accounting for nearly one-half of its global market estimates. Even with the government’s crackdown on luxury spending, hunger for luxury goods in China has not gone away.

Erwan Rambourg, author of The Bling Dynasty, said the anti-corruption measures have acted as a catalyst to stabilize the Chinese luxury market.

“The anti-corruption campaign indeed hit sales, notably as far as baiju (a distilled spirit), cognac and watches are concerned,” he said. “Think about watch demand as being on an artificial cliff. Tackling corruption made that demand fall from a cliff. For the first few months of 2014 demand was flatish, pedestrian, as if walking on the beach after having fallen from that cliff. It’s now time for demand to go hiking back up gradually.

“Growth rates were boosted by gifting, property prices and excess liquidity. These growth rates are now bound to be lower, yet healthier and more sustainable.” Rambourg also pointed out that the massive growth seen over the last 10 years is simply not sustainable: “Future growth cannot be as explosive as the base is much higher now,” he said.

It certainly looks as though China’s luxury market is maturing; the market is finally skewing toward women. Women’s clothes made healthy progress in 2013, with a compound annual growth rate of 10%, and shoes came in at 8%. This is a sign that China is following the leads of more developed markets, where women lead as consumers of luxury goods. Previously, men dominated growth in China’s luxury market, making 90% of luxury sales in 1995, but women are catching up with their peers, coming in at around 50% of luxury consumption in 2013.

Women have become increasingly important to the luxury market in China, where 70% of women have paid work – a much higher number than the global average of 53%, according to Bain. “The Chinese luxury market was once dominated by male purchases but a combination of austerity measures and women having greater financial autonomy has accelerated the shift from this male-orientated market to one, more naturally, driven by women, like in most other luxury markets,” explained Rambourg. The austerity measures are helping China’s luxury market mature and modernize while simultaneously a growing number of Chinese women enjoy financial mobility.

The Fortune Character Institute put luxury spending by Chinese shoppers at US$102bn last year, accounting for nearly one-half of its global market estimates. The austerity measures have not stopped certain luxury brands from succeeding in China. According to the EIU, Prada, Versace and Burberry still boasted double-digit growth last year – compare Prada’s 12.3% growth in China profits to its 1% in global profits. Clearly, frugality in China may have cooled down luxury spending but has not decimated it.

Growth in China’s luxury market will almost certainly continue as Chinese personal disposable income is forecast to grow more than fivefold by 2030, reaching about $18,000, according to the EIU. Though this is only a fraction of disposable income in many Western countries, the sheer strength in numbers in China’s population will mean that China will develop a middle and high income market larger than the US’s population. Luxury brands will have a new class of spenders in the coming years.

The biggest obstacle to growth in China’s luxury market is consumption outside of China. Many Chinese consumers go abroad to buy their luxury goods at significantly lower prices and global spending by Chinese consumers is experiencing and will continue to experience significant growth. Chinese consumers even purchase foreign-bought goods through middlemen, also known as “DaiGou” agencies, who will ship goods from overseas to China. More than 50% of consumers said in a Bain survey that they had purchased luxury goods from “DaiGou” agencies.

Rambourg estimates that 75% of Chinese luxury consumption takes place outside China. He pointed out why growth is unlikely to slow down: “Passport penetration rate is only at about 4% with Chinese nationals,” he said. “Once that goes to 30% – like in the US – let alone 70% – like in the UK, imagine what tourism-driven luxury sales will have become!”

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