The gloom in China’s luxury market looks here to stay
In the common conscience, for the past twenty years China represented an untapped reservoir of demand for Western beauty, fashion and luxury brands. That image may have to disappear from people’s minds.
China is no longer the Eldorado that once powered the rise of the luxury industry. The sector is entering a new era: one without China as a strong engine of growth. Chinese consumers increasingly prefer home-grown brands particularly in beauty and accessible fashion and are not keen on splurging on excessively expensive luxury items like Chanel’s 2.55 handbag.
Demand for luxury goods in the Middle Kingdom has fallen off a cliff in the past eight months and it’s unlikely to pick up in the near future, China specialists and industry executives predict.
“How and when the Chinese consumer will come back is THE question and the only one that counts right now,” explains Erwan Rambourg, global head of retail and consumer research at HSBC. “Other questions such as pricing, the U.S. cluster and the yen are not as important.”
Rambourg said the new pockets of growth expected from countries such as India, Indonesia and Brazil are still irrelevant in terms of size. They are not yet moving the needle in the terms of overall growth.
Rambourg was in China a few weeks ago. For the first time he said, people there could not tell when things would improve. “China has become a black box” Rambourg finds. “I think there is a realization that the major engine of growth that has been China is not going to come back for some time. But it's not been fully digested yet by the investment community.”
Without the Chinese’s voracious appetite for the status symbols that are luxury goods, megabrands such as Gucci, Louis Vuitton, Chanel, Prada and Burberry would be a fraction of the size they are today. Demand in Europe and America would have never been sufficient to drive the fantastic global expansion they’ve enjoyed these past two decades. The amount of money some luxury groups generate such as industry leader LVMH is mind-boggling. In 2023, its turnover reached €86 billion, or roughly twice France’s defense budget.
POST-COVID
“We felt that the lockdown would have a longer-term effect on the general feel-good factor,” Richemont Chairman Johann Rupert said at the last annual results presentation last month. Rupert proved right.
Today, luxury executives are adapting to the new post-Covid China, one in which footfall in luxury malls has dropped to record lows and revenues continue to decline or remain flat at best. The spending boom in January last year that followed the end of the country’s zero-Covid policy started petering out in September-October, China luxury watchers say. The situation has worsened in the past five months and is expected to continue for the foreseeable future. The mood among consumers aged between 20 and 30 - the bulk of Chinese luxury shoppers - is morose, market experts say. Many are unemployed, and their friends are unemployed. People say they are not motivated to study or work after the trauma of the harsh lockdowns and they are “lying flat” at home watching TV series.
Sales of Gucci and Chanel are down more than 35 percent and 25 percent respectively since the beginning of the year, senior retail executives say, citing numbers they obtained from the Chinese malls themselves. Stella McCartney is closing all of its boutiques in China. The brand, in which LVMH has a minority stake, failed to build a following in the country as its environmentally friendly products did not resonate with the Chinese consumer, local industry sources said.
LVMH, Richemont and Kering together with many other luxury groups and brands have put on hold plans to open boutiques or organize major events in China over the course of the next 12 months, several retail specialists working for these groups said.
TOO EXPENSIVE
“We are going to see some key changes in China in the next three to five years in the luxury sector. Notably, there will be some Western brands who will exit the market. In fact, we are already seeing this happening,” predicts Chloé Reuter, who was based in Shanghai for 20 years where she founded a strategic communications agency supporting luxury brands in China.
“You need so much money to build a brand in China. It’s become too expensive and too complicated for many brands, particularly for those that operate in the middle or the lower end of the price segment. For brands to succeed they need a real point of difference as well as local relevancy. They are now competing with world class Chinese brands, which is adding even more complexity.”
Jonathan Siboni is another China veteran who travels to the country several times a year. Siboni is CEO of Luxurynsight, a company that analyzes data for Western luxury brands in major markets such as China. Echoing warnings of other experts, Siboni predicts transition times ahead. “The Chinese market is going to stay a bit quiet for the next 9 to 18 months I think,” Siboni told Miss Tweed. “For example, I know many wholesalers are still selling but not ordering stock and that’s hurting their partner brands,” he added.
Stock at many French and Italian fashion brands is piling up. This is bad news for their image as excess items have to be offloaded at a discount via outlets, private sales and other parallel methods.
Sales generated by multi-brand fashion retailers in China are down 30-35 per cent year to date, according to Stefano Martinetto, CEO of Tomorrow London, a group that is a shareholder and the license partner of several fashion brands including Coperni, Martine Rose and A-Cold-Wall.“Consumers are reacting to public policies which aren't supportive of excessive fashion consumption,” Martinetto added.
Currently, the Chinese shoppers who are spending the most money are those who are travelling. Popular destinations include are Japan and South Korea. Chinese spenders have been hunting for deals in Japan where the weakness of the yen has made items 35 percent cheaper than at home. For some luxury brands, Chinese tourists in Japan accounted for as much as 50 percent of their sales, local industry sources say. Japan was the epicentre of Asia’s luxury growth in the first quarter, luxury executives said the FT Business of Luxury Summit in Venice. “Japan is on fire,” Prada Group CEO Andrea Guerra told attendants.
CRACKDOWN ON INFLUENCERS
A week ago, China’s Internet police cracked down on several famous social media influencers for flaunting their lavish lifestyles. More than a dozen celebrities including “China’s Kim Kardashian” called Wang Hongquanxing were kicked off social media platforms. As the economy slows down – with an annual growth rate of around 5 percent against 7.4 percent 10 years ago – and real estate prices falling and umpteen millions unemployed, Beijing considers it unethical to show off one’s wealth.
That’s a much harsher stance than in 2021 when President Xi Jinping made his famous “common prosperity” speech in which he called for a better redistribution of wealth. Back then Beijing considered it still OK to buy luxury goods and people were allowed to show they were successful, as accumulating wealth was always part of Chinese culture, Miss Tweed reported. Publicly displaying your €100,000 Patek Philippe watch or €11,000 Chanel handbag is now frowned upon. Such cultural change and government-imposed self-restraint may have lasting effects on the appetite of Chinese luxury buyers, experts predict.
Most major brands and groups are putting on pause projects in China. Geneva’s annual fair Watches & Wonders is struggling to get enough brands to invest in a big event it is planning in Shanghai at the end of August. Last year, some 14 brands participated. This year, the number is expected to drop to around nine, of which eight belong to Richemont, one senior marketing manager working for a major luxury watch brand said.
Some of Richemont’s watchmakers such as Jaeger-LeCoultre and independent brands such as Ulysse Nardin have decided at the last-minute to cancel their participation and relocate their product launches to other regions, the manager said.
“Despite the organisers promising to multiply the number of participating brands and set up a grandiose event, this edition of WWS (Watches & Wonders Shanghai) is clearly heading to failure due to a market decline in China,” the manager wrote to Miss Tweed in an email. “There is gradually less faith in the potential of Chinese consumers,” he said. The press office of Watches & Wonders in Geneva, an event from which Miss Tweed has been banned for three years, did not reply to questions sent by email.
BEAUTY
“The slowing Chinese economy is prompting more rational purchasing behaviors among Chinese consumers,” said Laurence Lim, founder of Cherry Blossoms Intercultural Branding, an agency specialized in decoding foreign markets for luxury brands. Lim said store openings by luxury brands in China dropped by 13 percent in 2023. “We see many of our clients shifting priorities on alternative existing or potential markets like the U.S., the Middle East or even India,” Lim said.
In areas such as in beauty and accessible fashion, many Chinese shoppers prefer home-grown brands. In fashion, they are seen are most adapted to their needs than affordable brands such as Zara, Gap, Mango, and Everlane, Lim points out. “Combined with the rise of China pride and declining prestige of the West, this will make it more challenging for mid-range Western brands to compete with local brands, which are premiumizing, offering better value for money (especially in a context of increased prices) and better resonating with Chinese consumers,” Lim explained.
In beauty, Big Western brands such as Estée Lauder and L’Oréal are losing market share in China. Estée Lauder and its sister brands have been forced to sell much stock at a discount. Both L’Oréal and Estée Lauder said during results presentations that their sales had suffered in China last year and in the first quarter.
Benefit Cosmetics – which belongs to LVMH - closed its Tmall, JD.com, and Douyin online flagship stores earlier this year. Estée Lauder’s Too Faced exited China more than two years ago.
L’Oréal is better off than other Western cosmetics groups. The French beauty giant has been building up a portfolio of Chinese beauty brands that allows it to tap into consumers’ growing preference for domestic brands which they believe are better adapted to their needs and expectations. These include Magic Holdings, a Chinese provider of facial masks and skincare brand Yue-Sai. Earlier this year, L’Oréal invested in the Chinese luxury fragrance brand To Summer.
In the longer term, the Chinese market for luxury goods will eventually improve, industry executives say. “We should not completely give up on China, “ one retail executive told Miss Tweed. “It will come back at some point.” Also, as it’s difficult to hire and retain competent staff in China, closing shop is not an option for many big luxury brands. China is not like Russia, where the situation has become hopeless with the war with Ukraine dragging on.
Big luxury brands such as Louis Vuitton, Loewe, Hermès and Moncler are likely to continue to enjoying resilient demand as no major Chinese brand can match their clout and cachet. But even these megabrands need to adapt to the new reality in China.
