Luxury Brands Dust Off Their Japanese Lessons
Covid-19 is making expensive European brands even more reliant on Chinese spending. The industry has been here before.
What happens if the Chinese lose their appetite for haute couture? It seems inconceivable now, but the luxury industry’s growing reliance on one nationality makes stocks such as Hermès and Gucci’s owner Kering riskier to own.
Covid-19 is worsening an already lopsided look at many designer-fashion labels. Spending on expensive clothing and handbags is recovering rapidly in China, but remains weak everywhere else. By the middle of the decade, nearly half of all global luxury spending will come from Chinese nationals, consulting firm Bain estimates, up from 35% in 2019.
Investors are treating this exposure as a big positive for now. At Louis Vuitton LVMUY -0.07% and Christian Dior, the top fashion brands of industry bellwether LVMH Moët Hennessy Louis Vuitton, sales were up 65% in China in the second quarter, compared with the same period of 2019. The company’s Paris-listed stock is down just 4% this year, while shares in rival handbag maker Hermès are up 8%.
Brands have been here before. In 1985, 55% of global luxury sales were to the Japanese, according to Bernstein. That era has a lot in common with the current Chinese spending boom. Buoyed by rapid economic growth, a newly affluent middle class snapped up European luxury goods to show off their wealth and spent heavily on shopping trips overseas. Today, young Chinese consumers whose incomes are bolstered by their parents’ savings are a major source of growth for luxury brands. They are not unlike Japan’s “parasite singles” who lived rent-free in the family home during the 1990s and spent a big chunk of their wages on designer baubles.
Japan’s luxury boom wasn’t ended by slower growth—fashionistas continued to spend through the country’s “lost decade” of the 1990s—but by demographics. As the population aged, spendthrift young shoppers weren’t replaced in adequate numbers to keep demand high. Today, the Japanese count for just 10% of global luxury sales.
China’s economy now is still at an earlier phase of development than Japan’s was in the 1980s, and luxury bulls expect demand to continue swelling with its middle class. But the world’s most populous country might face demographic challenges earlier than Japan did. China’s fertility rate has long been below replacement levels and has increased only marginally—to 1.7 children per woman at the World Bank’s latest count—since Beijing scrapped its one-child policy in 2015. The cost of supporting an older population could weigh on disposable incomes in future.
The more immediate challenge for brands will be to protect their exclusive image. With unsold inventory sitting in U.S. and European boutiques, the temptation to flood the Chinese market with products is strong. There are signs that labels are already going all-out: One proxy for Chinese social media spending by luxury companies increased 230% year over year in the second quarter, according to consulting firm Gartner. Another key reason the Japanese luxury bubble popped was because brands became too mainstream and lost their appeal.
Designers have little choice but to court the Chinese. Other nationalities aren’t biting, most notably in the industry’s home region: Luxury sales to European consumers have remained flat over the past decade, brokerage Jefferies estimates. But the sector now has too much riding on one country. Share prices should discount that risk rather than reward it.