For years, French, Italian and American luxury brands have thrived as China’s middle class developed a taste for high-end fashion and jewelry.
But that sales boom is ebbing based on the disappointing results many Western luxury retailers have reported of late, though much suggests this slowdown will be short-lived.
Last year, Chinese luxury sales fell 1% compared to 2013 at 115 billion RMB ($18.5 billion at current rates), according to a report by Bain & Co. A slowing Chinese economy and a government crackdown on graft and gift-giving that was particularly brutal on the watch industry is mostly to blame.
French luxury brand Hermès said watch sales fell 11% in large part because of China, and the company is expecting overall growth this year to remain slow compared to recent averages. Meanwhile, Prada said it expects the tough times for luxury to continue after its China sales fell 4% in 2014.
At the same time, Hermès, known for its highly coveted Birkin bags and horse-themed silk scarves that go for thousands of dollars each, has continued to expand its stores in China. That includes its flagship Maison Hermès in Shanghai a few months ago.
Why? Because there is ample data to suggest that luxury’s current slowdown in China is but a speed bump.
According to a new report by the Economic Intelligence Unit sponsored by Citigroup, China’s wealthy will have double the assets of their U.S counterpart within five years. By 2020, the financial assets of Chinese worth $100,000 to $2 million will reach $53 trillion, compared to $27 trillion in the United States, according to the report.
That means a lot of people will be wanting to shop at Prada, Gucci and Tiffany & Co (TIF) and buying expensive Estée Lauder (EL) beauty products. And such companies are happy to oblige.
Fashion company Michael Kors (KORS), which is just getting started with its China expansion, recently said sales there are “starting to take hold.” Kors’ archrival Coach (COH), which plans several new stores in China, saw its sales there rise 13% in its most recent quarter. Tiffany is full steam ahead with its China expansion despite disappointing numbers over the holidays at its Hong Kong stores, a favorite haunt of mainland customers.
Other Western companies, including non-luxury brands, also have big plans for China. Gap Inc (GPS), whose brands include Old Navy, plans to open 40 new stores in China this year, while Ralph Lauren (RL) sees China as one of its “greatest” markets on the back of double-digit sales growth last year.
So it’s clear that any Chinese slowdown is seen by luxury and retail executives as a blip.
“China’s prestige beauty growth remains at high single digits, and we see widespread opportunity to enter additional cities, doors and channels, and launch more brands,” Estée Lauder CEO Fabrizio Freda said last month.