China’s luxury market is more resilient than you think

September 15, 2021, 11:30 PM UTC

Beijing has cracked down on many facets of everyday life in recent months: karaoke, video games, and even after-school tutoring. In late August, Chinese President Xi Jinping took his government’s regulatory campaign a step further, calling for “common prosperity” and “wealth redistribution.” The directive suggested that another clampdown might be on the way; one that would rein in Chinese consumers’ penchant for luxury goods.

In his speech, Xi said that “it’s necessary to…regulate excessively high incomes and encourage high-income groups to return more to society.”

His common prosperity doctrine wasn’t accompanied by any concrete government action. Still, Xi’s words were enough to spook investors, given China’s outsize contribution to global luxury spend, which grew to nearly $291 billion last year. LVMH, Kering, Hermès, and Richemont—Europe’s top luxury groups—collectively lost $70 billion in market value in just two days.

But China’s luxury goods market—the second-largest in the world after the U.S. and the world’s fastest-growing—has weathered extreme challenges before, including the Great Recession of 2008, Beijing’s anti-corruption drive in 2013, and last year’s COVID-19 pandemic. That China’s luxury market has bounced back after major destabilizing events points to the sector’s resilience and suggests that fears of “common prosperity” hitting luxury spending may be overblown.

Purchasing power

In 1999, Chinese consumers accounted for 1% of global luxury spend. Top foreign luxury brands like Gucci and Ferragamo could sell their wares in China, but they could only do so via high-end hotels, owing to China’s foreign investment restrictions at the time.

China’s joining the World Trade Organization two years later, however, cemented the country’s integration into the global economy and increased Chinese citizens’ access to foreign luxury goods. China’s membership in the WTO “clearly supported the effective development of luxury brands,” enabling them to set up flagship stores and sell directly to consumers, wrote Serena Rovai, a professor of luxury management at Excelia Business School in France, in her 2016 book Luxury the Chinese Way: The Emergence of a New Competitive Scenario. Greater economic liberalization in China, alongside the explosion of the country’s middle class—which grew by 203 million people from 2001 to 2011—fueled a boom in China’s luxury market in the 2000s. By the end of the decade, Chinese consumers were responsible for one-fifth of global luxury spend.

When the global financial crisis hit in 2008, China’s economy and its citizens fared better than their Western counterparts. The Chinese government introduced the world’s largest stimulus package worth $587 billion, equivalent to 20% of its GDP and three times the size of U.S. efforts. The stimulus “boosted…domestic demand, in conjunction with calls for the nation’s banks to boost their lending rates” throughout 2009 and 2010, wrote Richard Burdekin, economics professor at Claremont McKenna College, in a 2012 paper for Economics Research International.

Chinese consumer confidence propelled China’s luxury market growth post-2008 even as the global luxury market contracted by 2% and 8% in 2008 and 2009, respectively. China’s luxury market in 2007 and 2008 recorded annual growth rates of 15%, according to market data firm Euromonitor, which includes luxury goods (clothing, liquor, cars) and “experiential” luxuries (hotels and premium food services) in its definition of the market. In 2009, China’s luxury market growth rate contracted by 1%, but by 2010, it bounced back, surging 36%.

“As long as the economy kept growing, the spending and luxury sentiment stayed strong,” says Simon Tye, executive director of retail research firm CSG. China’s luxury market rebound post-2009 was “in line with the [country’s] economic recovery and consumers’ purchasing power,” says Kemo Zhou, senior analyst at Euromonitor International. China “[bucked] the global trend in luxury consumption,” said a 2010 KPMG survey, which found that 44% of respondents in China maintained their spending on luxury items.

(Don’t) flash that cash

In 2013, however, the Chinese government began a major anti-graft crusade against Chinese Communist Party officials. The state banned party cadres from spending state money on foreign luxury cars like BMWs and Bentleys and from receiving lavish gifts like Swiss watches, upscale handbags, and expensive liquor.

The state campaign curbed luxury gift giving. China’s luxury market that year declined 0.9%—after averaging a 21.5% annual growth rate over the three years prior. French luxury group Hermès, maker of the popular Birkin handbag—which can cost anywhere from $9,000 to $500,000—posted sales slowdowns in China in 2014 and 2015. Peers like Britain’s Burberry and Switzerland’s Richemont, the parent of high-end watch and jewelry makers Cartier and Van Cleef & Arpels, suffered a similar drop in sales.

But not all luxury spending was hit equally. A 2015 study by Northwestern professor Nancy Qian and postdoctoral fellow Jaya Wen found that the effects of Beijing’s anti-graft drive “reduced the imports of luxury goods that are easily observed by the public by approximately 55% or $194 million, while having no effect on goods that can be consumed away from public view.” China’s actions curbed only the most visible forms of luxury, such as flashy jewelry. By 2014, China’s luxury market growth was in the black again; it jumped to 5%. It grew 7% to $169.7 billion the following year, says Euromonitor.

The slowdown at luxury houses was also short-lived. By 2016, Hermès said its China numbers were improving again.

China’s luxury market rebounded quickly because the government’s top level, anti-graft campaigns are “effective in the short term but often lack staying power,” argues Jacob Gunter, senior analyst at Merics, a China-focused research institute. “They tend to lead to a flurry of activity as officials, business leaders, and consumers take them seriously for a while before relaxing as attention moves on to the next campaign. It’s no surprise that luxury recovered.”

Since the early 2000s, Chinese luxury buyers have also spread across a wider range of demographics, including income and age, which has propped up the market even as spending from the ultrawealthy and high-profile took a hit. The transition from wealthy individuals’ gift giving to private consumption drove China’s luxury market rebound that began in 2014, says Zhou.

Chinese millennials in particular propelled the country’s luxury market rebound in the years after 2013. In China, it’s millennials who “move markets,” given that wealth and spending are a part of their identities, unlike their parents, who were raised in the austere Mao era, says Zak Dychtwald, founder and CEO of Beijing-based Young China Group, a market insights firm. By 2016, China’s millennials—those born between 1983 and 1997, according to consultancy Bain’s definitions—and Gen Z—those born after 1997—accounted for 85% of the country’s luxury market growth.

Powered by the middle class

Last year, the COVID-19 pandemic hit the global luxury market hard, with sales dropping 14% to $905 billion—the first decline in a decade. Meanwhile, China’s domestic luxury goods market grew 1.4% to reach $290 billion; and the country’s share of the global luxury market reached 32%—up 5% from the year prior. The Chinese luxury market will likely become the world’s largest by 2025, even though growth rates have slowed as the sector matures.

“Through the pandemic…the global luxury goods market [shrank] as economic and social considerations have limited access. However, the mainland China market has rebounded post-lockdowns,” says Bruno Lannes, Shanghai partner at Bain. He attributes the bounce back to “four engines”: China’s shoppers buying at home rather than abroad; the duty-free shops on China’s southern Hainan Island; millennial and Gen Z consumers; and the continued growth of luxury shopping via digital channels.

Chinese millennials continue to be the backbone of the market, but Gen Z has emerged as the growing class of luxury consumers. In the first three months of 2021, for instance, sales at Alibaba’s Luxury Pavilion—which hosts over 200 premium brands—surged 159%, driven by young Chinese consumers. Alibaba says 80% of the platform’s users are 35 or younger, and the fastest-growing segment are those between the ages of 18 and 25.

As for Xi’s “common prosperity” proclamation, experts say the speech is just another example of state support for the country’s middle class—which may actually benefit consumption given that members of China’s middle class are the ones fueling luxury spend. Beijing’s inclination toward common prosperity might mean reining in China’s high-profile ultrawealthy, such as billionaires and politicians—not dissimilar to the events in 2013. China’s high rollers won’t be targeted for their “spend per se, but rather its visibility,” wrote Jefferies analysts Flavio Cereda and Kathryn Parker in an August note.

Any action from Beijing is likely to only clamp down on “excessive display[s] of wealth and ‘frivolity’ on social media that reminds the 99% of the wealth gap,” Cereda and Parker wrote. Steve Lau, CEO of Shanghai-based luxury marketing agency Activation Group, says that the party’s focus on public exhibitions of luxury goods means sales of big-ticket items like private jets and yachts may take a hit.

Jefferies’ Cereda and Parker say that “as things stand…market concerns [surrounding Xi’s August speech] may be overdone. The focus on the ‘flaunting of excess’ may have less of an impact than feared.” They cautioned that the situation in China could change quickly, particularly if Beijing follows up with harsher actions. “More widespread wealth [meaning] more middle-class growth is good for luxury, but only if high spenders are ‘managed’ rather than punished,” they said.

For now, China will continue to consume.

As Gunter puts it: “[China] still wants its consumers spending—perhaps just not so conspicuously.”

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