Peering Over the China Peak


Chinese consumers remain the largest driver of global luxury growth, but there may be bad news ahead for European luxury brands.

Chinese nationals are the world’s leading luxury consumers. They not only drove 70 to 80 percent of the recent rebound in luxury growth, but now dictate trends and tastes. Indeed, brand preferences no longer originate in Europe and the recent explosion of “street luxury” (see Gucci and Louis Vuitton) and the boom a few years ago of higher-end brands like Chanel, Hermès and Bottega Veneta are a testament to this.

Now, with the quinquennial National Congress of Communist Party looming, all eyes are on China. And for good reason. What the party decides, the government does. And what the government does is sooner or later reflected in consumer spending.

In terms of macro-economics, the general view among entrepreneurs and investors is that the party will continue to promote consumption as a way to drive GDP growth. This would, of course, bring higher tax income to state coffers and help limit capital outflows. But were it to swing luxury spending back to China from Europe, where the recent terror attacks may have hurt inbound Chinese travel, it would spell bad news for European luxury brands. In fact, price elasticity to persistently higher prices in China would likely cause volumes to contract, as we have seen in the recent past.

Most observers also expect renewed efforts to cool the real estate market. Again, as we have seen in the past, over-zealous intervention can kick back on consumer confidence and even cause the property market to dip. Here too, it’s not good news for luxury spending. Household debt in the major cities is already holding back discretionary consumption, so the government must take care to strike the right balance.

In Hong Kong the luxury market seems to have returned to growth, with soft and hard luxury brands all reporting sales increases. Even watch sales are back to growth. That said, nobody really expects Hong Kong to regain its former importance. Most brands are waiting for their leases to expire in order to trim their local retail networks.

Investing in luxury means taking a positive view on future Chinese luxury spending … This seems a tall order.

At the individual level, the Chinese are also at the epicentre of the newness imperative. This is not surprising as Chinese consumers continue to spend more per capita — at equal income levels — than anyone else, and the more often people buy, the sooner they are likely to tire of the brands and styles available in the market: chances are they have already bought them. The Chinese need new products and new ideas to make them part with their money, more so than any other nationality.

Gucci and Louis Vuitton seem to have caught on to this: the former is enjoying tremendous success across China, with growth spikes well above 50 percent in many markets; the latter has regained desirability and is posting growth rates well into the double digits. However, companies that have not responded to the newness imperative and are still dependent on internal mechanics for growth are having a hard time. Tod’s, Salvatore Ferragamo, Burberry, Hugo Boss and Prada all fall into this basket.

In hard luxury, jewellery continues to be strong although this buoyancy may be evidence of an urge to “store value” in the face of uncertainty. In contrast, high-end watches are suffering from the country’s political gifting crackdown, excessive price inflation, and destocking by retailers attempting to create a more rarefied market. What’s more, rich consumers already own a lot of watches and watchmakers have been slow to see and act on the newness imperative. Lower down the scale, things seem to be in far better shape: Rolex is booming, as consumers see the brand’s products as some of the best value for money propositions in the market.

In sum, China remains a “watch this space” affair; we are down from the peak and given the significant run luxury stocks have enjoyed, it is difficult to pound the table on new long positions. In the short term, with the next six months of the year facing the tough base set by last year’s second-half performances, investing in luxury means taking a positive view on future Chinese luxury spending — as well as the prospect of American consumers opening their wallets in response to President Trump’s new tax policies.

This seems a tall order.

By Luca Solca


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