Luxury spend in China experiences trade war jitters
As the world’s second-largest economy prepares to celebrate the Year of the Pig, there is an ominous cloud crippling private enterprises, investment bankers and luxury retail. The rapid economic growth seen in the past decade is slowing, and trade war with the US has proved detrimental for businesses as they report an unexpected decline in sales. While luxury conglomerates are eager to please Chinese customers – tone-deaf marketing campaigns, a rise in living costs, and a general lack of understanding of the market can have a detrimental effect on luxury sale.
It’s no surprise that retail has been soft. The Federation of the Swiss Watch Industry announced that the number of watches sold in China plummeted in November 2018. According to a report by the consultancy Bain and the Italian luxury federation- Altagamma, Chinese shoppers are responsible for one-third of global luxury sales. That translates to over $7 billion a year. The millennials who constitute approximately 30 percent of the sector’s China sales, and perceived to be a demographic less sensitive to wider economic turbulence – have recorded a significant decline in luxury consumption.
While Apple, Caterpillar, Volkswagen, and other companies are sending tremors through Wall Street with indications of softness, another set of conglomerates reinforce the long-standing theory that luxury retail is recession-proof.
This proves to be a significant conundrum faced by several investors trying to gauge the purchase pattern of China’s generation-Z. After the collapse of Lehman Brothers Holdings Inc., U.S. retail sales excluding food tumbled by double-digits in 2009, but LVMH’s North America sales fell only by 7.2 percent. This statistic may still hold true, but the trade war between China and the United States has only escalated the predicament.
What remains somewhat under the radar is China’s growing status as a luxury label incubator. Chinese buyers are now embracing competing for homegrown brands, due to which western luxury labels may no longer carry the same weight that they used to. China’s affluent still love their Hermes and Gucci, but they are also switching loyalties to local designers or international designers of Chinese descent whose work embodies their roots and exudes a sense of national and cultural pride.
Not as long as 7 years ago, Chinese shoppers had wholly abandoned luxury brands during a government crackdown on corruption that started in 2012. The campaign made luxury products and watches off limits for Communist Party officials and corporate executives. This had a strong ripple effect on European luxury retailers who had come to depend on Chinese consumers thus proving that their dependence on international luxury goods can be somewhat ephemeral.
Evidently, brands like Nanjiren and Bosideng have become the top two home-grown labels in the apparel sector. There is a fortune to be made in the fast fashion segment, but steep competition, ‘Taobao villages’ and local know-how give domestic players an edge over global names like Topshop, Forever21, H&M, and Zara
While the millennials relocate to smaller and less developed cities to cut costs and battle the slackening growth rate and increased the cost of living. The battle for the affluent Chinese consumer has just started, and local brands have a solid chance at winning it.