The future of luxury fashion: A growing reliance on mainland China
The economic shockwaves of the COVID-19 pandemic are still delivering blows to industries across the globe, and the luxury sector is no exception. The luxury industry has an expected Q4 year-over-year shrinkage of 10%, with Bain & Co not forecasting a recovery until late 2022/early 2023. Through navigating the pandemic, there has been one dominant transformation; the luxury fashion houses’ shift in focus to the Chinese domestic market. This transition by luxury parent companies highlights the industry’s growing reliance on Chinese consumers. Although this strategy is logical, targeting your largest consumer market, there are consequences when an industry begins to depend so heavily on one country, especially one as strictly regulated by the government as China.
The luxury sector’s reliance on the Chinese market started in 2018, and although it was Chinese consumers spending the money, it was spent by Chinese tourists visiting Europe and the U.S., which benefitted those economies. Often USD and EUR prices were cheaper compared to their RMB counterparts, therefore Chinese shoppers chose to spend overseas. In 2019, mainland Chinese sales amounted to 11% of the market share, while overall Chinese consumers contributed 39%. Luxury brands recognised and exploited this fact, for example Gucci, owned by Kering, has 4 separate stores in Heathrow Airport alone. Now, it is a different matter. Due to the COVID-19 pandemic, global travel is restricted. However, the Chinese consumer appetite for luxury has not waned, leading to Chinese consumers turning to their domestic market. This can be seen in the steep recovery and growth of Chinese domestic luxury sales, which saw a yearly increase of 44%. Meanwhile, both European and U.S. sales dropped dramatically, 36% and 27%, which represents 57 and 63 billion EUR respectively, as quoted by Bain & Co. This chasm between the different geographical recovery rates reinforces the dependence on the domestic Chinese market, not just for the industry’s recovery from the COVID-19 pandemic, but also for further growth, as McKinsey predicted that by 2025 the Chinese market occupy the largest market share.
Although the Chinese consumer is set to overtake the U.S. as having the largest market share, the Chinese customer base is an unbalanced entity. China has four times fewer millionaires compared to the U.S., and therefore, many luxury shoppers in China belong to the middle-class, chasing the affluent lifestyle. With continued economic unrest, employment levels are not guaranteed, and if unemployment rises, the middle class will lose their purchasing power of luxury goods. This decrease in customer base would further take its toll on luxury’s recovery timeline. Furthermore, it stresses the need for the luxury industry leaders to consider investment to ensure recovery in other markets, and not to rely on the fragility of the Chinese middle-class. On the other hand, figures do not lie, and the recovery of the domestic Chinese market has been extremely fruitful. Short-term investment into companies such as Kering and LVMH should not be deterred.
In order to accommodate the growing reliance on the domestic Chinese market, luxury fashion houses are attempting to stamp a physical presence in China. Dior and Louis Vuitton, both brands owned by Bernard Arnault’s LVMH, have shifted their focus to advertising in China. Louis Vuitton had their first physical campaign launch since the pandemic, Mens Spring-Summer 2021, in Shanghai rather than Paris. Meanwhile, Dior held a Christian Dior Exhibition, also in Shanghai, and at the same event debuted its new high-jewellery line (high-jewellery is a tier above fine-jewellery). With the recently resolved acquisition of Tiffany by LVMH, it will be interesting to see what strategy is taken. Will Arnaud try to invigorate Tiffany’s diminishing Western market, or will he set his sights on China, where rival company Cartier, owned by Richemont, remains dominant? Although the accelerated recovery in China could be attributed to physical spending, with Hermès’ flagship store in Guangzhou generating 2.7 million USD on the first day of opening, post-pandemic closure, the well-established Chinese e-commerce platforms and the digitalisation of luxury are the real engines powering growth.
China has many technologically advanced monetary exchange platforms, with 60% of consumers expecting mobile online payments for luxury items to be accepted. This has greatly benefitted the luxury industry with recent global online sales almost doubling year-over-year from 12% to 23% of the market share. Burberry has since partnered with WeChat, China’s all-encompassing social media site, to launch their innovative bid to garner the attention of the Chinese market by launching an immersive ‘social-retail’ online experience in Shenzhen. Meanwhile, Tapestry, the parent company of American brands such as Coach, Kate Spade and Stuart Weitzman, have also partnered with a Chinese online platform, T-mall, and Coach is now the most sold brand on the platform. Tapestry surpassed analysts’ expectations in Q4, with the rise in Chinese sales salvaging much of the U.S.-based losses. Tapestry has announced that they are heading for recovery in Q2 2021. Meanwhile, Capri, another American luxury fashion parent company, who has not been as lucky to secure a Chinese partner, is looking at a 70% decrease in business sales. It will be particularly intriguing to monitor the growth of companies such as Hermès and Chanel, whose previous sales strategies to ensure exclusivity of their products involved limited power for online purchase. Read more about their 'exclusivity' sales strategies here, and how it makes Hermès Birkins and Chanel Classic Flaps an attractive alternative asset
The collaboration with Chinese online platforms, to facilitate the domestic Chinese market, could become a Trojan horse for luxury companies. The Sino-American technology war is ongoing, with WeChat and Tiktok under scrutiny from many governing bodies. The partnership between Chinese e-commerce sites and luxury fashion houses gives China access to multi-national European and American companies worth hundreds of billions. Moreover, in order to continually engage with Chinese consumers, luxury brands will have to invest more and more money into these relationships, and venture further into Xi Jinping’s China. Xi recently ordered an anti-trust investigation into Alibaba, who owns T-mall, the world’s largest online retailer. Many suspect this investigation is linked to Ant Group’s (Alibaba’s affiliate online transaction platform) failed attempt to dual IPO in Shanghai and Hong Kong, which Xi personally halted, showing that financial tech platforms that don’t comply according to the Chinese government will face consequences. Read more about The Student Investor’s coverage of Ant Group here. Furthermore, if Chinese international relations continue to sour, patriotic Chinese consumers may turn from conglomerate companies in favour of local brands. It has been noted that Chinese millennials and Gen Zs are investing in sustainable Chinese and Asian companies. Gentle Monster, for example, is a South Korean sunglasses brand relatively unknown in Western countries, but has a cult following in China. It should be noted that Gentle Monster partnered with Huawei in a recent campaign, a company facing bans in the U.S. and U.K.
In conclusion, the luxury sector has been impacted, like most industries, during the COVID-19 pandemic. The collapse of the global travel industry has seen the luxury market’s reliance shift from Chinese tourists spending in Europe and the U.S. to the domestic Chinese market. Therefore, the luxury sector’s recovery has been severely buoyed by the growth in the domestic Chinese market, which has offset the dramatic decreases in European and U.S. sales. Luxury fashion groups are now investing in advertising campaigns/launches and digitalisation through partnerships with Chinese e-commerce platforms in order to capitalise on the demand. However, these actions could come at a price. The neglect of the traditional U.S. and European markets places a burdensome reliance on the newfound local Chinese market and the Chinese middle-class. In order to capture and secure the Chinese consumer, luxury fashion companies will have to delve deeper into the strictly regulated online marketplaces, watched by Xi’s government. Although it is hard to bet against luxury’s billion-dollar companies finding a safe path, it would also be unwise to underestimate the power Xi Jinping wields in China; one wrong step could result in the dismissal from the market they rely so heavily upon.