Tag Archives: luxury goods

Stay-At-Home Chinese Consumers Recast Global Luxury Goods Industry

Chart of share of global luxury good market by region, 2019, 2020E and 2025E. Source: Bain & Co

RESTRICTIONS ON INTERNATIONAL travel and China’s place in the vanguard of global economic recovery is accelerating the recasting of the luxury goods industry. Unable to travel freely to the world’s shopping malls, where most Chinese spending on luxury brands occurred, Chinese consumers are buying their favoured luxury brands at home. The industry is expanding its sales channels in the country in response.

An early sign of this was a decision by the Paris fashion house Louis Vuitton to eschew a virtual fashion show in Paris to present its men’s spring/summer 2021 collection for a physical event in Shanghai. Since then, several fashion events and runway shows previously held in Europe and the United States have been staged in China. New stores, pop-ups physical and digital, and other e-commerce channels for Chinese consumers have followed.

Marketing campaigns are being built around events like the Qixi Festival. Those, though, can put foreign luxury brands on cultural thin ice. Balenciaga and Dolce & Gabbana were two who felt it cracking under them this year.

Doubling the challenge, the market’s growth is being driven by Millennial and, particularly in digital, Gen Z consumers, two demographic cohorts with distinct characteristics.

Unlike elsewhere, most high-end stores in China have been open in the second half of the year as the country bought its Covid-19 outbreak under control. Brands like Tiffany and Burberry have reported significant recoveries in their sales in China even while their other markets shrink.

Luxury goods sales in China will rise by 48% this year to 346 billion yuan ($52.9 billion), according to a joint estimate by the consultancy Bain & Co. and Alibaba’s TMall shopping platform, a leading conduit for foreign luxury retailers entering the Chinese market. That would near double China’s share of the global luxury goods market to 20%. (The chart above is reproduced from the Bain/TMall report.)

However, luxury good purchases by Chinese overall are forecast to fall by 35% this year compared to 2019, according to the Bain/TMall report, contributing to a 23% contraction in the global luxury market and emphasising the impact of Covid-19 induced closings of international borders.

The question is how permanent the changes will prove. Luxury groups’ focus on the world’s second-largest economy and the accelerated shift to more digital retailing will likely prove lasting. The luxury brands also probably have at least a year before their other main markets are operating with a semblance of pre-pandemic normality and international travel and tourism are reestablished.

The wild card is what opportunities the recast China luxury market will create for domestic producers and whether those will help them go in the opposite direction and achieve that elusive status of a global luxury brand.

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An Artistic Snapshot Of China’s Slowing Growth

Global total sales value of Chinese art and antiques, 2011-14

THE LATEST ANNUAL survey of the Chinese art market by artnet, a leading art market and auction company based in New York, provides another alternative indicator of China’s slowing growth.

Although art is considered an alternative asset class by financial investors and the Chinese art market experienced the sort of giddy spike in prices in 2011 that would not have looked out of place on the Shanghai stock exchange before the recent collapse of equity prices, this Bystander would not want to extend the metaphor too far.

For one, there has been a shortage of high-quality, high-priced works going under the hammer. Nor should the effect of President Xi Jinping’s anti-corruption campaign on conspicuous consumption be overlooked. Overall luxury spending contracted for the first time in several years last year.

Authorities’ attention has been switching from the the personal luxuries segments (fine wines and spirits, jewelry and cars) to property and, increasingly, art. Gifts of antiques, calligraphy and paintings to officials can now be deemed as bribes. It has long been suspected that art auctions have provided a way to ‘launder’ bribes with ‘gifts’ being subsequently sold at auction at inflated prices.

Yet there are some straws to be taken from the 2014 art-sales figures. Auction sales in mainland China (the overwhelming majority of art sales in the country) declined 9% year-on-year to $5 .5 billion, a 40% fall in value in U.S. dollar terms since the market’s 2011peak. However, sales outside China at $2.3 billion in 2014 ($1.8 billion of which were made in Hong Kong) were barely changed from the previous year.

That suggests that it is domestic Chinese buyers who for reasons of prudence or necessity are keeping their cash in their wallets.

That all said, as the report notes and is true the world round, only a tiny portion of China’s population has the financial means to engage with the art market on an active or regular basis so any broad economic conclusions should be approached with circumspection.

What did catch our eye, however, was that up to 63% of all lots sold for more than 10 million yuan ($1.6 million) last year were left unpaid or only partially paid. This non-payment rate is up 22% from 2013 and points to a credit pinch.

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The Catwalks Of Songjiang

Models present creations for the NE TIGER Couture 2012 collection with the theme "Tang Dynasty" on catwalk during China Fashion Week for Spring/ Summer 2012 in Beijing. Source: Shanghai Daily

China’s rag trade is the world’s largest. It consumes 45% of the world’s fiber, accounts for a third of world textile exports and now has a huge and fast-growing domestic market for textiles and apparel into which to sell. As best we can guess, the industry has half a trillion dollars in annual sales and employs more than 20 million people. A further 140 million are involved in cotton farming, and millions more in the chemicals industries producing man-made fibers. Our numbers, though based on commerce ministry data, are a guess. Many of the businesses operating in the industry are too small to get counted in the official figures.

One thing we do know is that the textile and garment industry is both privately and foreign owned to an uncommon extent for such a significant Chinese industry. Another is that it faces the challenge of breaking away from its low-cost, high-volume model, like other industries that have thrived in the export-driven phase of China’s growth over the past three decades. The slump in demand in its export markets in the developed world may be temporary, but rising labor costs will be permanent, and the more painful as industry wages are generally lower than in other parts of manufacturing. The high value added parts of its supply chain lie in the hands of others, notably specialist logistics companies.

The rag trade globally has always been a hybrid of  the high-quality fashion market, characterized by modern technology, relatively well-paid workers and designers and a high degree of flexibility, and the low-end, mass production of cheap and standard clothing, such as t-shirts and uniforms by semi-skilled and unskilled, usually female, labour, in which international retailers have the dominant market power. The potentially highest value added part of the business, internationally recognizable fashion brands, are almost completely outside the Chinese industry’s orbit. The country, and Shanghai in particular, does have an emerging cadre of world-class couture designers, some of those work has been making an increasing splash at the biannual Shanghai Fashion Weeks. A collection from Zhang Zhifeng’s Ne Tiger line opened the most recent show, seen above. Yet Shanghai’s best labels are still far from challenging the likes of Louis Vuitton, Chanel, Gucci, Dior and Armani, even inside China where those European labels are the ones that dominate the domestic fashion market.

Every fashion industry cascades down from couture through ready-to-wear to the cheap knock-offs sold on market stalls and needs a textiles industry underpinning it. Redressing China’s textile and garment industry’s structural shortcomings will require a level of innovation beyond anything the domestic textile industry has known. Inevitably, there is a plan. It has been devised by the China Textile Industry Association, a trade body, and officials in Songjiang, one of the satellite towns on the western outskirts of Shanghai and better known for Thames Town, the surreal facsimile of an English home counties market town that has been built there. They plan to build a 2,000 acre industrial zone for the textiles and fashion industries that will be part business park, part R&D center, part fashion expo and shopping mall, and part brand incubator. Two years in the making, a small corner of this project opened a few months back. The full vision will take six or seven years to realise.

The notion of clustering firms, in the hope that the cross-pollination of people, ideas and capital, will foster innovation, is taken from high-tech industries. Fashion Valley, as the zone is being called in an echo of Silicon Valley, will sit alongside Songjiang’s existing industrial zone, already home to biotech, semiconductor and pharma firms.

It will also be close to another essential component of a high-tech industrial cluster, a leading university. Songjiang has several. In particular, the fashion and fabrics-centric Donghua University, whose roots go back to the Shanghai Textile Engineering Institute and which absorbed the textile sections of a number of regional institutions in East China after the Communist Party took power in 1951, maintains a campus in Songjiang. Over the road is the Shanghai University of Engineering Sciences’ new home for its Institute of Clothing Technology, arguably China’s leading fashion design college thanks to its partnership with Paris’s IFA. Neither campus is far from the proposed fashion incubator.

Songjiang is not an illogical spot for such a project. The district has been associated with the textile industry ever since the Mongols replaced rice with cotton as the area’s main crop in the 14th century, leading to spinning and weaving becoming prominent local industries.

The question, asked a thousand times by economic development planners everywhere, and yet to be convincingly answered, is can innovation be systemized? This Bystander doesn’t doubt local bureaucrats’ natural affinity for expensive, large-scale real estate and infrastructure development. And up to a point, in China, if you build it, they will come. Some are told to; others just know to hear the call. Several local firms are already signed up. Developing creative industries and expanding China’s soft, cultural power are all now national priorities.

No doubt, too, that if China’s textile and apparel industry is to escape being stuck in the low-value end of the business it will have to become vertically integrated. To do that it will need to develop both management skills and quality standards along the value chain, as well as dealing with the sustainability and labor issues surrounding the fashion industry internationally. One point in its favor is that the textile and garment industry is suitable for the sort of incremental and process innovation that Chinese firms are starting to become adept at, rather than needing to search for breakthrough products and technologies. Another is that if the textile industry diversifies into technical textiles, for use in the medical, aerospace, automotive and green-technologies industries, for example, it can ride the development arc of those industries, all of which are being championed as strategic national interests.

Best business practice can always be taught, but industrial clusters tend to emerge despite the best intentions of planners. In the U.K. it took more than three decades of economic planning to develop a high-tech company incubator around Cambridge University, known as Silicon Fen. Yet, over the past couple of years, London’s Silicon Roundabout had emerged organically as the place for web start-ups. Closer to home, as well as a thriving fashion industry, Shanghai has an vibrant modern art scene that has grown up around 50 Moganshan Road to the north east, organically and unplanned.

The challenge for the textile and garment industry is give the creativity of designers and fashion entrepreneurs enough free rein to develop world-class brands and labels while providing them with both the technical advances and the business and production disciplines to compete with the established fashion multinationals. In the world’s fashion capitals it is the design and fashion schools rather than industrial parks that play a crucial part in that, places like London’s Central St. Martin’s, New York’s Parsons and FIT, Paris’s Ecole de la Chambre Syndicale and Esmod, Milan’s Instituto Marangoni and Tokyo’s Bunka Fashion College, all of which would fall into the top 10 of most lists of the world’s top fashion schools. SUES and Donghua, which woldn’t rank in many top 50s, will have to break into those ranks.

China has the potential to reshape the global couture market, as it does all luxury markets, because its domestic market is likely to grow so fast and so far. In white goods, Haier is a harbinger of what is possible. It turned a high-end consumer good, wine-cooler refrigerators, into a much cheaper middle-market product, and grabbed a 60% global market share in the process. Unlike as it seems now, it is perfectly conceivable that Shanghai, perhaps even Songjiang, will one day be spoken of in the same breath by fashionistas as Milan, Paris, New York and London.

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Putting A Price On Luxury

Can you put a price on the cachet of a luxury logo? Seems you can and, in Chanel’s case, it is as much as 200 yuan ($31). The Shandong Business News (here, in Chinese) reports that the largest of the luxe-goods maker’s paper carrier bags are selling for that much on the online shopping site Taobao. Shopping bags from Louis Vuitton, Gucci, Hermes, Ferragamo are also in demand from aspirational consumers who can’t afford the haute couture that goes inside the bags but still want to look as if they are shopping at those brands’ stores.

True, this is a phenomenon seen the world over, and as the Shandong Business News notes, the same thing is happening in South Korea with Burberry’s carrier bags. The local twist is that when Prada and Channel introduced transparent bags this summer (so you could see what was inside), what also popped up on Taobao but cheap yellow protective dust bags being promoted as looking like rough silk and an ideal liner for see-through bags. Others then can’t see that you’ve just got a pair of old trainers in your Prada bag–and not a pair of the brand’s expensive, high-fashion shoes.

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China To Get Its First Wine Investment Fund

Ever since the London International Vintners Exchange, more familiarly known as Liv-Ex, got up and running in 1999, wine investment funds have grown in popularity. Now China, as befits a nation whose status-obsessed wealthy are suitably obsessed with buying fine wine, is to get its own, the Financial Times reports. The Dinghong Fund, also known as the DeRouge Fund, plans to raise 1 billion yuan ($156 million) from investors that it will invest in Bordeaux and Burgundy vintages. Minimum initial investment will be for 1 million yuan locked in for five years. (Update: Three-fifths of the fund will be invested in wine and the remaining two-fifths in wine futures; the fund is aiming for a return of 15%.) The fund is co-founded by Ling Zhijun, a Shanghai-based asset manager and oenophile.

Another sign of a Bordeaux bubble?

Footnote: Chinese investors have been active participants in international fine wine investment funds and in funds that invest in a range of investment-grade collectibles from art, to diamonds and rare musical instruments. China Daily recently wrote about Chinese millionaires’ interest in these so-called passion funds. With buyers from China already driving prices at art and fine-wine auctions, this Bystander expects a bull market for investment funds specializing in wine and art.

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China Said To Cut Luxe Tariffs To Boost Domestic Consumption

Here, if true, is a drop of bad news for luxury goods retailers in London, Paris and Hong Kong: China is planning to cut the taxes on high-end watches, shoes, clothes, bags, cosmetics and the like to encourage more domestic consumption, according to a report last week in the 21st Century Business Herald. (Update: Finance ministry officials have denied the report which was based on statements by Commerce ministry officials. That probably means the two ministries are still arguing over the details of how much the luxury tax and import duties will be trimmed, in what mix, on which products and how the change will be phased in. )

Duties of 65% on fine wines, 50% on cosmetics and 30% on watches have driven many wealthy Chinese to pick up such luxuries duty free on foreign shopping binges, a trend further encouraged by the spread of China Union Pay terminals abroad; Harrod’s department store in London now has 40, giving Chinese visitors ready access to their bank accounts back home. With a forecast 65 million tourists coming from China this year, up from 57.4 million last year, it is perhaps not surprising that Burberry’s says that Chinese account for half of its sales in London.

A Commerce ministry study found that prices of a sampling of 20 luxury goods were 51% higher in China than in the U.S. and 72% higher than in France, the most popular European destination for Chinese shoppers and where they spent an estimated 650 million euros ($1 billion) on duty free items in 2010, according to a survey by Global Blue, a tax-free-shopping group. The World Luxury Association, a trade organization, estimated that Chinese consumers bought a total of $10.7 billion worth of luxury goods (exceeding transport–planes, yachts, cars) in 2010 with four out of five of those dollars being spent outside China.

Even though China has lowered its average import tariffs to 9.8% from 15.3% since joining the World Trade Organization, it still has some of the world’s highest tariffs on luxury goods. The 21st Century Business Herald says that some import duties may be scrapped altogether, with the National Day holiday in October the target date for the change. (That assumes the commerce and finance ministries have resolved their trade balances vs tax revenues dispute by then; it will probably have to be refereed at State Council level.)

Most top international luxury goods retailers, including LVMH, Gucci and Hermes, have dozens of stores in China already to cash in on the fast growing ranks of China’s wealthy. Coach, a high-end U.S. leather accessories manufacturer, for example, has said it plans to increase its sales within China to $500 million from $100m within three years. Such foreign luxe retailers won’t necessarily lose sales overall because of tariff cuts; indeed they will continue to have the twin winds of growing Chinese international travel and rising wealth in their sales, but they could feel an inelegant pinch to their profit margins.

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Vroom-Vroom

This Bystander has always been a sucker for those little numerical nuggets that provide a telling economic snapshot. We found just such a one  in the interim financial report of Sparkle Roll, the Hong Kong-listed ultraluxe marketer that runs a tony car dealership in Beijing. It covers the six months ended 30th September 2010:

During this six month period, number of automobiles sold in terms of different brands was 123 Bentley, 43 Lamborghini and 95 Rolls-Royce compared to 70 Bentley, 14 Lamborghini and 11 Rolls-Royce respectively [in] corresponding period of 2009. Revenue of automobile sales amounted to HK$1,155 million ($149 million) compared to HK$380 million of same period last year.

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Luxury Spreading Far and Wide

Chinese already spend one of every eight dollars spent on luxury goods worldwide–as the proliferation of international luxury brand retailers from Armani to Louis Vuitton operating in the country and their growing dependence on its business already bear tony testimony. By 2015, Chinese consumers will be spending at least one dollar in every five, according to newly published research by McKinsey, the international management consultancy. That adds up to sales of luxury watches, jewelry, handbags, shoes, and clothing of the order of 180 billion yuan ($27.5 billion), up from 80 billion last year.

Good news for the international luxury brands that Chinese consumers prefer? Up to a point. This broadening of their customers will move them out of their traditional niche of selling to the very rich. McKinsey reckons that there are 13 million Chinese households with incomes of 100,000-200,000 yuan ($15,000-30,000)–upper middle class in China and on the first rung of the ladder of luxury consumption–and that this number will increase nearly sixfold to 76 million by 2015. Their share of the Chinese luxury goods market is forecast to grow from 12% last year to 22% by 2015, making it the fast growing sector of the market.

Addressing their needs requires a different marketing approach to the high-touch, for which read expensive, way luxury-goods makers are used to dealing with their best-heeled customers. That implies better in-store services and digital experiences for their customers, and the development of products and services designed for the local market (as Hermes is doing with its Shang Xia brand), three factors that have not always been the strong suit of luxury companies, especially their online strategies; the broad spread of social media is a particular challenge to the exclusiveness of a luxury brand. The luxury companies’ market will also spread from the the first tier cities to the second and third, compounding the reach and brand dilution issues, though it will also remain concentrated in the main cities.

Luxury-goods manufactures will also find that growing familiarity with luxury goods will make Chinese consumers more value conscious. Brand retailers won’t be able to get away so easily with just slapping a high price on their goods. Luxury goods prices in China are about 20% higher than even in Hong Kong. On the flip side, the research shows that as consumers get more brand conscious, they value craftsmanship and quality more, and are becoming more aware, and rejecting of, counterfeits.

McKinsey also predicts that spending on luxury services, such as spas and other wellness activities, will grow faster than that on luxury goods, another shifting sand for luxury retailers. The elephant in the room, though, is whether China will generate its own luxury brands as the once similarly foreign-brand besotted Japan has done.

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