Despite Xi’s austerity campaign, high-end consumption is ‘reshoring’
High-end spending is back in China, but this time consumers are “reshoring” the luxury purchases they once made on overseas trips to fashion capitals such as Paris and Milan.
Foot traffic rose in opulent Shanghai malls, Swiss watch sales shot up and top European luxury brands from Burberry to LVMH reported sharply improved revenues from China in the second half of 2016.
Chinese consumers buy more luxury products than those in any other country, accounting for about one-third of global sales. But a decade of rapid growth stalled after 2013 amid President Xi Jinping’s government austerity and anti-corruption campaigns and an economic slowdown.
However, Burberry said this month its return to expansion in Asia was driven by “high single-digit comparable sales growth” in China, and Hugo Boss’s incoming chief executive Mark Langer said China had seen a turnround in the second half of the year.
On Thursday, LVMH highlighted “better momentum after a tough 2015” in its Chinese wine and liquor sales, underscoring Rémy Cointreau’s earlier announcement that a rebound in cognac sales in China had fuelled a 9 per cent sales increase in the third quarter.
Analysts said the “feel good factor” among wealthy Chinese consumers had returned after confidence was shaken by a stock market rout in 2015. Equities have recovered while house prices in top-tier Chinese cities rose by a quarter in 2016, creating a significant wealth effect for locals whose assets are mostly property.
The anti-corruption campaign has lost some of its initial steam, with prosecutions of government officials falling and the pace of new investigations slowing. While the days when officials openly flaunted luxury watches are over, the chill is decreasing, said Erwan Rambourg of HSBC. He estimates that global luxury spending increased 6 per cent in 2016, fuelled by Chinese purchases in the second half.
“The anti-corruption campaign has not disappeared, but its impacts have,” he said.
Sales of high-end domestic brands such as Kweichao Maotai have also grown briskly this year, as the culture of private dining made a comeback. “Business-to-business gifting has probably started to pick up again, that’s part of the way you do business in China,” Mr Rambourg added.
Mainland Chinese sales have been boosted by “harmonised” prices from brands who used to charge premiums in China. Chanel began the process in 2015, with brands such as Cartier following suit. “Luxury players were pretty drastic about acting on price harmonisation,” Mr Rambourg said, adding that some of the rise is a shift in sales once made overseas. “You’re moving from one pocket to the other,” he said.
That has paid off with sales among the many white-collar workers who aspire to buy luxury goods but are price-sensitive. Leaving a Prada store in Shanghai, a 36-year-old consumer explained: “If I like an item, I’ll look at it in a domestic store. If the price isn’t too different from abroad then I’d just buy it there.”
China has cut duties on some luxury goods imported through official channels as part of efforts to increase consumption and has opened duty-free zones for domestic tourists.
At the same time, it has cracked down on the vast industry of grey-market daigou or “personal shoppers” overseas who bring luxury goods into China. Officials have stepped up checks at airports, slapping taxes on luxuries brought home by travellers, while those found with large amounts can face smuggling charges.
“That control has stopped personal daigou. People got scared,” said Bruno Lannes, of consultancy Bain. Large-scale operations, involving Chinese nationals based overseas taking orders online and sending packages into China, were hit by the introduction in April of import tariffs on packages ordered online.
“The Chinese have come back in 2016 to the China stores. I’ve had many conversations with luxury brands and they’ve all had a good year in mainland China,” Mr Lannes added.
But growing sales in the mainland are coming at the expense of purchases made overseas, which in recent years have accounted for as much as 80 per cent of luxury shopping by Chinese nationals.
That is bad news for luxury stores in Hong Kong that have seen Chinese visits plummet, driving a 22 per cent decline in purchases of jewellery and watches in the territory in the first seven months of last year. Visits to Paris, a key luxury destination, fell after 2015 terrorist attacks.
Mr Lannes estimates that even as mainland rose, the global luxury market has remained broadly flat, and the share of sales made by Chinese nationals has dropped about 1 per cent to 30 per cent. “That they spend more in China does not offset their reduced spending overseas,” he said.
That was underlined by the Federation of the Swiss Watch Industry on Thursday, which reported a near 10 per cent year-on-year decline in 2016 exports, with Hong Kong seeing a 25 per cent fall. The global decline came even as mainland China “recovered strongly” to post more than 9 per cent sales growth in the second half of 2016, it said, predicting that exports would stabilise this year.
Currency fluctuations could also damp domestic purchases this year. China’s renminbi is likely to continue depreciating, adding to the cost of imports, although it has appreciated against some currencies such as the British pound. Analysts said high-end consumers were growing used to the declining currency, after an initial shock in 2015.
HSBC’s Mr Rambourg said travel to Europe for luxury shopping was likely to pick up again in 2017, as the psychological effect of the Paris terrorist attacks fades. “A lot of high end consumers are accepting we are living in a more dangerous world . . . people move on.”