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2024 market outlook: Where is China’s luxury industry headed?

December 7, 2023
in Entertainment
2024 market outlook: Where is China’s luxury industry headed?
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2023 has been a challenging year for luxury, to say the least. Soaring interest rates and inflation have cast a shadow over luxury spending in Western markets. Concurrently, China, the world’s second-largest luxury market, has been grappling with a series of economic challenges throughout the year, ranging from deflationary pressures and an unstable real estate market to other systemic issues that have impeded the country’s eagerly awaited post-COVID economic rebound. 

Adding to the complexity, the persistent conflict in the Middle East continues to contribute to the erosion of consumer confidence. These factors have created an overall less favorable backdrop for consumption, particularly luxury consumption. 

The impact of these challenges is evident in the Q3 performances of major luxury conglomerates. LVMH reported quarterly revenue growth of 9 percent year-on-year in the three months ended September 30, a considerable slowdown from the robust 17 percent growth observed in Q2 and falling below analysts’ estimates of 11 percent year-on-year growth.

Similarly, Kering faced a decline in sales, dropping by 9 percent on a comparable basis in Q3, which was below analyst expectations of a 6 percent decline. This downturn affected Kering’s star brands across the board: Saint Laurent experienced a 12 percent decline in sales year-over-year, while Gucci and Bottega Veneta both reported a 7 percent decrease in revenue.

Gucci reported a 7 percent decline in sales in Q3 2023. Photo: Gucci

Positive signs of a global recovery

However, the global economic landscape appears to be poised for change as 2024 approaches. In October, US inflation data unexpectedly came in lower than anticipated, leading to speculation that the Federal Reserve might be less inclined to raise interest rates in the upcoming months. This development holds the promise of boosting consumer confidence and fostering increased consumption.

Simultaneously, data from the National Bureau of Statistics indicates positive momentum in China’s economic indicators. In October, China’s industrial output exhibited a year-on-year growth of 4.6 percent, surpassing the 4.5 percent pace observed in September and marking the most robust growth since April of the same year. Retail sales in China also experienced a notable uptick, registering a 7.6 percent increase in October compared to its 5.5 percent gain in September. 

“China’s economic growth was stronger than expected in Q3, with consumption contributing to over 80 percent of GDP growth. We are seeing an over-index gain in the premiumization and price value segments, and growing categories include pets, outdoor-related goods, experiences, health, and beauty,” says Harry Hui, Founder and Managing Partner of private equity firm ClearVue Partners.

China is currently contemplating a substantial $137 billion injection to revitalize its struggling property market as well. The significance of this move is underscored by the fact that approximately 70 percent of Chinese household wealth is currently tied to the property market. 

“There is a “near-term property wealth effect” erosion on aggregate demand, but we expect the market to rebound. Another 100 million middle-class households will enter the market in the next cycle,” adds Hui. 

Over the past two decades, upswings in China’s property market have been closely linked to heightened consumer confidence and increased spending. This trend is pronounced among the burgeoning middle class in China, a demographic that has played a pivotal role in propelling luxury consumption.

The unfolding developments indicate that economic recovery is well underway. However, it’s important to acknowledge that challenges may persist and that headwinds are to be expected. Anticipating a slow start, consumer spending is likely to pick up momentum in Q2, setting the stage for a healthy and balanced recovery throughout 2024.

Savvy consumers are in search of value

Despite the challenging economic climate, however, hard luxury demand has demonstrated resilience — as displayed by Richemont’s Q3 performance. The company reported a notable sales increase of 6 percent at actual exchange rates (and 12 percent at constant exchange rates). 

The Asia Pacific region emerged as a key driver for Richemont, with sales experiencing a substantial 14 percent increase at actual exchange rates (and 23 percent at constant exchange rates). Its jewelry maisons performed particularly well, with sales rising by 10 percent at actual exchange rates (and 16 percent at constant exchange rates).

Chinese singer Jackson Wang wears pieces from Cartier’s Le Voyage Recommencé fine jewelry series. Photo: Cartier

In times of uncertainty, consumers traditionally adopt a more value-oriented approach to their purchases. This trend is evident in the current market dynamics, where there is a notable inclination towards choosing brands and luxury categories known for their ability to retain value. 

The preference typically extends to hard luxury categories such as watches and jewelry — aligning with the predominant segments within the Richemont portfolio — and occasionally includes fashion outliers (such as Hermès, which reported a 16 percent increase in sales during Q3).

Amid spending reallocation, brand desirability is key

Despite earlier concerns about luxury spending reallocation across markets with the return of international travel for the Chinese, this has surprisingly not been the case. 

“The bulk of Chinese consumers’ expenditure on luxury used to occur overseas, but that changed during the pandemic, and such spending continued to largely take place domestically in 2023,” says Scott Chen, Managing Partner at L Catterton Asia.

“While outbound travel is expected to recover further next year, we believe 60–70 percent of such expenditure will remain in China as luxury brands have enhanced their product array, service quality, and overall customer experience in the country,” he adds.

At the same time, confronted with a disposable income crunch, the middle class has adapted their spending behaviors. Rather than engaging in across-the-board “revenge spending,” consumers appear to be strategically reallocating their income to prioritize specific categories. 

In a recent study conducted by RTG Consulting Group, only 6.4 percent percent of Chinese consumers surveyed expressed an intention to increase spending on luxury fashion & leather goods. In contrast, a significant 55.1 percent of respondents planned to allocate more funds towards travel and leisure.

Only 6.4 percent percent of Chinese consumers surveyed expressed an intention to increase spending on luxury fashion & leather goods. In contrast, a significant 55.1 percent of respondents planned to allocate more funds towards travel and leisure.

For those unwilling to compromise on luxury consumption, a notable trend known as “exquisite poverty” has emerged on Chinese social media. This refers to the practice of cutting back on non-essential expenditures in other aspects so as to afford and prioritize luxury items or experiences. While the financial prudence of this spending pattern might be questionable, it also goes to show the importance of brand desirability and how it can continue to drive demand even in challenging times.

Optimization for the road ahead

Businesses tend to adopt a more defensive posture in times of economic instability, choosing caution and opting to reduce external costs where possible. However, as shown during the Covid years, it is during these slower periods of time that brands are forced to reassess their current setups and develop more streamlined strategies to better connect with consumers.

Companies that dedicated time to reviewing and optimizing their ways of working during these lull years are now reaping the rewards. Taking the initiative to reassess strategies during economic downturns can yield long-term advantages, fostering adaptability and resilience in the face of uncertainties while positioning the company for sustained success in China’s ever-evolving market.

Angelito Perez Tan, Jr. is the co-founder and CEO of RTG Group Asia, parent company of business consultancy RTG Consulting Group and investment firm RTG Capital.

>>> Read full article>>>
Copyright for syndicated content belongs to the linked Source : JingDaily – https://jingdaily.com/china-luxury-market-outlook-2024/

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