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In China, luxury shopping faces constant headwinds

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This article is part of our special section on the DealBook Summit which included business leaders and politicians from around the world.


Towards the end of 2021, a gleaming luxury mall called Taikoo Li Qiantan opened in Shanghai. The 120,000 square meter center (the equivalent of a stretch of 17 football pitches) is made up of nine buildings, landscaped gardens and stores of Western brands such as Balenciaga, Bulgari, Cartier, Gucci, Hermès and Tiffany & Company. This colossal, state-of-the-art mall in China’s commercial capital, owned by Hong Kong conglomerate Swire Properties and Lujiazui Group, was expected to soon attract hordes of shoppers eager to buy luxury goods.

But for much of 2022, it often sat empty; China’s zero Covid policy and mass shutdowns have underscored the government’s commitment to eliminating local cases of the virus, regardless of the economic or social costs.

Beijing last week largely scrapped rules requiring mass testing, limited the scope of lockdowns and scrapped mandatory hospitalizations and mass quarantines. Local media reported that residents would no longer be required to show negative Covid test results to enter supermarkets, malls, the city’s main airport and other public places. Yet tensions remain high.

For more than a decade, the most populous country in the world with 1.4 billion consumers has been supplying the Western luxury market. And then the global pandemic came in 2020. Although this year and 2021 for China ultimately proved less damaging than expected for China’s luxury sector (which overall suffered its worst year of trade on record), this year s turned out to be a different story: The government has maintained painful and often sudden months-long lockdowns in major cities, blocked borders, imposed quarantines and conducted extensive surveillance that has sparked mass protests in recent weeks.

With youth unemployment hitting a record 20% and economic growth well below Beijing’s own projections, those hoping for a stellar Chinese rebound in 2022 have been disappointed. Bloomberg Intelligence research estimated that China’s luxury goods market share could have been halved in 2022 thanks to store closures in the first half of the year and customers’ reluctance to return to stores beyond the initial euphoria of reopening.

“Most luxury brands were preparing for a very strong V-shaped recovery in mainland China sales after the end of the Shanghai and Beijing shutdowns, which affected business in the spring,” said Erwan Rambourg, head of Global Consumer and Retail Research at HSBC. “There was a recovery in V, but not really what they were hoping for. Apart from Hermès and Moncler, which saw strong market growth, the rest of the sector saw very moderate growth or, more commonly, no growth at all.

During an October conference call for LVMH Moët Hennessy Louis Vuitton, the luxury conglomerate’s chief financial officer, Jean-Jacques Guiony, remained cautious about China’s outlook. As he said, “we are not operating under normal conditions”.

Before the pandemic, the majority of luxury spending by mainland Chinese shoppers was not at home, thanks to relatively higher local prices.

Instead, the bulk of sales took place in European cities like Paris and London, and more regional Asian cities like Seoul and Hong Kong, although many big brands continued to invest in local Chinese infrastructure. , including stores and concessions.

But when the virus spread, international travel was (and remains) severely restricted. Hong Kong’s position as a luxury shopping mecca has been hampered after the city maintained some of the toughest border rules in the world. In mainland China, boutiques in second- and third-tier cities have opened to better cater to the tens of millions of shoppers unable to travel far, especially in places like Chengdu and Hangzhou.

A particular hot spot has been Hainan. Several years ago, the Chinese government – ​​keen to preserve the repatriation of luxury consumer spending to help sustain the economy – transformed the tropical island, known as Hawaii in China, into a center of duty free shopping.

Along with moves to further consolidate his grip on power, Xi Jinping also called for a distribution of wealth “to keep the means of accumulating wealth well-regulated” – part of a broader “prosperity common”. Although few expect a widespread crackdown, the giddy returns Western luxury brands once enjoyed in China no longer seem like ironclad guarantees.

As a result, and due to the geopolitical instability linked to the war in Ukraine, certain managers have reassessed the geographical distribution of their investments in order to have a more balanced sales mix.

Notably, some have redirected money from China to what remains the biggest luxury market in terms of sales: the United States. Despite the decline of department stores – once a cornerstone of business – luxury sales in the United States grew almost twice as fast as the global average in 2021, and one and a half times faster in the first half of 2022, according to Citi Research. .

“Developing the US market was not a major priority over the past decade when there was so much to do in China, but brands are now recognizing that there is much more that can be done, especially beyond the two coasts,” said Luca Solca, head of luxury research at Bernstein, noting that Texas and Tennessee are key states.

This has been a volatile year for Western brands operating in mainland China – and for Chinese consumer psychology. “Revenge spending,” or the tendency for consumers to spend after a period of enforced abstinence, originally drove many shoppers back to stores, but that trend has largely waned.

“Consumer confidence has suffered significantly from the restrictions,” said Chloe Reuter, founding partner of Gusto Collective, which helps luxury brands manage their expansions in China and Asia. “It is difficult for companies to plan without a clear roadmap for an easing of restrictions.”

Many businesses, she added, were now holding back on new stores or large-scale offline events and taking a short-term “wait-and-see” approach, with few expecting a recovery until at least the middle of 2023.

Longer term, however, China remains an essential piece of the global luxury puzzle with huge potential. According to a recent study by Bain & Company and Altagamma, Chinese shoppers will represent 40% of all luxury consumers by 2030. This means that Western brands should always keep a close eye on how they deepen their popularity and longevity in a changing country. and an unpredictable economic landscape.

“Overreliance on China is risky, but not nearly as risky as not being there at all,” said Claudia D’Arpizio, head of Bain’s luxury goods practice which led the study. study. “There may be a rebalancing of growth globally, given the strong sales in America, Europe and Southeast Asia and the domestic situation in China, but this ultimately remains the luxury market the more important for major Western brands.”

Look no further than Gucci, the biggest sales brand of French luxury conglomerate Kering, which revamped its management structure in China this year and parted ways with long-time creative director Alessandro Michele last month. partly on speculation that its aesthetic had fallen out of favor with Chinese consumers.

“Sooner or later things will go back to normal,” said Gusto Collective’s Ms. Reuter. “But I think luxury brands and consumers can all agree that 2022 hasn’t been a great year.”

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