Big brands worry about China as middle class rejects luxury

An empty road is seen in the Shanghai Central Business District (CBD) during a lockdown, amid the coronavirus disease (COVID-19) pandemic, in Shanghai, China April 16, 2022. REUTERS/ Aly Song/

Join now for FREE unlimited access to Reuters.com

Register

SHANGHAI/MILAN, May 20 (Reuters) – Chloe Kou, a 28-year-old beauty brand marketing executive from Shanghai, will not buy her usual “one or two” high-end handbags this year. Instead, she plans to save, not spend, and that’s a problem for luxury brands.

China’s current zero-COVID policy, with its lockdowns, restrictions and economic impact, has weighed on consumers’ financial security. Read more

“Fancy clothes or handbags, I really think they’re useless right now, [because of] the uncertainty surrounding my financial situation,” Kou said.

Join now for FREE unlimited access to Reuters.com

Register

“I really think we need to shield ourselves from this uncertainty around the economy,” she said.

While typical of many middle-class urban young professionals in China’s cities, it’s bad news for luxury brands that have relied heavily on mainland China for their meteoric growth in recent years.

Last year, the country accounted for 21% of the global personal luxury goods market, behind North America and Europe, according to consultancy Bain & Co. It is expected to become the top market by 2025.

As life returns to normal in many places, luxury sales have soared in recent quarters, particularly in the United States, but falling sales in China are threatening luxury brands’ growth ambitions.

Luxury business executives from LVMH to Watches of Switzerland and Estee Lauder have admitted in recent weeks that their outlook depends somewhat on how long lockdowns in China last. However, the expectation of a rapid consumer rebound – as seen in 2020 after the initial COVID lockdowns – remains widespread and poses a risk.

“We anticipate a rebound, and we are prepared for it. We have bought stocks: we are investing ahead of the curve,” said Julie Brown, Chief Operating Officer and Chief Financial Officer of Burberry, this week. Read more

Richemont Chairman Johann Rupert, however, sounded cautious on Friday, saying he believed China’s economy would suffer longer than many had expected and that he expected consumer behavior be more “conservative” in the future.

“Even when China emerges from its isolation, the rebound will not be as quick and as immediate as we have seen in Europe and the United States,” he told reporters, adding that he expected a number of large companies to lay off. Read more

Like Richemont, Burberry – which makes about a third of sales from Chinese shoppers – said 40% of its mainland China retail network is currently down and online deliveries have also come to a halt due to the shutdown. warehouses.

“We think the recovery will be bumpier than before,” said Imke Wouters, retail and consumer goods partner at consultancy Oliver Wyman.

MID-CLASS GROWTH DRIVER

The market value of major luxury brands took a hit last August following the unveiling of Chinese President Xi Jinping’s “common prosperity” policies aimed at reducing income inequality. Middle-class Chinese shoppers were at the forefront of luxury spending, but now it looks like status symbols may be out of fashion.

Luxury executives, however, said at the time that policies were likely to target the ultra-rich more.

“We see no reason to believe that this could be detrimental to the upper middle class, the wealthy class, which constitutes the bulk of our clientele,” said LVMH chief financial officer Jean-Jacques Guiony at the time.

Zero-COVID, however, could pose a greater threat than common prosperity, as it is likely to impact the majority of consumers in China, including potential luxury buyers.

It is difficult to quantify the extent of the economic damage likely to be inflicted or to predict when the current lockdowns will end and if they will be the last.

But China’s vaunted rising middle class, a now 400 million strong cohort “is clearly stuck in the current pandemic,” said Alicia García Herrero, chief economist for Asia-Pacific at Natixis.

Young people have been disproportionately affected, said Ben Cavender, director of the China Market Research Group, with rising youth unemployment another problem for luxury brands that have voraciously pursued Chinese Gen Z consumers. who spend freely in recent years.

“It’s not going to be about buying things,” he said, with life balance and quality time with friends and loved ones likely to trump status-affirming luxury logos .

Join now for FREE unlimited access to Reuters.com

Register

Editing by Elaine Hardcastle

Our standards: The Thomson Reuters Trust Principles.

Comments are closed.