In a piece of news that’s likely to have brands worried about their future financial reports, China’s ongoing luxury slowdown has caused growth to move from the black to the red, according to a new report by Bain & Company and Altagamma. Luxury companies shouldn’t develop too much anxiety over the forecast, however, since Chinese consumers are still spending—they’re just doing it overseas.
Bain’s 13th annual “Luxury Goods Worldwide Market Monitor” predicts that China is currently showing “minus 1 percent” growth this year at constant exchange rates (minus 2 percent at current rates). Not only is this a decrease from last year’s growth rate of 2.5 percent reported by Bain, but it’s also much lower than the firm’s May 2014 prediction that growth would be between 2 and 4 percent for the year. It’s worth noting that not all estimates are the same: Euromonitor still predicts 4 percent growth for the year, according to its own recent report.
The reasons for the slowdown include both the Chinese government’s ongoing corruption crackdown that has hit luxury gift spending and changing Chinese consumption patterns—mainly, a growing number of Chinese travelers opting to shop abroad.
Despite the domestic spending slump, the report states that Chinese consumers are still the top and fastest-growing nationality when it comes to luxury spending. The majority of this buying is done while traveling abroad, where they spend more than three times the amount that they spend locally thanks to their efforts to avoid high mainland tariffs on imported goods. This was a major contributor to 6 percent growth in the Americas and 10 percent growth in Japan predicted in the report for 2014.
According to Bain partner and study lead author Claudia D’Arpizio, these traveling shoppers are changing the way the industry conceptualizes markets. “With such cross-pollination of luxury spending, it no longer makes sense to think only in terms of geographies. The focus is shifting to consumers, with local trends and tastes representing only part of the picture,” she says. “This new mindset has important implications for luxury brands. It requires that they think about their product offering from a more global perspective, with the concept of seasons, a key pillar of this industry, becoming increasingly obsolete.”
Chinese tax-free luxury consumption in Europe grew by 10 percent in the first eight months of 2014, which the report states is a slowdown from the same time period in 2013. It notes that this shows a polarization toward the two extremes of the luxury segment: “accessible” luxury and “absolute” luxury.
According to the report, these “accessible” luxury brands like Coach are a bright spot in China’s lackluster domestic market thanks to growing upper middle class spending—a segment that is supposed to double by 2017.