Reports

    Is China Luxury Demand Really 'Weak'?

    Slowing domestic sales in China are only a small part of the picture when it comes to assessing global Chinese shoppers' appetite for luxury.
    A Prada store in Shanghai. (Shutterstock)
      Published   in Finance
    A Prada store in Shanghai. (Shutterstock)
    A Prada store in Shanghai. (Shutterstock)

    This week, earnings reports from luxury powerhouses Prada and the Richemont Group illustrated how murky the global luxury market has become. Throughout 2015, observers have sought to understand whether China’s demand for high-end items has waned or intensified, particularly in light of first-quarter earnings reports that indicated that luxury demand in Asia—previously the jewel in many brands’ crowns—had died down.

    Much of this concern has been tempered in recent months, with Hermès recording a 20 percent increase in sales in Japan in the first half of the year, much of that growth powered not by a Japanese consumer that has awoken from the protracted stagnation of that economy but by a resurgent Chinese tourist-shopper. Chinese arrivals in Japan have boomed in 2015 as the country benefited from a weaker currency, easier visas and more China flights, and South Korea’s MERS virus outbreak. According to the Japan National Tourism Organization, 591,500 Chinese tourists visited Japan in August, an increase of 133 percent from the same time last year. This marked the second month in a row that Chinese arrivals topped 500,000. Also in August, a record 137,000 Chinese travelers visited Japan on cruise ships, a marker of how quickly Chinese tourists have sought to take to the seas.

    But Hermès isn’t the only luxury player that has benefited from continued strong Chinese outbound tourism. Swiss luxury group Richemont this week announced a 4 percent increase in revenue in the five months leading up to August, doubling its highest forecast, as sales jumped 28 percent in Europe and 48 percent in Japan. As for Hermès, a significant proportion of these sales went to Chinese tourists, lured by weaker currencies and the strong popularity of overseas shopping.

    As Vontobel analyst Rene Weber told Reuters, many analysts were stunned by the strength of the Chinese consumer in Europe and Japan, noting, "We already have some confirmation here in Switzerland, but we did not know that for all of Europe, July and August were very much driven by Chinese tourism.”

    Owing in no small part to its diverse portfolio, and the power of the Cartier brand in the Greater China region, Richemont announced this week that it also returned to double-digit positive growth in mainland China, although sales in Hong Kong and Macau remained down year-on-year.

    The picture for Prada remains harder to discern, as the company continues to post relatively weak results in key markets, yet recent drops have been less severe than expected. The Italian luxury group announced this week that first-half net profits dropped 23 percent, blaming a slowdown in Asia in general and Hong Kong and Macau in particular. However, the group noted that these results were better than expected, indicating that the company may be bottoming out after seeing its shares decline 60 percent over the past two years.

    In China as in most markets, Prada may be seeing the lingering effects of over-expansion and a lack of innovation biting into profits. As The Wall Street Journal noted this week, Prada—more than more low-key brands—is “particularly vulnerable to the China slump because its handbags and fashion are losing cachet.” According to Chinese local media, Prada stores have recently resorted to discounting to clear inventory.

    With Chinese consumers still making around 30 percent of all global luxury purchases, and being of primary importance in boosting brands’ sales in markets like Europe and Japan—places where local consumers certainly aren’t lining up to drop thousands at a time—is it really accurate to harp on “weak demand in China”? If anything, demand for luxury in China has intensified despite tired commentaries on Xi Jinping’s corruption crackdown or gift-giving—it’s just that this stronger demand also comes at a time when demand for international travel and shopping is hitting fever pitch.

    Whereas Chinese consumers five or 10 years ago were all about “conspicuous consumption”—hitting the town in head-to-toe Prada or Gucci—now their buying habits and methods of shopping have become more diverse and nuanced. Perhaps more have taken cues from sophisticated Japanese consumers, who also are known to make big-ticket purchases in Paris, Milan, or New York, but do so in a more low-key and private way.

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