Is China’s domestic luxury boom over? Overseas spending returns

    China’s tourism recovery remains uneven, making it difficult to discern whether (or when) the country’s overseas luxury consumption will fully return to pre-pandemic levels.
    Affluent Chinese tourists are heading in rising numbers to Japan, Singapore, and Europe in search of new experiences. Photo: Getty Images
      Published   in Finance

    Are Chinese luxury consumers venturing back onto the international stage, or is their Covid-era proclivity for domestic spending set in stone?

    By any measurement, Chinese overseas travel and luxury spending has yet to return to pre-pandemic numbers, and most high-end purchases continue to be made within mainland China. According to Bain estimates, mainland Chinese consumers made approximately 70% of their luxury purchases domestically in 2023, down from 90% during the pandemic years, but far more than the estimated 23% in 2015 and 27% in 2018.

    This translates to continued challenges for overseas boutiques that depend on big-spending Chinese consumers, particularly in tourism hotspots like Paris, Seoul, or Milan. Bain estimated that Chinese travelers in Europe and Asia made up around 40% and 65% of spending in those markets in 2019, respectively.

    Today, the crucial question for luxury brands is how deep this preference for domestic luxury shopping runs. Is it simply convenience-based, or do Chinese consumers now actively prefer the experience of shopping closer to home?

    As Jonathan Siboni, founder and CEO of Luxurynsight, tells Jing Daily, Chinese consumers are rethinking their lifestyles post-pandemic and “no longer want to spend three hours queuing outside a store in Paris in the rain, but rather [want to] connect with a local sales associate who knows them and can advise them better.”

    Uneven recovery#

    China’s tourism recovery remains highly uneven, making it difficult to discern whether (or when) the country’s outbound luxury consumption will fully return to pre-pandemic levels. While Chinese travelers took an estimated 101 million cross-border trips in 2023, around 60% of 2019 levels, over 70% of these journeys were to Hong Kong, Macau, or Taiwan. Meanwhile, Chinese tourists continue to take the majority of their trips domestically, which they see as more convenient and better value for money.

    Chinese travelers made just 2.4 million trips to other destinations last year, putting the recovery at a relatively meager 36% of 2019’s level.

    Mainland Chinese tourists are flocking to Hong Kong for food tourism and shopping. Image: Getty
    Mainland Chinese tourists are flocking to Hong Kong for food tourism and shopping. Image: Getty

    Oxford Economics expects international trips by Chinese travelers to roughly double this year compared to 2023, yet this implies that Chinese outbound travel volume will remain around 22% lower than in 2019. The forecaster expects Chinese outbound travel to fully return to pre-pandemic numbers in 2025, in a “notably slower recovery than other large global source markets.”

    However, Chinese consumers’ preference for domestic luxury spending was already increasing in the run-up to the pandemic, propelled by government initiatives aimed at bolstering domestic consumption and regulating the daigou market, along with efforts by global luxury brands to reduce price disparities in mainland China.

    Yet, there are signs that some wealthy mainland Chinese plan to increase their international spending this year, which could portend a wider recovery in the next one to two years. A recent Hurun survey of affluent Chinese found that travel is one of Gen Z’s preferred forms of entertainment, while older respondents said they plan to travel more after retirement.

    Perhaps more encouraging is that seasoned Chinese travelers will continue to head to familiar destinations like Western Europe and Japan in significant numbers, in addition to Hong Kong. According to Oliver Wyman, 40% of Chinese tourists who previously visited Western Europe intend to revisit this year. The European Travel Commission anticipates a 60% surge in Chinese tourists in 2024.

    Although shopping as a motivation for international travel dropped year-on-year in Oliver Wyman surveys of Chinese travelers, it has since regained its position as the top reason for overseas travel, followed by gastronomic experiences.

    This is a popular trend among Gen Zers, who made up around 30% of new travelers in 2023. Sixty-two percent of Chinese Gen Zers said enjoying nice food is the top reason for international travel, which could boost travel to culinary destinations like Japan, South Korea, Thailand, and Italy in 2024.

    Recovery nonetheless#

    According to McKinsey’s new brief, Consumers Are Spending Again (Outside of China), there is reason to be optimistic about the continued recovery of Chinese overseas spending in 2024.

    The report notes that China experienced a moderate recovery in 2023, with 5.2% GDP growth primarily fueled by a surge in consumption, despite a backdrop of pandemic-induced challenges from the previous year. Employment and income levels remained stable, while the savings rate climbed.

    Despite an 8% YoY decline in foreign direct investment and mixed exports performance, early indications this year suggest a cautiously optimistic outlook, albeit with ongoing concerns over consumer and business sentiment, highlighted by a collapse in property transactions and stagnant private investment.

    In the early months of 2024, China’s consumers welcomed the Year of the Dragon, boosting the economy. Retail sales increased 5.5% year-on-year and food service sales leaped 12.5%, indicating a strong recovery in the hospitality sector.

    Growth was also observed in the food, cosmetics, clothing, and home appliance segments, though at a more modest pace. Notably, the automotive sector surged, especially electric vehicle (EV) sales, which increased 37% YoY, reflecting a shift towards greener alternatives supported by government incentives.

    Air passenger numbers rose 44.4% from January to February 2024, showcasing a revived interest in travel and in-person business engagements. McKinsey notes a strong recovery in domestic and international travel in the first two months of the year, with domestic travel surpassing pre-Covid levels by 16% and Lunar New Year holiday travel surging 34% compared to the same period in 2023 and surpassing 2019 levels by 19%.

    Image: McKinsey & Company
    Image: McKinsey & Company

    More encouragingly for global luxury retailers, international travel reached 77% of 2019 levels in the first two months of the year, a notable increase over December’s 63% and September’s 54% of 2019’s levels. According to a global ConsumerWise consumer sentiment survey conducted by McKinsey in February, 36% of Chinese respondents said they plan to increase their spending on international travel over the next three months.

    While McKinsey found that Chinese consumers plan to cut back on property, apparel, and cosmetic expenditures, they plan to spend more on bigger-ticket items like international travel and automobiles.

    While the number of international trips from China has yet to fully reach pre-pandemic levels, overseas luxury spending by Chinese consumers has surged, defying expectations with a robust recovery that outpaces outbound travel growth.

    Image: McKinsey & Company
    Image: McKinsey & Company

    Data from Global Blue reveals an impressive increase in spending per Chinese traveler, with expenditure rising 14% in Italy, 20% in France, 117% in Japan and 64% in Singapore versus 2019.

    This surge challenges the narrative that Chinese consumers’ preference for domestic luxury consumption is set in stone, underscoring a resurgent and persistent appetite for high-end overseas shopping experiences. The remarkable uptick in spending, particularly in Japan – known for its luxury, high-tech, and gastronomical offerings – suggests a discernible shift towards experiential travel and prioritizing quality over quantity.

    • Chinese luxury consumers are showing signs of venturing back to the international stage, as evidenced by a robust recovery in overseas spending that surpasses the growth in the number of outbound travelers, despite international travel not yet reaching pre-pandemic levels.
    • Mainland Chinese consumers continued to make a significant portion of their luxury purchases domestically in 2023, though there is a notable interest in returning to familiar overseas luxury markets.
    • A recent uptick in spending per Chinese traveler in key luxury destinations like Italy, France, Japan, and Singapore challenges the expectation of a sustained shift towards domestic luxury consumption, hinting at a resilient demand for international luxury experiences.
    • To capitalize on the emerging recovery, luxury brands should tailor their offerings and marketing strategies to cater to the nuanced preferences of Chinese consumers, focusing on personalized experiences and high-quality service to attract this lucrative market segment.
    • As Chinese consumers’ international travel and spending habits continue to evolve, a gradual but significant resurgence in global luxury shopping is likely, driven by the younger generations’ penchant for travel and gastronomy, potentially reshaping luxury retail in the coming years.
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