Prestige brands face new low-growth reality in China

Subscribe to our Jing Beauty to get the latest on China's world of beauty and wellness. Once a beacon of growth for high-end brands, the Chinese market now reflects economic and social changes that have curtailed the once-voracious appetite for luxury goods. These shifts are reverberating globally, including in luxury giants’ third quarter sales performance. LVMH’s Q3 revenue in its Asia ex-Japan region dropped 16% YoY, and Kering, which releases its financial report on October 23, guides a 30% YoY drop in revenue for the second half of the year, partly attributable to slowing demand in China. This marks a significant shift, signaling that Chinese consumers are no longer shopping for luxury goods in the same way they used to. Waning demand Spencer Zhuang, a Hangzhou-based daigou (also known as a surrogate shopper) who specializes in high-end luxury brands, offers a front-line view of the changing landscape. “Beginning in February 2024, there was a sense of endless tightening and a fear of spending money,” Zhuang says. “Customers who once spent freely are now hesitant, and what was once a supply shortage has flipped to oversupply.” Only about 10% of Zhuang’s clientele is maintaining previous spending levels. Many former luxury buyers – who once purchased bags priced between 30,000 RMB ($4,279) to 50,000 RMB ($7,132) – have disappeared, and those who do return are buying less expensive items. “These loyal spenders tend to be wealthier individuals from smaller cities, such as third- and fourth-tier urban areas, who don’t carry significant debt. In contrast, high earners with heavy financial burdens, like mortgages and car loans, are cutting back due to pessimism about their future income and mounting debts,” she says. China’s luxury market, previously driven by economic expansion and a growing middle class, now faces what experts call “structural weakness.” Barclays recently revised its outlook for the luxury sector downward, citing China’s economic slowdown as a major factor. Similarly, HSBC Global Research reduced its growth forecast for key luxury brands, from 5.5% to 2.8% for 2024, due to macroeconomic pressures like sluggish GDP growth and declining consumer confidence. Cooling interest in Western brands Western luxury brands are particularly affected by these shifts. A recent survey of 2,000 Chinese consumers by Investment firm TD Cowen found that only 17% plan to increase their luxury spending, while 64% plan to spend more on travel. Many consumers are gravitating toward domestic brands or opting for more sustainable, personalized, and culturally relevant products. “Chinese consumers are buying fewer luxury goods as economic challenges take a toll on spending,” Ashley Dudarenok, founder of the China digital marketing agency Alarice, tells Jing Daily. “There’s also been a noticeable shift in mindset, where flaunting luxury brands is now seen as shallow and disconnected from reality.” Instead of focusing on brand logos, consumers are increasingly valuing outstanding product quality and unique style. “While some ultra-high-end brands still benefit from their heritage and cultural significance, the overall trend is moving away from overt displays of brand loyalty,” Dudarenok says. Zhuang, the daigou, echoes this sentiment. “Even I am reluctant to spend the way I used to. My income has decreased by 20% to 30%, and I’ve had to cut back on daily expenses, social activities, and even clothing,” she says. This reflects a broader trend of downgrading consumption among middle-income consumers, who are increasingly turning to affordable platforms like Pinduoduo. Consumer confidence While domestic luxury spending has slowed, international travel is once again playing a significant role in where Chinese consumers make their luxury purchases. “Chinese consumers are traveling again and now spend about 40% of their luxury budget outside of China,” says Jacques Roizen, managing director of China Consulting at Digital Luxury Group. This trend is expected to continue as travel returns to pre-pandemic levels, with overseas shopping becoming a key part of the luxury market once more. In fact, according to Kering’s CFO, Armelle Poulou, a third of Chinese luxury spending occurred overseas in the second quarter of 2024. Additionally, rising youth unemployment and low consumer confidence are shaping the luxury market. Youth unemployment reached 18.8% in August and the Consumer Confidence Index dropped to 86 in July. “As consumers grow more cautious about spending due to uncertainty around job security and income, luxury brands may struggle to maintain previous growth levels. Fewer first-time luxury buyers are entering the market, posing a long-term challenge to the sector's growth prospects,” Dudarenok says. Rise of domestic brands While foreign brands face challenges in the market, Chinese luxury brands are gaining momentum. “Domestic brands like Duanmu and Shang Xia are gaining traction by leveraging their understanding of Chinese culture and consumer preferences,” Dudarenok says. “Unlike foreign brands that often dominate the market, these local brands focus on products deeply rooted in Chinese traditions, such as those incorporating Traditional Chinese Medicine in cosmetics. This cultural alignment resonates with consumers, particularly as national pride grows among Chinese shoppers.” Angelito Perez Tan, CEO of RTG Group Asia, which advises global luxury brands on their China and Asia business strategy, recently shared insights from discussions with luxury brand executives. According to Tan, there is a growing demand among high-net-worth individuals for exclusive products and personalized services. As competition intensifies, brands are striving to attract and retain this valuable customer segment, and brand loyalty is increasingly dependent on the ongoing efforts to maintain and strengthen relationships. “Brands like Hermès, Prada, and Chanel are faring relatively well in China. Their focus on heritage, quality, and exclusivity resonates with affluent consumers who are still willing to invest in luxury goods. These brands have been successful in maintaining strong brand positioning and avoiding overexposure, which has helped them weather the economic slowdown,” he adds. China’s luxury market is in a state of transformation rather than decline. While economic uncertainty and shifting consumer preferences are tempering growth, Chinese luxury consumers remain significant players in the global market. The resurgence of international travel and the rise of domestic brands underscore that this is more of a behavioral shift than a true market slowdown. “The narrative of a Chinese luxury slowdown doesn’t fully capture the market’s complexity,” Roizen says. Chinese consumers are still buying luxury, just not in the same way – or in the same places – they used to. Brands that adjust to these new behaviors will continue to thrive in one of the world’s crucial luxury markets.

Prestige brands face new low-growth reality in China

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Published October 16, 2024

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Prestige brands face new low-growth reality in China