More pain ahead for China’s luxury market, says Bain

China’s luxury goods market experienced its sharpest contraction in recent years in 2024, falling 18-20% to levels last seen in 2020, as low consumer confidence and increased overseas shopping dramatically reshaped spending patterns, according to Bain & Company’s China luxury report released yesterday. The downturn, which intensified throughout the year before showing slight improvement in Q4, effectively marks the end of the artificial Covid-era boost that had previously propelled mainland China’s luxury consumption, the report found. Only a few brands managed to achieve growth in what proved to be a particularly challenging year for the sector. Category performance “2024’s market decline was primarily driven by reduced domestic spending, which stemmed from low consumer confidence and increased tourist spending abroad, particularly in Japan and Europe,” said Bruno Lannes, senior partner at Bain & Company in Shanghai. The impact varied significantly across luxury categories. Beauty proved most resilient, particularly in perfumes, color cosmetics, and ultra-premium skincare, as consumers continued seeking emotional and sensory experiences. In contrast, watches and jewelry were hit hardest, with more rational consumer behavior and declining secondary market prices dampening demand. Fashion and leather goods segments also underperformed, with leather goods particularly impacted due to what Bain described as an “over-reliance on iconic pieces” and limited seasonal innovation, leaving consumers with little incentive to make additional purchases. Shifting spending patterns A key factor in the market’s contraction was the dramatic shift in where Chinese luxury spending took place. Overseas shopping rebounded strongly, particularly in Japan, where favorable exchange rates created price differences of up to 30% compared to mainland prices. This contributed to approximately 40% of Chinese luxury spending occurring outside mainland China in 2024. Even Hainan, previously a bright spot during China's Covid isolation, saw duty-free sales plummet 29% YoY due to reduced traffic and smaller basket sizes as affluent shoppers resumed international travel. Market outlook Looking to 2025, Bain expects the mainland luxury market to remain flat, with a challenging first half potentially offset by economic stimulus measures in the second half. The consultancy noted that while VIC (very important customer) spending has shown resilience, even these high-net-worth individuals have adopted more conservative spending behaviors. “Brands need to shift their mindsets from capturing incremental market growth through expansion to competing for market share in a more stable and normalized environment,” said Weiwei Xing, partner at Bain & Company in Hong Kong. “To succeed in this new era, elevated differentiation in branding, product innovation, pricing strategies, and client experience will be crucial.” Strategic recommendations For luxury brands looking to navigate this challenging environment, Bain outlined several strategic priorities: Product innovation and experience: Brands must invest in product differentiation and enhanced consumer experiences to rebuild desirability. This includes addressing global pricing disparities to limit gray market (daigou) influence. Lower-tier opportunities: Rising consumption power in tier 2 and 3 cities presents opportunities for brands to establish first-mover advantages in these emerging markets. Global operations alignment: Brands should strengthen their wholesale operations management to limit daigou activities and ensure pricing harmonization across markets. Their mainland China strategy should be closely aligned with global operations. Consumer evolution: Brands need to adapt their offerings to appeal to Gen Z’s diversifying preferences while catering to VICs’ growing appetite for understated luxury. There should be increased focus on experiential luxury offerings. Long-term potential Despite the current headwinds, Bain maintains an optimistic long-term outlook for China’s luxury market, citing the country’s solid economic fundamentals and growing middle class. However, the report emphasizes that brands must use this period of uncertainty to refocus strategies and enhance operational efficiency to emerge stronger when growth eventually returns.

More pain ahead for China’s luxury market, says Bain

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Published January 22, 2025

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More pain ahead for China’s luxury market, says Bain