How China’s Zero-COVID Policy Will Change the Luxury Market

As the rest of the world opens up, China remains closed in its pursuit of zero-COVID. According to an estimate from the Japanese financial firm Nomura Holdings, about 373 million people in 45 cities have been living under some form of lockdown since last month. The prolonged lockdowns, especially in Shanghai and Beijing — China's two wealthiest cities, which power much of the nation's economy — have dampened luxury stock prices. Despite showing resilient sales performance in 2022's first quarter, the stock prices of major luxury players Louis Vuitton, Kering, Hermès, and Richemont all dropped down in May. The lockdown disruption, alongside supply chain bottlenecks and the Russian war against Ukraine, is the most frequently quoted concern among investor reports. The hope for Chinese consumers to embrace "revenge shopping" with pent-up demand after getting out of lockdown — as they did when COVID-19 first hit in early 2020 — may be overly optimistic this time. As top economists warned, the economic cost of China's latest coronavirus outbreak could be more than ten times that of the initial wave in Wuhan two years ago. While many countries in the West today are caught up in inflation boosted by a hot job market, the mainland faces the opposite problem — one with an already slowing economy further challenged by shrinking consumer demand. "Panic saving (强制存钱)" and "layoff wave (裁员潮)" quickly rose to be popular topics on social media as younger working generations' worry about an imminent recession grew. Since March, large-scale layoffs from domestic internet giants, including Alibaba, JD.com, and Xiaohongshu have frequently hit news headlines. On May 9th, premier Li Keqiang described the employment situation as "complex and grave" in a public statement. After decades of economic optimism, mounting layoff anxiety from some of China's most robust industries has started to shake the myth of social mobility for the country’s younger workers. "I never realized the importance of saving until last month when Shanghai came under total lockdown. An entire department from my company was fired over a video meeting, and it is really hard to say if this will hit me anytime soon," said Lily Huang, a 27-year-old product manager in a major Chinese tech firm. "Until last year, I wouldn't have had a second thought about using my annual bonus to reward myself with a Chanel bag or a luxury watch. Everyone around me took it for granted that our income could only grow higher and higher in the future. But times have changed," Huang continued. Similar worries to Huang's could spell long-term trouble for luxury, whose growth largely depends on the widening pool of newcomers from China. For years, luxury has been working to boost demand from aspiring customers, who are seen as the growth engine of an industry historically focused on existing high spenders. The strategy worked exceptionally well in the past decade, as the consumer appetite for luxury moved in lockstep with steady growth from fast-expanding sectors such as tech, real estate, and education. Yet moving forward, a big chunk of this aspirational spending will be halted by Beijing's crackdown on all three sectors and further dragged down by disruptive lockdowns without a clear end date. Last year, BCG and Tencent estimated the post-1990 and light-spending consumers (annual luxury spending lt;7.5k (50k RMB)) to contribute 33 percent of luxury's growth in 2022. Today, how much of that aspirational class' spending confidence is left remains a question. Last month, a Weibo post from user @林登万大人 — claiming a content leak from LVMH's APAC executive meeting — stirred up a site-wide controversy on China's increasing wealth polarization. According to the post, the French conglomerate's local management team has classified customers into three categories: the "ultra-high net worth" (annual income over 1.48 million (10 million RMB), the "high net worth" (annual revenue over 445K (3 million RMB)), and the "zero income" including students and average professionals. The post also claimed that the management had decided to move away from the "zero income" group to focus on the higher net worth individuals by raising products’ entry price. Within 24 hours after the post was published, the hashtag # LVMH's Zero Income Classification rose to Weibo's Top Five Search List. While some netizens accused the group of being unabashedly classist, others said that the meeting note is an honest reflection of their country's widening wealth gap. A spokesperson from LVMH's Shanghai office denied the post's content claim and told Jing Daily that the meeting never took place. Regardless of the accuracy of the now-viral post, polarization is an increasingly accurate feature that defines Chinese luxury consumer spending. In mid-April, one of the mainland’s premium department stores SKP Beijing was still seeing long waiting lines in front of luxury boutiques before closing down temporarily for COVID restrictions. This small yet recession-proof consumer pool has proven its resilience, and it will remain luxury's bread and butter. According to the luxury publishing group Hurun Research Institute, China has about 4.7 million high-net-worth consumers, which accounts for 0.3 percent of the nation's total population but contributes over 80 percent of its luxury spending. Betting on these wealthy few could be a way forward for brands, but the strategy comes with other risks. After decades of success in relying on the country’s rising young middle class for growth, it will take brand's years to look for another target if this vital population shrinks. While the broader outlook for luxury is increasingly uncertain, one thing is clear. As wider, longer lockdowns continue to hit China's aspirational consumers hard, luxury will face more extreme spending attitudes: between either the Chanel-style extra, or the Uniqlo-ish basic.

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How China’s Zero-COVID Policy Will Change the Luxury Market