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Luxury brands look to ride the storm of China’s policy shifts

Lily Ye shelters in a doorway near the Hermès store in Ginza and grumbles about being a stranded asset. Since the pandemic stopped Chinese tourists arriving in their millions for duty-free shopping, there has not been too much for a Tokyo-based, Mandarin-speaking luxury goods sales specialist to do.

The narrow streets around her, on a rainy Friday afternoon, are a study in sumptuous desolation. Ginza has its domestic customers, of course, but feels ever more like a cluster of the world’s highest-end brands readied for a still unscheduled future stampede of Chinese consumers. Among them, when they come, will be the emergent “alpha female” shopper whom even Xi Jinping might think twice before vexing. 

The question, though, is whether China’s ever more strident rhetoric of “common prosperity” and the Communist party’s apparent ease with untrailed regulatory change has put Xi on a collision course with luxury goods and those who most crave them. 

The frustration of Ginza’s emptiness, says Ye, is heightened by evidence of what these absent Chinese visitors might be doing if allowed to travel. Much of the luxury rebound in late 2020 and in the first half of this year, say analysts at Bain & Co, was led by “insatiable” mainland consumers: in some cases they drove luxury clothing and accessory brands to triple-digit year-on-year growth and almost doubled their share of the global luxury market to 20 per cent by the end of last year. By 2025, predicts the same report, Chinese consumers’ share of global luxury goods will be the world’s largest.

Pre-Covid, the buying power of Chinese tourists was formidable, with analysts at Citi Research estimating that their overseas spending represented between 17 and 20 per cent of global luxury sales in 2019. But since the pandemic denied them access to favourite duty-free hubs such as Tokyo, they have spent at home: not with quite the same enthusiasm but with enough to drive the mainland Chinese luxury market to an estimated $54bn in 2020 and continuing to push it higher this year. It is in this environment, says Bain, that what they term the “alpha female” customer has evolved, rippling with buying power as luxury sales intensify in the various tiers of Chinese cities.

Corporate strategies are already flexing around this new reality. Earlier this month, the Fosun Fashion Group adopted the name of its most famous portfolio company, the French haute couture house Lanvin, as prelude to a more full-throttled expansion of luxury sales in mainland China. 

Given the attractiveness of this narrative in an otherwise mostly tough global environment, the chill was all the greater when the Xi rhetoric on “common prosperity” and narrowing the gap between rich and poor intensified over the summer. Would this, in the long run, mean forced or self-imposed curbs on conspicuous consumption? Did the sudden attacks on technology giants and their billionaire founders foreshadow a broader bashing of capitalism’s winners and their shiny trappings? Share prices of luxury giants like LVMH and Kering were hit hard in August as Xi’s line appeared to harden. Companies were forced to admit to investors that the implications were difficult to read, but argued that their customers were not the mega-rich, but the swelling ranks of upper middle classes nurtured by China’s years of growth.

The questions swirling around the luxury sector are a microcosm of wider investor confusion over the true intention behind the language of “common prosperity”. Two schools of thought have emerged, says Matthews Asia strategist Andy Rothman: one that suspects this is an effort to address important social and economic concerns, another that it is about rolling back market-based reform. Much of the problem, he adds, is a failure to articulate policy objectives.

Belatedly, there may be clarity. Last week China made public the content of a speech made by Xi in mid-August to the party’s central committee for financial and economic affairs. In the space of two paragraphs, he made five positive allusions to the act of “getting rich”. In his most unambiguous phrase, he said he wanted to enhance people’s “ability to get rich”. 

Xi may indeed be a leader who wants tighter government control over the economy’s ultimate shape and its most thriving industries. But this is probably not the language of someone who is gunning for the handbags, watches or designer loafers of the middle classes and entrepreneurs whose businesses drive almost all employment growth. Particularly not if he or those around him have judged that, in the longer term, more and more luxury brands will be shifting production aimed at the Chinese market into China itself.

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