China and the Chinese played a primary role in the growth of the luxury sector in the past decade. But what was once a boon for luxury goods brands is now turning around.
Chinese consumers account for the largest portion (31 percent) of global luxury spending, up from only 1 percent in 2000, according to a study by consulting firm Bain & Company. And in the past decade, thanks to China and Chinese shoppers abroad, the luxury goods market worldwide grew by 72 percent in size.
“The relentless expansion of the domestic economy that fueled China’s voracious appetite for the finer things in life has slowed,” Exane BNP Paribas analyst Luca Solca wrote on Fashion of Business.
“This only compounds the chilling effect that the government’s anti-corruption campaign has had on demand for luxury fashion and fine jewelry.”
Many luxury goods brands opened up store after store to tap the Chinese market. The experts are now debating whether they are too exposed to China.
In his analysis, Solca looked at whether each brand is over- or underexposed to the Chinese market based on the number of stores they have. Accordingly, Versace is the most over-exposed brand with 22 percent of its stores based in China. Moncler, Tod’s, and Dolce&Gabbana are among the overexposed brands as well.
The only large brands underexposed to China are Hermes, Tiffany, and Michael Kors. And these brands still have some retail expansion opportunity in China, according to Solca.
Sales of luxury products in the mainland have started to slow down after Chinese regime leader Xi Jinping launched his political anti-corruption campaign in 2013. Many of the Chinese officials and their numerous cronies and associates notorious for using luxury items for bribes stopped shopping for those items.
A slowdown in the Chinese economy since mid-2015 was the second blow for luxury brands. Some brands have already started closing stores in China.
“A corollary to the drop in domestic sales is a reduction of the store footprint by most brands, with a greater focus on fewer, larger, and better-located stores” Bain & Company stated in its report on China’s luxury market in 2015.
Louis Vuitton, which is the most valuable luxury brand in the world, closed six stores and opened two new stores in China in 2015. And the company recently announced the closure of two additional stores located in Shanghai and Shanxi.
Meanwhile, Gucci closed five stores in China, Burberry closed two stores, and Prada closed four stores in 2015, according to the Bain report. Due to collapsing demand in China, brands are expected to shut more stores across the country in coming months.
Adding to the industry’s woes, publicly traded luxury goods companies announced weaker than expected results in April 2016, caused by slowing Chinese tourism in Europe. Burberry Group Plc, Prada SpA, Kering SA, and LVMH Moet Hennessy Louis Vuitton SE all reported disappointing results following terror attacks in Europe.
According to Bruno Lannes, a Bain partner based in Shanghai, luxury brands should place greater emphasis on exclusive and fashionable collections, digital platform engagement and digital content, as well as pricing, in order to remain competitive in rough times.