Big brands are worried about China as the middle class rejects luxury

An empty road is seen in the Shanghai Central Business District (CBD) during lockdown amid the coronavirus (COVID-19) pandemic, in Shanghai, China, April 16, 2022. REUTERS/Ali Song/

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SHANGHAI/MILAN (Reuters) – Chloe Ko, a 28-year-old beauty brand marketing manager from Shanghai, won’t buy her usual “one or two” luxury handbags this year. Instead, you plan to save rather than spend, which is a problem for luxury brands.

China’s current non-proliferation policy, with its attendant closures, restrictions and economic impact, has affected the financial security of consumers. Read more

“Luxury clothes or handbags, I certainly think are unnecessary at the moment, [because of] “The uncertainty about my financial situation,” Koo said.

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“I definitely feel that we need to protect ourselves from this uncertainty about the economy,” she said.

If it’s typical of many young, urban middle-class professionals in cities across China, that’s bad news for luxury brands that have relied heavily on mainland China for stellar growth in recent years.

Last year, the country captured 21% of the world’s personal luxury goods market, after North America and Europe, according to consultancy Bain & Co. It is expected to become the largest market by 2025.

With life returning to normal in many places, luxury goods sales have surged in recent quarters, most notably in the United States, but declining sales in China threaten luxury brands’ growth ambitions.

Luxury executives from LVMH to Watches of Switzerland and Estee Lauder have admitted in recent weeks that their forecasts depend to some extent on the length of the lockdowns in China. However, the expectation of a rapid consumer rebound – as we saw in 2020 after the initial COVID shutdown – remains prevalent and risky.

“We’re expecting a rebound, and we’re ready for it. We’ve bought stock: we’re investing ahead of the curve,” Julie Brown, Burberry’s chief operating officer and chief financial officer, said this week. Read more

But Richemont’s chairman, Johann Robert, made a cautious note on Friday, saying he believes the Chinese economy will suffer for longer than many expect, and that he expects consumer behavior to be more “conservative” going forward.

“Even when China comes out of isolation, the recovery will not be as quick and immediate as we have seen in Europe and the United States,” he told reporters, adding that he expected a number of major companies to lay off employees. Read more

Like Richemont, Burberry — which gets about a third of sales from Chinese shoppers — said 40% of its retail network in mainland China is currently not operating, and online deliveries have halted as warehouses closed.

“We think it’s going to be a much bumpier recovery than before,” said Emke Waters, retail and consumer goods partner at consultancy Oliver Wyman.

mid-tier growth engine

The market value of top luxury brands was hit last August after Chinese President Xi Jinping’s “shared prosperity” policies were revealed to reduce income inequality. Middle-class Chinese shoppers were driving luxury spending, but now it seems that status symbols may be outdated.

However, luxury executives said at the time that the policies were likely to target the wealthy more.

“We don’t see any reason to believe this could be detrimental to the upper middle class, the wealthy class, which is the largest part of our client base,” said Jean-Jacques Guyonni, LVMH’s chief financial officer at the time.

However, the lack of COVID could pose a greater threat than shared prosperity, as it is likely to affect the majority of consumers in China – including potential luxury shoppers.

It is difficult to determine the extent of the likely economic damage or to predict when the current lockdowns will end and whether they will be the last.

Alicia Garcia-Herrero, chief Asia-Pacific economist at Natixis, said China’s long-bragged rising middle class, now numbering 400 million, “is clearly caught up in the current pandemic.”

Young people have been disproportionately affected, said Ben Cavender, director of the China Market Research Group, with rising youth unemployment, another issue for luxury brands that have voraciously sought out Chinese consumers for free-spending Generation Z in recent years.

“It won’t be about buying things,” he said, with a balance of life and quality time with friends and loved ones likely to take a head start on luxurious slogans emphasizing status.

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Editing by Eileen Hardcastle

Our Standards: Thomson Reuters Trust Principles.

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