For a sign of the strength and importance of China’s luxury goods market, look no further than LVMH. The world’s biggest luxury group published its first-quarter revenues on April 12.
Global sales surged 17 per cent year on year, with fashion and leather goods – the company’s biggest division – up 18 per cent. Yet, while sales in the United States rose 8 per cent, revenues in Asia excluding Japan increased 14 per cent, compared with an 8 per cent contraction in the final quarter of 2022.
The outperformance of Asia stems almost entirely from the reopening of China, which accounts for roughly 80 per cent of LVMH’s business in Asia. Since early October, the share price of LVMH has soared 47 per cent.
China has long been a luxury behemoth. No other country has such a large and rapidly growing base of upper-middle and high-income consumers. Bain & Company, which expects China to overtake the US to become the world’s biggest luxury market by 2025, says that in the medium to long term, “‘the next China’ is China.”
The Covid-19 pandemic has accelerated and accentuated trends that are reshaping the global retail landscape. Although China’s luxury sector shrank 10 per cent last year because of citywide lockdowns, three years of self-imposed isolation have given rise to a more mature and sophisticated domestic market.
The mainland’s share of Chinese luxury purchases surged from a third in 2019 to more than 90 per cent in 2021. The repatriation of spending has led to far-reaching changes in shopping behaviour and preferences.
The results of a survey conducted by Oliver Wyman revealed that half the 1.5 million luxury spenders in 2021 were new to the market, many of them aged 18-25 who had only begun shopping for luxury goods in the previous 12 months. These “Gen Z” spenders, moreover, put a premium on the store experience, maintaining more frequent contact with sales assistants from their preferred brands than shoppers over the age of 25.
“The Chinese luxury market is a very young market [where] shoppers have close relationships with sales assistants. This is a key differentiator,” said Imke Wouters, partner, retail and consumer goods, at Oliver Wyman in Hong Kong.
This underscores the pivotal role played by bricks-and-mortar stores. While digitisation in China is high and rising, most luxury categories’ online penetration rates are quite low. This is because physical stores – which have faced an existential crisis in Western economies because of the far more disruptive impact of e-commerce – continue to be the main channel for purchases and brand building.
Furthermore, local brands’ investments in customer experience and service during the pandemic have paid off. A report published by McKinsey in December noted that “consumers are choosing local brands for their quality and innovation and not just for cheaper prices, or out of a sense of national pride”.
All this has huge implications for the retail property sector. At a time when Asia’s commercial property occupier and investment markets face significant headwinds, mainland Tier 1 cities were the preferred destination for retailers seeking to expand across the region, the findings of a survey published by CBRE in January showed.
CBRE also found that 71 per cent of respondents from mainland China planned to open new stores, the highest percentage in Asia. Although China’s retail market is experiencing a surge in new supply this year, partly thanks to the end of pandemic-induced disruptions, there is still a scarcity of prime shopping space in many emerging Tier 1 cities.
Last October, Swire Properties teamed up with China Tourism Group Duty Free Corporation – the world’s biggest duty-free operator – to develop a resort-style premium retail complex in Sanya, the linchpin of Hainan’s efforts to position itself as an international luxury hub.
The investment is part of Swire’s strategy to leverage its brands in China and its expertise in experiential retail to exploit consumer spending power in key cities. “We were lucky to find suitable land parcels at prime sites last year where we can develop large-scale landmark developments,” said Han Zhi, director of retail at Swire Properties in Hong Kong.
The rapid development and increasing sophistication of mainland China’s luxury market pose a challenge to Hong Kong. While demand from mainland tourists was already tapering off in the years preceding the pandemic, the retail experience on the mainland has improved substantially in the past several years.
Survey data from Oliver Wyman in 2021 revealed that 70 per cent of overseas travellers would continue shopping in Hainan even when cross-border travel resumed, mainly because of lower travel costs. Hainan also vied with Hong Kong as a top destination for shopping.
Still, Hong Kong has enduring strengths, particularly its status as a global financial centre and its strategic location. From a real estate standpoint, the city is also much cheaper than it once was, with prime high street rents more than 40 per cent below mid-2019 levels and more than 60 per cent down from the 2013 peak.
“Retail affordability has improved a lot,” said Marcos Chan, head of research at CBRE in Hong Kong. “It’s a good time for brands to expand their footprint in order to lock in lower rents.”
The big question for Hong Kong is how successful it will be in luring mainland shoppers who have more compelling options for luxury purchases in their domestic market. China’s reopening has just got under way, but the luxury market is stronger than ever.
Nicholas Spiro is a partner at Lauressa Advisory