China's Luxury Goods Market May Escape the Worst of the Global Economic Crisis(1)
As the effects of the economic crisis ripple across the global economy and demand for expensive products plummets, luxury brands face gloomy prospects in North America and Europe. Except in China which saw 15% retail sales growth in Q1, consumer spending is in sharp decline as consumers retrench, look for value in their purchases and cut back on non-necessities.
The second half of 2009 does not present much hope for a rebound. Global luxury spending rose 6.5 percent in 2007 before slowing to 3 percent . Growth in mature markets such as Europe, Japan, and the United States suggest flat or negative growth in 2009.
In the face of reduced demand, luxury brands like Gucci are turning to China as a potential stronghold for consumer spending in 2009. Like the rest of the world, China is feeling the effects of the economic crisis, and real estate and exports have all taken a beating.
But consumer spending in China remains strong as CMR MD Shaun Rein wrote in BusinessWeek recently.
China’s $586 billion USD stimulus package which is designed to encourage consumption will also help maintain luxury sales. If luxury brands focus on the desires of Chinese consumers, they may be able to use China as a haven even as other markets falter.
Successful luxury players
Many key luxury players reported strong sales performance in China in 2008, despite the global downturn. For example, LVMH Moet Hennessy Louis Vuitton SA (LVMHF.PK) reported “very dynamic” growth in China, led by strong numbers from its leading brand, Louis Vuitton. According to LVMH’s 2008 Annual Report, worldwide, China became the second-largest customer base for Louis Vuitton. In addition, LVMH’s wine and spirits brands, which have been struggling in other markets, enjoyed “exceptional” growth in China last year, with particularly strong performance from cognac maker Hennessey. China was the largest market for Hennessy cognac last year. Furthermore, in November 2008, LVMH reported that Parfums Christian Dior experienced “excellent” double-digit growth in China through the third quarter. And in its selective retail division, LVMH attributed the recent strong performance of duty-free retailer DFS Group LP to continued expansion of Chinese clientele.
Even though Gianni Versace SpA has had management control issues recently, they are still upbeat on China. Versace is also optimistic about China’s prospects and is focusing efforts on China growth in the coming months, including by opening new boutiques in China in 2009. The company expects Asia to surpass the United States as its second-largest market in 2009, driven largely by growth in China.
China sales also boost the Gucci Group (GUCG.PK). Gucci Group’s global 2008 sales were up about 8 percent over 2007, with the highest growth rates coming from Asia and led by China. According to a 2008 annual report, Gucci’s sales in Greater China grew 42 percent over 2007. Last fall the company said it expected steady consumption growth in China and other emerging markets and would likely continue to prioritize these areas
Reasons for luxury’s success
Consumer spending-and demand for luxury goods-has remained strong in China for several reasons.
Consumer optimism
First, Chinese consumers--especially consumers in their mid-twenties to mid-thirties--are optimistic. In the last several months, the China Market Research Group (CMR), has conducted what we believe is the most extensive consumer insight research in China by interviewing consumers in Beijing; Chengdu, Sichuan; Fuzhou, Fujian; Guangzhou, Guangdong; Shanghai; and Xi’an, Shaanxi about how they have adjusted or are planning to adjust their spending because of the economic crisis. 70% consumers said that they will spend more in the next 6 months than they did in the previous 6. Optimism remains high with a full 80% saying they have the full trust that the Chinese Government will implement the policies needed to invigorate the Chinese economy.
A middle class that wants to spend
China’s young, emerging middle class is beginning to equate accumulation of possessions and leisure opportunities with quality of life, and it is this group that is largely responsible for China’s falling savings rates and rising consumption rates, especially in major cities. group have also been instrumental in driving the growth of the luxury market within China, as they try to display their success and status with luxury hand bags and high-end mobile phones, such as those made by UK-based luxury phone maker Vertu (a Nokia subsidiary). This group remains optimistic about its future. Much of China’s middle class has little to no stock market exposure, and those with experience expect that the market will rise again. The group also expects 10-15 percent annual salary increases and strong economic growth over the long term. despite the short-term difficult job market.
Superrich still spend on luxury
Global slowdown in demand and slowing exports from China are unlikely to change the lifestyles of China’s superrich, another key consumer group for the luxury market. Versace is counting on this, as described above, as is high-end luxury retailer Hermès. Hermès has seen sales drop in Japan, where many of its customers are middle class. In China, where Hermès customers mainly come from the superrich consumer group, sales have not shown any impact of the downturn thus far. The Asian region, excluding Japan, posted 21 percent growth through the third quarter primarily because of increased demand in China. Hermès is bullish on China, and last September announced its plans to open three to four more stores in China each year for the next three years.
Trust in the government
In general, Chinese consumers trust the PRC government to make sound policy decisions regarding the economy. Whereas in the United States there is little faith that Congress will respond adequately to the economic crisis, Chinese consumers are extremely confident in the government’s ability to respond to economic strain and stimulate growth.
