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China’s recovery over the past year has not been as straightforward or as robust as the luxury sector had hoped. The initial optimism and revenge spending that followed the country’s reopening to the world in January 2023 have fluctuated, hampering the bounceback for brands.
From domestic pressures to global difficulties, a number of issues have weakened China’s consumer sentiment and are set to run into 2024. Externally: geopolitics alongside rising anti-Chinese sentiment, weakened global demand and the outbreak of wars, all point to continued fragility. While no official figures are published, youth unemployment remains an issue, coupled with an ageing population. The climate emergency and frequency of extreme weather events also pose a threat.
The property sector has a big influence on sentiment in China, says Daniel Zipser, senior partner at McKinsey. Unlike many other parts of the world, the majority of personal assets in China are in property and the country has been grappling with a liquidity crisis since mid-2021. “People put their money in property, not as something to live in, but something to invest in. As a result of that, there’s so much personal wealth tied to the property market,” he explains.
People are less worried about defaulting on their mortgage repayments than they are about the value of their assets depreciating. Faced with this, their savings are staying in the bank. The World Bank estimates that China has the highest savings to GDP ratio among large economies. “They’re not spending because they’re very uncertain about the future. There are massive questions of the property market and transactions have completely collapsed as a result of people wondering what happens with their personal wealth,” Zipser says.
The outlook isn’t all bleak. Overall, the unemployment rate is low and wages are on the rise. Governments, banks and regulators have taken a number of steps during the past year to bolster the economy — eager to keep it on track to meet its projected 5 per cent growth goal. Figures released by the National Bureau of Statistics on 17 January show that GDP grew 5.2 per cent year-on-year. “Macroeconomic-policy easing has been supporting the recovery in the short term,” confirmed Mara Warwick, World Bank country director for China, Mongolia and Korea, in a statement in December.
Meanwhile, the latest China economic update released by the World Bank outlines that policies to liberalise housing registration, among others, could encourage households to save less and spend more.
Last month, Mintel’s monthly Chinese consumer spend tracker, which surveys internet users aged 18 to 59 in 12 cities, ticked upwards after staying flat for six months. “Our latest data tells us that consumer confidence started to improve again in December,” says Mintel category director Laurel Gu. “This coupled with other officially released stats (for example, retail sales saw accelerated growth in November 2023) suggests that the fiscal stimulus is taking effect, and this is a positive sign to start 2024.”
Chinese consumer spending on personal luxury goods reached $59.2 billion in 2023, up from $31.5 billion in 2019, according to market research provider Euromonitor. Fflur Roberts, global head of luxury goods at Euromonitor, says the future for luxury goods in China looks bright. “Luxury sales in Mainland China are set to rise by 12 per cent in 2024, while outbound spending from international trips is predicted to more than triple by the end of this year,” she outlines. This trajectory is set to remain for the short to medium term, albeit at a slower pace of growth — reaching $88 billion by 2028.
Bain reports that by 2030, Chinese customers will account for 35 to 40 per cent of the personal luxury goods market; the same as Americans and Europeans combined.
Despite this changing economic landscape, consumer perceptions of luxury brands are particularly stable, according to Kantar’s 2023 BrandZ Luxury report. “The strongest brands continue to leverage their relationships with consumers to justify increasingly high price points,” says Kuzak Park, group research director for Kantar in Greater China. Consumers are still demanding the latest trends and fashions. “Brands offering more up-to-date designs and visible quality signals — classical elegance, great workmanship and materials — are proving most popular.” The leading brands in terms of consumer brand equity (or the brands most desired by consumers) remain Chanel, Dior, Hermès and Rolex.
On 18 January, Richemont reported that sales in Mainland China, Hong Kong and Macau were up 25 per cent year-on-year in the quarter ending 31 December. In an analyst conference call in November, Richemont chairman Johann Rupert outlined his analysis of China’s outlook: “I am not pessimistic about the Chinese market. We are just cautious because Chinese consumers are more rational. When people act rationally, they are less likely to spend money.”
Securing repatriated spend
China is now in a new normal, and experts predict that domestic spending will remain higher than it was pre-pandemic. “After three long years of domestic luxury shopping, new-found shopping habits, and major improvements in local shopping options and the customer journey, are set to stick. A notable share of luxury purchases by Chinese customers will continue to occur within the Mainland,” says Roberts.
A number of challenges (slow issuing of visas, reductions in flight capacity and costs) limit the return to pre-pandemic outbound travel, which currently sits at around half of 2019 levels according to McKinsey. In 2024, Zipser expects this to increase. By the end of the year, the country’s aviation regulator hopes to have 6,000 international flights a week (around 80 per cent of the total before Covid).
Meanwhile, domestic travel has already rebounded to surpass 2019 levels, according to McKinsey, and trips to Macau, Hong Kong and Taiwan are approaching pre-pandemic figures (at 83 per cent of 2019 levels as of September 2023). China’s domestic destinations underwent an upgrade with huge investment into tax-free havens like Hainan or ski destinations that have encouraged local exploration and confidence. Euromoniter expects overall luxury sales in Mainland China to rise by 12 per cent in 2024, while outbound spending from international trips is predicted to more than triple by the end of this year.
Claudia D’Arpizio, senior partner and global head of fashion and luxury at Bain, says the top challenge and objective for luxury brands is attracting the repatriated spend in China from shoppers that used to buy goods in Europe. “It’s difficult to hook them in China due to price differences, but also because they usually don’t live in the big cities where there is a lot of variety.”
Analysts concur that China’s shoppers are increasingly discerning. According to research carried out by VF Corporation, 76 per cent of its consumers intend to decrease the number of impulse purchases they make in 2024. “This trend challenges brands to provide better value to consumers while at the same time provides a good opportunity for brands that are focused on product, design and innovation to stand out,” argues Winnie Ma, VF’s president of the APAC region.
Experts predict that there will be a continued shift in focus from product to services in 2024. In particular, high-net-worth individuals (HNWIs) — who account for 80 per cent of consumption in China despite making up only 0.3 per cent of the population — seek one-of-a-kind experiences. “There is an increased interest in service and a renewed interest in experience coming up again after Covid and after the release of the [zero Covid] measures,” says Bain’s D’Arpizio.
“Consumers in China now are placing an even-greater emphasis on service consumption compared to goods,” says Elisa Harca, co-founder of marketing agency Red Ant Asia. “People are increasingly seeking high-quality service experiences,” she says. “They want enriching experiences across the board — from food to travel.” The Shanghai food scene for one is “booming with interesting new concepts”, such as Yuangu Yunjing in the city’s French Concession.
Social value has become an important purchase-making factor, especially for younger shoppers in China. In 2023, Euromonitor found that 33 per cent of Gen Z consumers make purchasing decisions based on the social and political beliefs of brands and companies. “Embedding social values into communication strategies has helped many brands [with their] image transformation,” says insights manager for health and beauty at Euromonitor, Yang Hu. She points to C-beauty giant Proya, founded in 2006 and based in Hangzhou, as a strong example of securing social value. For over three years, the company has been promoting gender equality by making brand films addressing “girl power”. This has enabled it to “successfully transfer its brand image onto young consumers”.
This comes down, in part, to the fact that people “need emotional bonding more than ever”, Ma continues. “Therefore, this means that marketing campaigns that are authentic and speak to people’s emotional needs can make real connections with consumers, and thus resonate with them much better.”
Immersive cultural retail
The younger generation continues to show a growing appetite for luxury brands that incorporate traditional Chinese cultural elements to satisfy their pride in the past and nostalgia. New immersive models such as the “Bookshop-style culture space” have become a notable touchpoint for retailers. “Culture can bring sustainable commercial values, and culture-led spaces are advantageous when it comes to storytelling. Brands and products that are empowered by art and culture justify the ‘value purchase’ and ‘price premium’,” says Harca.
Shoppers now expect to step into a venue and be “transported into the very essence of a brand, a visceral expression of its DNA”, she explains. Examples include Aesop’s in-store women’s library on Dongping Road, Shanghai in March 2023 that featured more than 10,000 books by women for women. In April, fashion group Icicle launched an organic fabric-themed bookshop.
Chinese traditions, from Hangzhou embroidery to local arts like ceramics, jade carving and sculpture, have become a focus for luxury companies. But, it’s no longer enough for western brands to mix their own aesthetics with China’s storied heritage. “The current consumer has become quite savvy in detecting whether a product has authenticity or not. I think the key storytelling elements have to come from an authentic place or root,” says Ning Yuan, founder of luxury silk brand Ning Dynasty.
2024’s Lunar New Year Jade collection from Loewe, featuring master carvers and fronting from global brand ambassador Yang Mi, is an example of how to get it right. The campaign includes a documentary with T Magazine China, as well as a conversation series set in various cities that taps historians and cultural influencers, alongside the “jade masters”.
Instagram content
The live streaming opportunity
Live streaming is ingrained in the Chinese shopper’s psyche. During 2023’s Double Eleven shopping event — a local 24-hour shopping festival that indicates sentiment — traditional e-commerce dipped slightly, but live streaming surged by 20 per cent and accounted for one-fifth of the total gross merchandise value (GMV), according to McKinsey’s Zipser. Of the top 58 Tmall or Taobao live-streaming channels (each with over RMB 100 million in GMV), over 60 per cent were operated by brands rather than KOLs (key opinion leaders).
There are plenty of opportunities for luxury to crack the sector, like big-scale events or simple engagement with consumers. Yet, underneath the impressive GMV figures, there are several challenges and concerns for luxury brands, including maintaining equity and ensuring ROI on hosts.
“Live streaming (along with short video) are known to be the best medium for delivering authentic and immersive experiences to consumers,” says Kantar’s Park. Viewers not only want to see product reviews and unboxings, he says, but also browse content that helps them understand the story behind the brand. Content should not be a hard sell, he advises.
Jack Porteous, commercial director at culture agency Tong, agrees that 2024 will see a focus on content over discount-driven strategies, as well as a dip in third-party hosts, such as KOLs. “Players are heavily investing in brand-owned live streams on platforms like Douyin. Category managers in there advise brands that a ‘healthy’ sales mix for the platform would be 40-40-20 split between in-house streaming, third-party streaming and ad-driven sales,” he says.
Dior has found particular success on the app with in-house live streaming, prioritising real-time interaction and unique offers via their membership programme, says Porteous. The maison has also taken regular “show-streaming” to new levels: it live streamed its Autumn/Winter 2024 show in Shenzhen on eight platforms, clocking up over 130 million views. Elsewhere, Zara’s upmarket soft launch on Douyin at the end of 2023 was well received and could offer pointers to brands daunted by the format. Running for five hours, it used catwalks, walk-throughs of the fitting room and makeup area, and behind-the-scenes views to create a tailored experience for audiences. It was less about conversion, more about creating an online space for brand fans to mingle.
Also emerging is a companion to the quiet luxury craze: “quiet selling”. Porteous describes this as “a less flashy form of live streaming”. He says this is a nascent trend and predicts it will remain strong throughout 2024.
Sustainability considerations
In many areas, China is gearing up for a greener lifestyle — it accounts for 30 per cent of global electric vehicle sales, according to Kantar. However, China is also home to companies Shein and Temu, whose ultra-cheap products and business models have upended and pressurised the global fast fashion industry.
The EU continues to tighten regulations that target fashion’s environmental and social impact, which will have big implications on Asia’s supply chains in 2024. Shifts in mindset could also act as a wake-up call. Responding to a survey by Deloitte in 2023, 73 per cent of Chinese consumers said they are willing to pay a “green premium” for more sustainable beauty products, and 67 per cent said this of fashion and footwear. According to Mintel, Chinese consumers are increasingly aware of climate threats. “[Because of this] we believe they will make more sustainable purchasing choices in all walks of life,” says Gu.
Groups such as Kering and VF Corp have well-established and active ESG strategies in China. Chinese consumers are increasingly embracing a sustainable lifestyle as a rational way of living, says VF Corp’s Ma. “They believe that it serves the greater good and, more importantly, enhances their personal life by bringing joy and better experiences.” These ethical consumers are not willing to compromise on style, but rather demand added value and elevation. “As they place greater emphasis on the practicality of apparel and footwear, sustainable items must provide tangible benefits for the wearer to enhance their overall experience. Including elevated comfort, enhanced functionalities,” says Ma.
While there is a greater need for authentic marketing and promotion about the topic, especially given the interest from the younger generations, Porteous has a warning for brands. “Various studies have shown that consumers remain sceptical of greenwashing, so any efforts to burnish green credentials in 2024 must be backed up evidence, and not risk hard-earned consumer trust in the brand.”
Across the board, agility will be essential to compete in China this year. “This is the number one thing I would say about operating in 2024,” says Ian Hylton, CEO of Xiamen-based brand Ms Min, which is gearing up to open its first Paris Fashion Week showroom. “It’s the ability to turn on a dime because things are ever changing and hard plans are never set. There needs to be an openness and the ability to react — to the good and the bad.”
Key takeaway: Despite a patchy rebound post-Covid, dampened consumer sentiment and caution, China will remain a growth engine for luxury in 2024. A huge advantage is that there’s a strong desire for luxury products, yet very little on offer from local brands. That doesn’t mean global luxury players can rest on their laurels: Chinese shoppers are becoming more discerning. Providing enriching experiences, backed up by authentic marketing, will be central to success.
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