LONDON — With waves of tense lockdowns and rounds of crackdowns on the tech, real estate and entertainment sectors in 2022, China’s personal luxury sales contracted for the first time in five years, a Bain report published Tuesday revealed.
The “Setting a New Pace for Personal Luxury Growth in China” report estimated that spending in the personal luxury space in China shrank by 10 percent in 2022.
Almost all luxury categories were impacted, but those with higher online penetration, such as luxury beauty, performed better than those with a smaller online presence.
The report said the watch market saw the sharpest decline, with sales falling by 20 percent to 25 percent from 2021. Fashion and lifestyle categories saw a 15 percent to 20 percent decline, while jewelry and leather goods performed slightly better, contracting 10 percent to 15 percent.
A few brands managed to stay flat or grew during the challenging market environment.
Bruno Lannes, senior partner at Bain & Company in Shanghai, said three factors contributed to their success. “First, bigger brands outperformed smaller players on average. Second, brands with iconic portfolios did better than those with trendy or seasonal merchandise and finally, brands with a higher concentration of Very Important Clients, or VICs, fared better.”
Bain said some brands achieved higher VIC sales than the global average of 40 percent in China, as the economic slowdown affected entry-level luxury consumers more than ultra-high net worth ones.
China’s thriving duty-free sector, which is mainly driven by a dozen malls on Hainan island, was also heavily impacted in 2022, with sales down 30 percent year-over-year to 35 billion renminbi, or $51.5 billion, the report said.
As a result of the decline, China Duty Free Group, the nation’s largest player in the market, and its affiliates have been aggressively pushing for domestic e-commerce options to offset declines.
Price hikes in the Chinese market have also helped some brands to recoup their losses. Brands’ efforts to harmonize the price between different markets pre-pandemic were thrown out of the window as China became isolated from the rest of the world in 2020. Only a few maintained a global pricing strategy during the pandemic.
The report found that there is a price gap of 25 percent to 45 percent between China and Europe in the leather segment and 25 percent to 345 percent in the jewelry and watches sectors. The price gap for entry-level products is larger than high pricepoint items.
With China reopening on Jan. 8, with all COVID-19-related rules being scrapped, Bain expects that growth in the luxury sector will resume in 2023.
“We believe 2022 was a reset, not a harbinger of more distress,” the report said. “The fundamentals of consumption in China are still intact. Compared to other emerging markets, China is a behemoth for luxury growth. It has a larger number of middle- and high-income consumers, and those populations are projected to double by 2030. In the mid to long term, ‘the next China’ is China.”
Weiwei Xing, partner at Bain & Company in Hong Kong, said with luxury consumption recovering as COVID-19 subsides, mall traffic improves and consumer sentiment rebounds, she expects to see “2021 sales levels sometime between the first and second half of 2023.”
The report also believes that Hainan will rebound and become a key travel destination again, even with the return of international travel.
For those who return to Paris, Milan and London from China, Bain urged brands to adapt and cater to their distinct shopping behaviors and preferences.
“Differences between the Chinese and global luxury market will widen, especially around digitalization, the retail environment, cultural references and relationships with brands. Brands that understand the nuances of the China luxury market will succeed over time,” the report said.
Xing also pointed out that “while optimism abounds, there are also risks. Brands need to resolve pricing gaps between China and Europe before international travel resumes. In addition, as more Chinese high-net-worth individuals are residing outside of China, luxury brands must deliver excellent experiences everywhere in the world.”