SHANGHAI — Despite fears of a slowdown in the growth of China’s luxury retail sales, there’s still plenty of optimism about business prospects for 2012, the Year of the Dragon.

This story first appeared in the February 7, 2012 issue of WWD. Subscribe Today.

Though China’s economic growth rate is expected to slow this year — the Organization for Economic Cooperation and Development is forecasting that China’s annual gross domestic product growth rate will slip to 8.5 percent, the lowest pace in 11 years — analysts said this was an inevitable decline after years of blockbuster gains. Two weeks ago, China said fourth-quarter GDP fell to 8.9 percent from 9.1 percent in the third quarter.

 

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The extent to which that impacts luxury goods remains to be seen. Aaron Fischer, CLSA’s Hong Kong-based head of consumer research, recently told WWD that over the past 12 to 18 months, many top international luxury brands have grown anywhere from between 40 and 80 percent; in some cases, sales have doubled.

“We definitely can see that growth is going to slow down. There are valid concerns about the property market and the stock market, exports and things like that, but at the same time, other structural things are in place that will support demand, so I think the sales of luxury goods will slow down but aren’t going to go anywhere near negative or collapsing,” Fischer said.

According to Isabel Cavill, a senior retail analyst with Planet Retail who specializes in the global clothing and luxury retail markets, China’s retail market as a whole in 2012 and 2013 will grow at a rate of 14 percent, and luxury retail will continue to grow at an even higher rate of 20 percent over the same period.

“You’ve got to take into account with luxury in China that because it’s still quite an aspirational market, luxury brands still tend to be seen as a status symbol,” she said.

In October, Bain & Co. estimated that luxury consumption by Chinese people, factoring in spending both in Mainland China and spending by Chinese tourists abroad, accounts for just over 20 percent of the global luxury goods market, which was on track to total 191 billion euros, or $241.7 billion at current exchange rates, for 2011.

Irene Yu, a business analyst at China Market Research, said she doesn’t see demand for luxury goods leaving China so much as migrating inland, away from the traditional centers of spending power.

“We see the fastest growth in luxury spending shifting away from first-tier cities like Shanghai to second-tier and third-tier cities, like Chengdu, where incomes are rising and there is massive pent-up demand,” Yu said.

A significant percentage of China’s luxury retail dollars are spent offshore, with wealthy visitors to Hong Kong, Europe and America shopping up a storm to escape the Mainland’s prohibitive value-added tax on imported goods. A lowering of the VAT could be a game changer to the luxury retail scene in China, and some believe that may come as early as this year. China’s VAT on luxury products can range from the standard 17.5 percent to more than 50 percent.

Byron Kan, general manager of Shanghai Centre, a lifestyle and retail hub in the city’s central Jing’An District, with tenants including Tom Ford, Miu Miu, Salvatore Ferragamo and Christian Louboutin, is expecting an announcement from the Chinese government amending the VAT “very soon.”

“Right now, there are two factions inside the government who are arguing about this — there is the tax bureau that wants to keep this import tax high, supposedly to support the local fashion industry, then there is the commercial bureau, who are saying that it doesn’t matter, because if you keep this tax high, people aren’t going to decide not to buy international brands, they’ll just choose to buy them in Hong Kong,” he said.

Philip Mok, an analyst at Phillip Securities in Hong Kong, agrees that the Chinese government will make a move to increase consumption in 2012, in part to shield the country’s economy from the effects of the euro zone debt crisis and a continuing slump in the U.S. economy, both of which have led to a decrease in China’s manufacturing output. He is not confident, however, that a change in the taxation system will be a boon to international luxury brands.

“There are always rumors that the Chinese government will amend its tax policy in order to boost the expenditure of Chinese citizens,” Mok said. “There are many categories of VAT and an adjustment may happen in 2012, but I don’t think it’s very likely to have a huge benefit to the luxury goods sector.”

One seemingly unlikely source of benefit to the luxury retail market in China has been the softening property market and changes to property ownership laws, restricting the practice of “flipping” investment properties.

“The housing policy restricting housing purchases means it makes sense for people to spend their money on other products for investment purposes,” said Maureen Fung, general manager in the leasing department at Sun Hung Kai Properties, which owns the Shanghai IFC luxury mall. “For example, watches have been appreciating in price over the past few years, so people are looking at this as a good investment. This may bring a good shift of money to the luxury market that would previously have been spent on property.”

Both Tomas Meier, creative director of Bottega Veneta, and Vittorio Missoni, chairman of his family’s company, said they haven’t seen evidence of Chinese luxury customers pulling back.

“There is a slowdown in China’s economy, but not in luxury for us, as there is a pickup in understated luxury products. It was much more bling at first, but now it’s changed: There is a lot of demand from a sophisticated customer who is looking for a very strong cultural heritage, quality and tradition, and all more understated,” Meier said.

Similarly, Giorgio Armani said he plans to continue investing in China by opening a significant number of stores in the future.

Patek Philippe chairman Thierry Stern voiced a more cautious stance on the country. He described the watch firm’s Chinese clientele as “massive,” but at the same time stressed that it is important for luxury brands not to focus too much on China.

“What if China closes [its borders]? You should be careful. If China does that, there will be a lot of brands that will be in big difficulties. For Patek, I am not willing to take this risk. China is a good market, but it’s not the only one. And we should not count only on them. We should respect them, but we should not only send everything to China,” he said.

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