This is the Year of the Rooster, which in the Chinese zodiac is also seen as exorcising evil spirits. And the New Year already seems to be working its magic on the luxury sector, which is beginning to see a rebound at last.
To be accurate, signs of a turnaround actually started to emerge in the last quarter of 2016, as Chinese consumers at last began to open their wallets once again.
“Global demand from Chinese clientele started to pick up in the third quarter, then accelerated further in the fourth quarter with growth in the mid- to high-single digits,” said Thomas Chauvet, managing director for luxury at Citi. “At LVMH, at Kering, Chinese demand overall has recovered and is firmly on track going into 2017.”
Luca Solca, managing director, head of global luxury goods at Exane BNP Paribas, said in his report “The Red Dragon Comes Back” that a recent trip to China suggested “that Chinese demand is in good shape and even Hong Kong seems to be finally turning a corner. Consumer tastes and priorities are evolving fast, Chinese brands are emerging in the premium and bridge segments, digital is roaring in consumer goods and digital luxury should take off, while physical retail networks are being rationalized to increase space productivity. China and the Chinese should make a good contribution to global luxury spend growth in 2017.”
Related Galleries
However, he urged companies to continue investing in brand development, product innovation, digital penetration and retail optimization as the Chinese market “remains the fastest paced and most demanding in the world.” Solca said that BNP regards the Swatch Group (with a 47 percent sales exposure to China); Burberry (40 percent); Compagnie Financière Richemont (36 percent), and Prada (35 percent) “given their exposure, as best positioned to benefit from this trend.
“Chinese authorities are likely going to be supportive of the economy and demand, as the five-yearly party conference is scheduled for autumn 2017,” continued Solca. He saw risks for the sector in 2017 as “political in nature. We think that the most important risk is by far an outright falling out in the Sino-American relationship, as this would likely puncture — as a third level effect — the Chinese consumer feel-good factor. A U.S. border adjustment tax, if somehow agreed with major trading partners like China, would be a negative — but of a significantly smaller magnitude.”
Citi’s Chauvet said that a return to growth in Mainland Chinese sales has largely been driven by factors that encouraged consumers to repatriate purchases, such as a weaker currency, efforts by brands to reduce the price gap between Asia and Europe, cutting prices in China and stricter enforcement of import duties when bringing luxury goods into the country.
However, he said, “Europe remains the cheapest place to buy luxury products, so at the moment, when Chinese tourists are ready to come back to Europe, this has a really positive impact on overall luxury demand.”
Flight reservations from China to Europe were up 68.5 percent compared with 2015 for the lunar New Year holiday from Jan. 18 from Feb. 1, according to travel intelligence firm ForwardKeys.
In Paris, “there is a sense that the Asian market is back with visitors from Japan increasing as well as Chinese,” said Christophe Laure, president of UMIH Prestige, the French trade association for luxury hotels. Luxury hotels in the City of Light saw a 25 percent drop in visitors from China in 2016 due to the terrorist attacks in Europe. Based on January’s results and reservations for the coming months, Laure estimates that the overall number of visitors to high-end hotels will be up 10 percent year-on-year in the first quarter, even if traffic has yet to bounce back to its 2015 peak.
“Inside that growth, we can safely say there is a strong increase in the Chinese segment,” he said. Security fears had been the principal issue keeping away Chinese tourists, but greater visibility of security forces are helping to make visitors feel safe. The Feb. 3 machete attack near the Louvre seems to have had “no impact” on reservations, according to Laure.
According to “Chinese Luxury Demand Momentum: A few original data points” conducted by Contactlab in collaboration with Exane BNP Paribas and presented this week in Milan, China represents around 16 percent of the total luxury business globally. The amount Chinese consumers spent on luxury goods grew by about 10 percent in 2016 compared with 2015, and 2017 is expected to continue to increase, the study said.
Chinese customers who buy locally represent 30 percent of the global luxury market. The study highlighted that shopping is increasingly consolidating locally, despite higher taxes on luxury goods in Mainland China. In the last quarter of 2016, local spending grew 25 percent compared with the same period in 2015 and double-digit growth locally is forecast for 2017, too.
“China is and will be for the next years the leading driver in the luxury sector,” said Marco Pozzi, senior adviser of Contactlab, and author of the study. He emphasized the strong digitalization of the country with increased penetration of the e-commerce channel. “For this reason, it is surprising that some of the main luxury brands still do not have a direct e-commerce channel, including Hermès, Louis Vuitton, Gucci, Prada and Tiffany.”
Actually, Gucci is launching its online store this year. Gucci president and chief executive officer Marco Bizzarri said business in China was “flying” in 2016. He attributed this to the brand’s “change of direction” under creative director Alessandro Michele. “Also, we satisfy the Chinese consumers’ desires and need for service. Now they want the story, the connection, the contact. And people buy more locally now.”
He said it was important to be able to attract the new, younger generation that has spending power. He admitted “Hong Kong was slow for a while” but it has “picked up and we had a strong rebound of local customers.”
Stefano Cantino, group strategic marketing director of the Prada Group, said, “China has started to grow again from the third quarter,” attributing this to a focused strategy on the territory for the Prada and Miu Miu brands, “against the background of a general positive trend due to the ‘shopping repatriation.’”
Cantino said the company has paid increased attention to each market and a “rebalancing” of prices that has reduced the difference [between countries], favoring local purchases.” Also, a new retail concept for both brands that offers “a new and exclusive shopping experience to customers increasingly more demanding has been very much appreciated.”
The company said it plans to roll out its e-commerce platform “giving priority to China, Hong Kong and Singapore with the objective of achieving global coverage within two years.”
Mario Ortelli from AllianceBernstein said he continued to see positive trends in Mainland China in 2016 and in the last quarter of the year. In 2017, for Greater China, “we expect the Year of the Rooster will usher in a rebound in Chinese spending.”
Ortelli attributed this to “improving consumer sentiments as Chinese consumers are more accustomed to volatility and uncertainty, continued repatriation of luxury spending back to China, minimal pricing cuts and moderation in the anticorruption campaign.”
There are even positive signs in China for luxury watches, which have dragged for the last few years to the point that some brands were either buying back excess inventory from retailers or literally destroying watches and breaking them down into their component parts. “We expect a strong finish to the reporting year for Richemont as we see the Chinese New Year [Jan. 28] sales to be particularly strong due to repatriation of sales back to Mainland China as well as waning anticorruption sentiments,” Ortelli said.
The industry is slowing down on the maturation of China, and the development of the online channel is decreasing the need for marginal stores, said Ortelli, who expects “reengineering” of the store network to continue over the next several years.
“Tier-2 Chinese cities have high store counts for the relative opportunities in these markets. While stores in these locations tend to offer inexpensive rents, being overstored in these cities represents a risk to perceived brand exclusivity and many companies have already declared the intent of net store closures in the Chinese market, including Louis Vuitton, Gucci and Burberry,” he said.
Huishan Zhang, a young Chinese designer who shows in London and manufactures his collections in China, said “Chinese consumption was never really ‘down’ — the Chinese consumer is always looking for new and exciting things, and today they have more choice than ever. I think that foreign brands are increasingly listening to the local Chinese market; they are relating to the customers. They are marketing from the inside out — rather than the other way around. China is changing so quickly and the sophistication of the Chinese shopper is much higher today than it ever was.”
Zhang, who is based between both countries, emphasized that it is important to get one’s marketing strategy right. “My collections sell at the department store SKP, and I am building a market with them. They have local expertise — even I need that. Every time I go to Beijing, I listen to what’s happening on the shop floor. I listen to customer feedback. I’m learning about the local lifestyle in Beijing — when and where do those customers travel? I want to be able to deliver the right product at the right time.”
Wendy Yu, a Chinese investor based between London and China, said the changes in Chinese consumer spending are due to a few factors. A big one, she said, is the government tax on spending abroad. Chinese tourists can’t bring more than 5,000 yuan, or about $725, worth of purchases home to China. Anything more and border officials will confiscate it as the government wants to encourage spending in China.
Yu said that in addition to the government tax crackdown, luxury brands such as Chanel have brought their Chinese pricing in line with that of other countries, so there is no incentive for the Chinese to hunt for bargains in Europe.
“They’ve made it easier to shop in China — there’s no longer a huge difference now with pricing, and you can have access to all the local customer services. The brands that are in China are focusing on bespoke experiences, such as personalization, monogramming and drawing,” she said. “They’re spending huge amounts on marketing and they’re respecting the Chinese market more and more.”
Yu added that the big brands such as Burberry, Dior and the other LVMH Moët Hennessy Louis Vuitton labels are going the extra mile for their VIP customers, with personal shopping events and “special experiences.”
Erwan Rambourg, managing director at HSBC in Hong Kong and the cohead of Global Consumer & Retail Equity Research, said China now is “booming for luxury, which sounds strange. Generally speaking, the entire luxury sector is picking up.”
He said there was a period of about 12 months between the summer of 2015 and the summer of 2016 when the Chinese “weren’t contributing much, they were pretty much flat year-on-year, linked to psychological issues.”
Many executives would point to August 2015 “as being the real step down because that’s when you had the steep deterioration of the renminbi that sent a message to wealthy consumers that the outlook was a bit blurred and obviously purchasing power took a hit and then you had a whole series of threats to travel — Paris, Brussels, geopolitical concerns in Asia, in Europe with the elections in Austria and the U.K., and a very intense campaign in the U.S.,” he added. “It basically just boils down to the reality that there was no rationale to purchase luxury products. The only rationale to purchase luxury products is what the company calls the ‘feel good’ factor. Well, you had a good period of time when people weren’t feeling good about themselves.”
Ivano Poma, founder and ceo of Retail Outlet Management, also pointed to a narrowing price difference between China and other markets as brands increasingly align their global pricing structures. “And you know, my old boss Victor Fung [Li & Fung] called it the wealth effect. The stock market goes up and things [stabilize]; you tend to spend more because you feel richer. And vice versa, you have things deteriorating even if it’s not touching you, it’s touching your perception. Chinese consumers are very price sensitive so they know exactly — and with today online you can check a bag in Florence and get somebody to ship it to you — now daigou is no longer that easy. They compare Florence with Milan with Paris with Korea with Japan and China. In China, you have the full collection.”