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Luxury goods ride out changing social habits in China

Consumption of luxury items dipped 2 per cent last year, but purchases by Chinese overseas grew 10 per cent


Date: March 23, 2016

Is the party over for bling in China? Or is conspicuous consumption ready for its second wind?

That’s the puzzle for companies that manufacture and sell luxury goods, as the market in China – a huge one for luxury brands – remains volatile and growth continues to slacken.

While the country’s economy expanded by 6.9 per cent last year, this was the lowest growth since 1990. The slower pace comes on the heels of an anti-corruption drive that began in 2012, which put a damper on lavish gift giving that is a business custom and building block for upward mobility.

“There was a big downturn last year. But I think the Chinese market is still growing because there is a huge middle class and they are the main consumers in China right now,” says Yi Zhao Eric Wang, a Vancouver-based personal stylist and brand consultant who works with Chinese and Chinese-Canadian clients.

Mr. Wang says the market is shifting from the practice of blatant “social gifting” – buying nice things for business prospects to curry favour – toward more nuanced consumption by middle class people, especially younger consumers.

Globally, luxury-goods companies haven’t done badly in the first half of this decade. The S&P global luxury index, made up of 80 of the world’s largest firms that make or distribute luxury goods, rose 16.84 per cent from January of 2010 to the beginning of 2015.

While this compares favourably with the S&P 500, which went up 14.54 per cent in the same period, the ride for luxury goods has been considerably more volatile.

In addition to economic winds, luxury companies can be affected by counterfeit goods, distribution problems and changes in public tastes.

In China, ultra-luxury companies such as LVMH Moët Hennessy Louis Vuitton SA, the manufacturer of Louis Vuitton luggage, showed declining sales in 2015. But other upper-mid-level brands such as Coach and Michael Kors appear to be doing better, Mr. Wang says. “Both are opening stores and growing aggressively.”

Market research shows how the luxury market is morphing in China. A survey by Bain & Co. of Chinese consumers found that while overall luxury consumption dipped 2 per cent last year, purchases of luxury goods by Chinese consumers overseas grew 10 per cent, with their spending in Japan up an astronomical 200 per cent.

According to the Bain report, which was released in January, wealthy Chinese consumers are relying less on daigou – overseas personal shoppers who buy and send luxury goods to them – and are making more online purchases from overseas websites.

“There are plenty of growth opportunities for those with more exclusive and fashion collections, digital platform engagement and digital content creation, as well as with pricing that encourages Chinese consumers to spend locally,” said Bruno Lannes, a Bain partner based in Shanghai and author of the report.

Social media is one of the best predictors of a rising brand in China, Mr. Wang says. “That’s not much different than in North America – you see Beyoncé wearing a type of high heels and everybody wants it. In China the effect can be 100 times more powerful.”

In recent years, consumer interest in leather goods had dropped in China but appears to be coming back, Mr. Wang adds. In some cases, companies have suffered because they have focused too much on the Chinese market and neglected their consumers in Europe, North America and elsewhere in Asia, he says.

Sometimes a luxury company simply needs to rejuvenate its brand. Mulberry, the venerable British leather goods firm, recently hired a hot designer, Johnny Coca, to kick-start the company, whose pretax profit for the year up to March of 2015 dropped to $8.6-million (Canadian) from $68-million in 2012.

Mr. Wang says another world-recognized company, Gucci, saw its sales suffer in China when consumers grew tired of its ubiquitous logo, which was being used on a large variety of goods. “Then they changed designers and sales boomed at the end of last year,” he says.

To determine whether it’s a good time to buy or not buy the stock of a luxury company that trades in China, “you really have to do your research about the company,” Mr. Wang says. “I think the most important part of the research is to look at the company’s digital platform. Online shopping is becoming an everyday thing [for Chinese consumers].”

The most lucrative target market in China is a group known as “HENRYs”, he adds. “It stands for High Earners, Not Rich Yet.”

He praises LVMH for coming back from sluggish sales with “a really good online shopping experience,” adding that some companies are adding new features such as digital models based on a customer’s measurements.

“They create an online person who will try on clothes for you,” he says. Companies that provide personalized service such as monogramming or hand-painting goods also do well, he adds.

And don’t count out Canadian goods for high status in China, Mr. Wang adds. “Canada Goose – it’s taking over the world.”

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