China’s luxury goods market is expected to experience a boost in the upcoming second-quarter earnings season, offering a glimmer of hope for premium brands like Chanel and Louis Vuitton. While the focus has primarily been on the rising cost of groceries, luxury brands were actually early drivers of inflation, swiftly increasing prices shortly after the pandemic-related lockdowns took hold in the United States. Surprisingly, despite the limited opportunities to showcase these high-end products due to restricted social activities, expensive handbags and baubles continued to find buyers.
As restrictions gradually eased in the West, the demand for luxury goods gained even more momentum. Now, it seems that China’s affluent population is ready to follow suit, eagerly purchasing costly items both domestically and internationally. This surge in luxury spending comes just months after the nation relaxed its travel requirements.
According to HSBC analyst Erwan Rambourg, the upcoming earnings reports are expected to confirm the positive trend in the luxury sector. Rambourg highlights the escalating sales of airlines and the steady but still recovering luxury spending by Chinese tourists, which has yet to reach pre-pandemic levels. This news will be particularly reassuring for luxury brands, as some aspirational customers with more modest incomes have been deterred by rising living costs in the West.
Rambourg notes that despite a slowdown in the US and some normalization in Europe, overall second-quarter results are likely to demonstrate robust organic growth driven by increased sales in mainland China. The surge comes at a time when rising living costs in the West have dampened demand among aspirational shoppers.
While hopes for a swift economic rebound in China following Covid-19 lockdowns have diminished, the country’s wealthiest individuals show no signs of cutting back. Recent data on travel and tax-free shopping consolidate Rambourg’s optimism about the sector. In fact, earlier this year, he turned bullish on luxury brands like LVMH Moët Hennessy Louis Vuitton and Cie. Financière Richemont. LVMH has already reaped the benefits of affluent tourist spending in its most recent quarter.
In conclusion, the luxury goods market in China is projected to experience strong growth in the second quarter, offering a positive outlook for premium brands. Despite the challenges posed by the pandemic, Chinese consumers’ appetite for luxury items remains strong, both domestically and abroad. As the country’s economy continues to recover, there is potential for further expansion in this thriving sector.
Unleashing the Untapped Potential of Chinese Consumers
The spending power of Chinese consumers is being significantly underestimated, according to a recent analysis. Aneesha Sherman, an analyst at Bernstein, predicts that by 2027, premium consumers will make up 22% of the Chinese population, up from the current 18%.
However, not all Western brands in China are set to benefit equally from this trend. Mid-tier companies such as Under Armour and Skechers may face some challenges due to their positioning and retail presence, which are more focused on mid-tier consumers. This segment is expected to experience slower growth and fierce competition from leading Chinese competitors.
On the other hand, premium global sportswear brands have positioned themselves strategically to capitalize on this growing segment. Brands like Nike, Adidas, Lululemon Athletica, and running shoe brands On and Hoka, owned by On Holding and Deckers Outdoors respectively, have explicitly tailored their China strategies to cater to premium consumers. As a result, they are well positioned to benefit from the anticipated growth in this market.
Sherman reinforces her optimistic view on Nike and Adidas, stating that these brands will continue to target premium consumers in their location strategies, marketing initiatives, collaborations, and pricing strategies. By constantly premiumizing their offerings, these brands aim to attract a higher-end clientele.
In the race to tap into the purchasing power of the wealthy, the best approach is to join and sell to them.