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Hot Topic: China's luxury slowdown

2016 will be a crunch year for luxury brands when it comes to Chinese consumers’ appetite for high-end goods.

Fears of an economic slowdown in China, the devaluation of the yuan, and persistent turmoil in the stock market throughout January have grabbed media headlines, raising questions about the demand for luxury goods among Chinese consumers in the year ahead. 

Global Blue data for December shows Tax Free Shopping (TFS) spend by Chinese globe shoppers worldwide slowed to +16%, after a high of +42% in November. Despite concerns around Chinese luxury spending worldwide, however, there are positive signs for luxury brands in 2016, provided they respond to modern consumer preferences and behaviour.


Slower growth, continued travel

China’s economy grew 6.9% in 2015, following a 7.3% rise in 2014, according to the Wall Street Journal. Economists predict growth of more than +5% in 2016. ‘[This] may seem weak compared to the past, but it is still far above what other countries are experiencing,’ said Philip Guarino, European director at China Luxury Advisors.

‘More people are becoming part of the country’s middle class every day, and millions more Chinese are travelling abroad each year, learning about new brands and purchasing luxury goods,’ he added.

According to a Consumer Life survey by market research firm GfK, more than 109 million Chinese travelled overseas in 2015, up from 100 million the previous year. By 2020, this figure is set to rise to more than 200 million.

Travel bookings for the upcoming Spring Festival 2016 in February indicate strong demand from Chinese travellers. Online travel service Ctrip reports that more than 60% of those Chinese taking holidays during the festival will do so overseas. 


Spending in China

Despite expectations of a slowdown in global luxury sales and the impact Chinese consumers may have on worldwide sales, analysts at Goldman Sachs have backed the luxury market, upgrading investor advice on global luxury conglomerates LVMH and Kering, according to the Financial Times.

One of the themes driving Goldman Sachs’ endorsement of the global luxury market is spending in China.

Recent trading updates by luxury brands show a rebound in demand within mainland China. In Q3 trading, both Burberry and Richemont Group highlighted a reversal in the decline of luxury sales in China, attributed in part to a new breed of middle-class shoppers.  

Luxury spending in China should rise +6% in 2016, noted Goldman Sachs, the slowest rate since the Chinese luxury market opened up a decade ago, and less than the +10% growth reported in 2015.

Despite slower growth, the investment bank said: ‘The emerged and emerging middle class have a lower propensity to spend on luxury, but the desire for branded, status luxury brands remains unchecked.’

This means a greater focus on affordable luxuries to a more mass customer base, reducing the emphasis on status-driven purchasing. Three quarters of total growth in 2016 is expected to come from 70 million middle-class consumers in China with an annual disposable income of US$30,000-$65,000.

Chinese consumers are also starting to buy more frequently, something that should benefit brands with a strong footwear, cosmetics and ready-to-wear offering, said Paul Swinand, analyst at investment firm Morningstar.

‘We believe Chinese consumers will behave more like their Western counterparts, with more frequent lifestyle purchases of aspirational luxuries on a per household basis and fewer purchases of status symbol goods that were often a store of wealth,’ said Swinand. 


Chinese millennials

Chinese outbound travel is dominated by millennials. More than 50% of Chinese outbound travellers are aged between 15 and 29, according to GfK, while 37% are aged 30 to 44, and just 10% are aged 45 to 59.

The behaviour of millennial travellers differs from that of older generations. They are increasingly likely to be looking for travel and dining experiences as well as products, especially as their income rises. This has given rise to a number of designer brand/gourmet crossovers within mainland China itself, as well as in other Asia tourist hotspots.

Sharing on social media is central to any overseas travel experience for young Chinese travellers and is an opportunity that luxury brands are yet to fully leverage.

Luxury purchases remain a big part of overseas trips, with just over half (51%) of Chinese millennials aged 18-29 likely to buy luxury goods when travelling overseas, according to MasterCard research. This group is the biggest purchaser of luxury goods in Asia Pacific, and its members are set to spend an average of US$4,362 per head on luxury goods in 2016, twice as much as the average across nationalities.


Global Blue takeouts:

  • Despite concerns around Chinese luxury spending worldwide, there are positive signs for luxury brands in 2016, provided they adjust to modern consumer preferences.
  • A growing Chinese middle class and a shift away from conspicuous luxury consumption is opening up opportunities for affordable luxury goods purchases.
  • Chinese millennials are the dominant age group for overseas travel and for luxury goods purchases on trips.
  • Luxury brands should not underestimate the quickly changing behaviours and preferences of millennial travellers; a desire for unique cultural experiences combined with luxury lifestyle opportunities is high on their agenda.
  • 2016 is an important year for luxury brands as they re-examine how they engage with Chinese consumers both at home and abroad.