Bain estimates that Chinese luxury sales are set to return to 2021 levels between the first and second half of this year. VICs, the duty-free market and global pricing strategies will be key factors impacting the rebound of China’s luxury landscape.
In the past year, various cities in China experienced varying degrees of lockdowns due to the country’s strict COVID measures. Consequently, consumer activity was severely limited, and storefronts were unable to operate as per normal.
According to Bain & Co.'s latest report, China's personal luxury market contracted by 10 per cent last year as a result. Performance of most luxury brands across all categories experienced its first major decline in five years.
In terms of categories, watch sales fell the most, by approximately 20 to 25 per cent year-on-year compared to 2021. Categories with higher online penetration, on the other hand, were more resilient during the lockdowns. Luxury beauty, with its 50 per cent online penetration, only contracted 6 per cent in 2022. Other categories have a level of online penetration ranging from 10 per cent to 15 per cent.
Most brands saw their performance decline over the past year. However, there were still some brands that managed to maintain their performance or even demonstrate a small increase in sales.
“Three factors contributed to their success – first, bigger brands out-performed smaller players on average; second, brands with iconic portfolios did better than those with trendy or seasonal merchandise and finally, brands with a higher concentration of Very Important Clients (VICs) fared better,” said Bruno Lannes, Senior Partner at Bain in a statement.
The majority of the pandemic measures were lifted following a significant shift in China's COVID policy. With the reopening of China's borders, a gradual rise in leisure outbound travel from China is expected. In this context, Bain forecasts that Chinese luxury market sales will return to 2021 levels between the first and second half of 2023.
Long-term, the fundamentals of Chinese consumption remain strong. The population of middle- and high-income consumers is expected to double by 2030, reaching a total size of around 500 million. While India and Southeast Asia might be emerging luxury markets, the sheer size of the China luxury market makes it unique and of great strategic importance. “’The next China’ is China,” Bain states.
Bain also delves into three key factors that will impact the comeback of China's luxury market: the growth of VICs, duty-free markets, and global pricing strategies.
According to the study, 2 per cent of consumers account for approximately 40 per cent of the global luxury market. Over the past year in China, brands have been focusing more on VICs to ensure revenue levels. The reason for this is two-fold – besides purchase intentions of entry level consumers being impacted by the economic slowdown, new customer acquisitions have also been limited as a result of lower foot traffic at offline touchpoints.
As domestic travel in China recovers, Hainan will continue to be a top location for Chinese consumers seeking luxury products at more competitive prices. Leading Chinese retailers, including Wangfujing Group and Swire Properties, have announced plans to establish new duty-free projects on this tropical island.
Duty-free sales in Hainan fell by 30 per cent to 35 billion RMB in 2022, a far cry from the Hainan government's target of 100 billion RMB. Despite this, Hainan's traveller spending per capita has increased by 8 per cent year-on-year.
Over the past year, in order to address the decline in domestic travel, Chinese travel retailers such as CDFG (China Duty Free Group) have also started capitalising on discounted duty-paid e-commerce. CDFG has since launched its e-commerce business on digital platforms such as WeChat and Douyin. According to the company's financial report, the duty-paid business accounted for 40 per cent of its results in the first half of 2021.
Because of the overall decline of global travel retail over the past three years, CDFG has risen to the top spot among global travel retailers in terms of sales with its offshore duty-free business in the last year, surpassing leading retailers such as Dufry and Lotte.
Bain also points out that following the outbreak of COVID, some luxury brands put their global pricing strategies on hold. These days, the price differential for entry-level products in Europe versus China ranges from 35 to 45 per cent (before accounting for value-added tax), while a gap of 25 to 35 per cent is observed for footwear. Brands should reconsider price harmonisation measures as outbound travel resumes in order to protect brand equity across markets.
Despite the rather optimistic projections for the Chinese luxury market in 2023, some risks remain.
For one, some Chinese HNWIs are heading to countries such as Singapore and Hong Kong, and brands must consider the consequent pullback of the luxury market in mainland China.
At the same time, given the investment in customer experience and service that luxury groups have made in mainland China during the pandemic, Chinese consumers now have even higher expectations. With the return of leisure travel, brands need to ensure a level of consistency in the consumer experience everywhere in the world.
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