For the first time in three years, Chinese tourists are boarding planes headed to the hotspots of Europe and Asia. And western luxury brands — which count on wealthy Chinese as a key client base — are hoping that they touch down with open wallets and a healthy appetite for expensive bags, watches and shoes.
It’s been a rocky few years for the Chinese luxury market. The industry took a deep hit in 2020 when the pandemic broke out, before rebounding domestically the following year, and again plummeting in 2022 due to renewed health restrictions and the resulting economic slowdown.
Now that Chinese nationals can again travel abroad — where roughly 70 percent of Chinese luxury shopping occurred before the pandemic — brands like Chanel and Louis Vuitton are hoping for a reset. While there is reason for optimism, as with several industries and trends in China, luxury shopping is unlikely to return to its pre-pandemic patterns anytime soon.
“I cannot imagine that the Chinese luxury market will go back to the trajectory it was on before,” says Z. John Zhang, a professor of marketing at the Wharton School. “A lot has changed: the real estate industry, the crackdown on tech companies, a lot of people’s income has come down, friction between the West and China.”
Blindly expecting [Chinese shoppers] will return to the stores and spend the same amount as before is naive.
Adam Knight, co-founder of Tong
Just how many of China’s big spenders return to luxury shopping will be key. The market has in the past been characterized by a relatively small number of people splashing a lot of cash. According to a survey by consultants Oliver Wyman, in 2021 some 5.4 million people — less than 0.4 percent of China’s population — spent a total of $39 billion on high end goods.
Many Western brands are highly dependent on this vast market. For example, companies like Zegna Group, the Italian luxury fashion house, and Swatch Group, the Swiss watchmaker, make more than 40 percent of their revenue in China. The country is currently the world’s second largest luxury market, and some analysts estimate it will overtake the U.S. to become the biggest by 2025.
The shoppers descending on the Zegna and Swatch stores represent a new wave of Chinese luxury consumers, who are disproportionately young — 40 percent are below the age of 25 — and are big spenders. A fifth of these new shoppers spend more than 20 percent of their income on luxury goods, according to Oliver Wyman’s data.
Courting these young Chinese consumers — with limited brand loyalty and few ingrained shopping habits — will require concerted effort. “You make your own luck,” says Adam Knight, the co-founder of Tong, an agency that helps global brands navigate the Chinese market. “It is a great opportunity, but you can’t expect it’s going to land on your lap. You have to do the legwork. Blindly expecting [Chinese shoppers] will return to the stores and spend the same amount as before is naive.”
One way brands have done that during the pandemic is by shifting operations to cater to Chinese customers shopping in their home country. Fifty-five percent of all global luxury retail store openings in 2021 were in China, according to data from Savills, a British real estate services company. And these openings extend beyond the famous shopping districts of Shanghai and Beijing. Last month, Hermes, the French luxury brand famous for making Birkin bags, for example, announced a new store in Nanjing, in eastern China, after opening new outposts in Wuhan and Zhengzhou last year.
Luxury brands have had to “adjust to Chinese luxury spend repatriation,” says Luca Solca, an analyst at the research firm Bernstein, adding that they have also “tooled up to serve Chinese consumers at home,” referring to the boom in online sales. Hermes, for example, has used WeChat to promote VIP experiences in China, and Tmall, the Alibaba e-commerce platform, to sell certain products like perfume and body lotion.
The focal point of the domestic Chinese luxury market, however, has become the south eastern island province of Hainan, a tax free zone. Hainan luxury sales increased by about 90 percent in 2021, according to Bain & Company data, reaching $8 billion, and the island is now home to the world’s largest duty free mall. Because Hainan offers similar prices to overseas without the hassle of cross continent trips, analysts such as those at Oliver Wyman expect many Chinese consumers to return, even after travel restrictions are lifted.
I expect the Chinese will most likely embrace a similar YOLO [you only live once] attitude out of the pandemic that we have seen in Europe and in the USA.
Luca Solca, an analyst at Bernstein
Broader economic forces, however, are creating uncertainty. The Chinese economy grew by just 3 percent last year, while the overall unemployment rate reached 5.5 percent in December, with nearly one in five 16 to 24 year olds now jobless. The Chinese government’s flagship common prosperity initiative — aimed at decreasing income inequality — could diminish some people’s desire for ostentatious designer goods, experts say.
“It’s actually difficult to predict what’s going to happen [in China]. What we can say about China is China needs economic growth. It’s no secret,” Bernard Arnault, chief executive of LVMH, the parent company of Louis Vuitton, said on an earnings call in late January. “[But] there are green shoots there in China.” Analysts appear to share that cautious optimism: consultancy McKinsey, for example, expects the sector to grow by between 9 and 14 percent this year.
Though luxury has been fairly resistant to geopolitical tensions related to China, cultural issues have wiped out business for some brands. In 2018, after Dolce & Gabbana, the Italian designer, ran a series of advertisements portraying Chinese models struggling to eat Italian food with chopsticks, the brand was accused of racism, and its sales took a steep dive in China.
Perhaps as a result of these cultural gaps, some consumers are turning to Chinese luxury brands, though the domestic industry is still nascent. “There is interest in local Chinese luxury brands,” says Imke Wouters, a Hong Kong-based partner at Oliver Wyman. “In a lot of sectors, there are good domestic options, but in luxury, there really aren’t.” Dior and Chanel, she notes, are still the two most desired brands by young luxury shoppers in China.
But the question many luxury brands are asking is, what will Chinese shoppers want as they come out of the challenging years of the pandemic?
The pandemic has taught everyone a lesson. It doesn’t matter if you have a Hermes bag in lockdown.
Z. John Zhang, professor of marketing at the Wharton School
Some predict they will behave much like the rest of the world, where revenge spending fueled the industry. “I expect the Chinese will most likely embrace a similar YOLO [you only live once] attitude out of the pandemic that we have seen in Europe and in the USA,” says Solca. “If this is the case, their luxury spend could rebound in the mid to high double digits, relative to fiscal year 2022.” Since the beginning of January, when China’s borders reopened, shares of LVMH and Richemont, the Swiss owner of Cartier, have surged by over 20 percent.
Others think after being cooped up at home for so long, wealthy Chinese may want to spend money on experiences and travel, not designer goods.
“The pandemic has taught everyone a lesson,” says Zhang, “it doesn’t matter if you have a Hermes bag in lockdown.”
Katrina Northrop is a journalist based in Washington D.C. Her work has been published in The New York Times, The Atlantic, The Providence Journal, and SupChina. @NorthropKatrina