It is hardly a coincidence that the explosive growth of China’s luxury retail industry coincided with a government-directed stimulus of 4 trillion RMB ($586 million) in 2009 to fund massive infrastructure projects.
Well known luxury brands such as Richemond, the owner of Cartier; Swatch Group, the owner of Omega; LVMH, the owner of LV brands; and PPR, the owner of Gucci and Bottega Veneta, have benefitted handsomely from the stimulus, witnessing 20-30% sales growth year over year in Greater China for the last 4 years.
Even that lofty growth figure does not capture the upward trajectory of the Chinese luxury market. Nearly 50% of such high end products are sold to Chinese nationals at shopping destinations abroad such as London, Tokyo, and New York. High-end Swiss watchmaker Richemond, with almost half of its revenue and an even higher portion of profits from Chinese buyers, is now effectively a China story.
Fiscal Projects and High End Retail Growth
While the $4 trillion of fixed assets investment successfully staved off a looming recession, the massive government spending also spurred an economy of corruption.
While many observers have noted that state cronyism has blossomed since Beijing’s mega-stimulus, few have analyzed the financial bubble that has been inflated by the corruption economy. Historically, China has always preferred fiscal rather than monetary expansionary policies.
That’s partially because of the culture’s empire-building mentality, but more importantly kickback and bribery opportunities abound as projects are allocated top down, from the state, to provinces, to cities, and ultimately to companies.
In comparison, other expansionary policies, such as tax or interest rate cuts, while benefiting the average Joe, hardly deliver those perks to the empowered, enfranchised and their affiliates.
Austerity Starves the Gift Economy
For multinationals doing business in China (and all emerging markets), policy changes are unavoidable risks that are confronted on a daily basis. With China’s new leaders, Xi Jinping and Li Keqiang, vowing to “clean house,” the corruption-inflated bubble is due for a correction.
Going into and throughout the Chinese New Year in 2013, austerity was the new sentiment for the government, as well as the average Chinese consumer.
The impact of the austerity measures has been felt acutely across all sectors in China,from upscale restaurants to luxury packaged tours and VIP room traffic in Macau casinos.
While it is impossible to obtain an accurate number on “gifting” as a percentage of the total luxury industry, we estimate that for certain items (such as high end watches and handbags) 40-60% of purchases are intended as gifts.
Declining Search Interest
Reliable data are hard to get in China overall, and luxury retail poses an extra challenge, since almost 50% of the purchases take place out of China. One way to circumvent these obstacles is to monitor the change in online searches for various brands.
Whether Chinese travel or buy the items at home, they are likely to research the products and similar brands online first. Our research thus far indicates a drastic slowdown in certain luxury brands inquiries.
China bulls would argue that a surging middle/upper class with increased purchase power will eventually more than offset the decline in luxury “gifting”.
This seems to be wishful thinking as the middle class in China is neither well defined nor thoroughly studied.
Ultimately, the middle class is a wild card, the realization of which is heavily, if not entirely, dependent on the government policies among China’s other “X factors”.
forbes.com
Well known luxury brands such as Richemond, the owner of Cartier; Swatch Group, the owner of Omega; LVMH, the owner of LV brands; and PPR, the owner of Gucci and Bottega Veneta, have benefitted handsomely from the stimulus, witnessing 20-30% sales growth year over year in Greater China for the last 4 years.
Even that lofty growth figure does not capture the upward trajectory of the Chinese luxury market. Nearly 50% of such high end products are sold to Chinese nationals at shopping destinations abroad such as London, Tokyo, and New York. High-end Swiss watchmaker Richemond, with almost half of its revenue and an even higher portion of profits from Chinese buyers, is now effectively a China story.
Fiscal Projects and High End Retail Growth
While the $4 trillion of fixed assets investment successfully staved off a looming recession, the massive government spending also spurred an economy of corruption.
While many observers have noted that state cronyism has blossomed since Beijing’s mega-stimulus, few have analyzed the financial bubble that has been inflated by the corruption economy. Historically, China has always preferred fiscal rather than monetary expansionary policies.
That’s partially because of the culture’s empire-building mentality, but more importantly kickback and bribery opportunities abound as projects are allocated top down, from the state, to provinces, to cities, and ultimately to companies.
In comparison, other expansionary policies, such as tax or interest rate cuts, while benefiting the average Joe, hardly deliver those perks to the empowered, enfranchised and their affiliates.
Austerity Starves the Gift Economy
For multinationals doing business in China (and all emerging markets), policy changes are unavoidable risks that are confronted on a daily basis. With China’s new leaders, Xi Jinping and Li Keqiang, vowing to “clean house,” the corruption-inflated bubble is due for a correction.
Going into and throughout the Chinese New Year in 2013, austerity was the new sentiment for the government, as well as the average Chinese consumer.
The impact of the austerity measures has been felt acutely across all sectors in China,from upscale restaurants to luxury packaged tours and VIP room traffic in Macau casinos.
While it is impossible to obtain an accurate number on “gifting” as a percentage of the total luxury industry, we estimate that for certain items (such as high end watches and handbags) 40-60% of purchases are intended as gifts.
Declining Search Interest
Reliable data are hard to get in China overall, and luxury retail poses an extra challenge, since almost 50% of the purchases take place out of China. One way to circumvent these obstacles is to monitor the change in online searches for various brands.
Whether Chinese travel or buy the items at home, they are likely to research the products and similar brands online first. Our research thus far indicates a drastic slowdown in certain luxury brands inquiries.
China bulls would argue that a surging middle/upper class with increased purchase power will eventually more than offset the decline in luxury “gifting”.
This seems to be wishful thinking as the middle class in China is neither well defined nor thoroughly studied.
Ultimately, the middle class is a wild card, the realization of which is heavily, if not entirely, dependent on the government policies among China’s other “X factors”.
forbes.com
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