China’s New Normal: Luxury Market Shrinks as Billionaire Base Expands

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Gucci China

Beijing passed New York as the new billionaire capital of the world in February. These Chinese billionaires are worth a third more today ($1.4 trillion) than they were just a couple of years ago. So why did China’s luxury market decline last year, according to a new report?

The much respected Bain & Co. reports that the size of China’s luxury goods market shrunk by 2% in 2015. Bain contributes the decline to anti-corruption campaigns, slower economic growth and a spectacular late-2015 stock market crash. Specifically, Bain noted the market shrunk from 55 billion yuan–75 billion yuan ($8.5 billion–$11.5 billion) in 2014 down to 34 billion yuan–50 billion yuan ($5.2 billion–$7.7 billion) in 2015. Specifically Bain singled out declining sales in men’s clothing, designer luggage and wristwatches. Luxury wristwatches in particular have become synonymous with government graft. Flight services for the high-flying rich have also been grounded. But to be clear, China is still the world’s luxury market leader.

And brands must come to terms with what appears to be the “China New Normal.”

Maybe the biggest cautionary tale in China is Prada: The brand added stores at a furious pace in the past few years, taking it eye off of its product line. In five years Prada nearly doubled its total retail stores, with a third of those in China. Last year Asia sales for Prada fell 16% and 2015 was its worst year in a half decade.

Burberry is fighting for Chinese customers in part by focusing on Japan, a new favorite destination of the more savvy spendthrift Chinese overseas traveler.

And Gucci—which has been forced to shutter more stores than it opens in China—has redirected attention to its actual product by shifting the focus its new collection to Asian themes by regional designers.

Business of Fashion recently named only three luxury brands as underexposed in China: Hermes, Michael Kors and Tiffany.

It doesn’t help that luxury brands are feeling the heat from below as well. H&M just launched its high-end Conscious Exclusive 2016 collection in Beijing. The collection does not retail for the bargain basement prices H&M gear is known for. Some items are selling for hundreds of dollars. But the collection’s highlights is in its “eco-friendly” materials, including recycled silk, linen, and glass as well as sustainable hemp.

As China luxury market watcher Jing Daily recently pondered, top-shelf luxury brands’ mixed communications about eco-friendliness and teaming with designers might cause confusion “as H&M’s catchy green campaigns join those of other high-end fashion houses catering to a growing number of Chinese millennials lapping up brands with CSR initiatives.”

One bright spot for luxury retail locations in China—but as a market wash overall—is a new tax on luxury products purchased abroad. These purchases—part of China’s multi-billion dollar grey market—accounted for over $7 billion in purchases in 2015. Buying on the grey market is currently popular because of how domestic taxes on luxury goods drive up prices inside China. This tax may even the playing field.

While wristwatches and luggage may be getting brutalized, some luxury automakers are basking in the spending glow. In March, Mercedes-Benz posted 26.6% YOY sales growth in China. Other luxury autos saw comparable happy numbers. Even Cadillac, a brand that’s struggled at times in China, enjoyed March YOY sales growth of 14%.

One luxury expense that remains popular is international real estate. With real estate accounting for a large amount of the total, Chinese investors dumped $30 billion into the US last year—twice as much as in 2014. Other property markets, such as in Vancouver, also saw a wild upswing in purchasing by Chinese luxury buyers. In Australia, China’s property buys jumped by 75%, reaching AU$24.3 billion ($18.6 billion).

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