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Silk Road U-turn

10 April 2015 By Carol Ryan

A new Silk Road runs from west to east. For the past decade, luxury companies have rushed to cash in on China’s boom. But Erwan Rambourg’s prediction of the reign of Chinese shoppers is starting to look shaky just a few months after his “Bling Dynasty” hit bookshops.

Rambourg, an HSBC analyst, is bullish about the country’s prospects despite what he calls near-term challenges. He says the sector is undergoing “a once-in-a-generation transformation; no other nationality will influence luxury consumption as much as the Chinese in our lifetime.”

The United States was the top market for luxury in 2014 with 65 billion euros in sales, Bain & Co research shows. Japan was in the second spot, followed by Italy and France. China was fifth, with 15 billion euros of sales. But the ranking is deceptive as Chinese consumers shop abroad to avoid domestic taxes. They account for 29 percent of all global personal luxury sales and are propping up the market in Europe and the United States.

Rambourg says the bulk of future growth will occur mechanically. Over the next 10 years, he predicts that the number of luxury consumers in the People’s Republic – broadly, anyone who earns more than $30,000 a year – will double from 75 million to 150 million, while spending should triple. In this scenario, the Chinese will dominate the global luxury industry.

On paper, the figures back him up. China had 213 billionaires on the 2015 Forbes Billionaires List, second only to the United States. The exploding middle class points to a consumption bonanza.

But the reality has become more complex since the book was published in October. Sales growth of luxury goods in mainland China turned negative for the first time in 2014, Bain research shows.

Contrast this with Bain’s 2011 forecast for 30 percent sector growth and it’s clear just how much this former star market has dimmed. China’s 2014 GDP expansion of 7.4 percent was the country’s weakest since 1980 and spending by the super-wealthy on gift giving has fallen by a quarter.

Luxury executives point to factors like China’s anti-corruption crackdown, which has made government officials reluctant to display ostentatious wealth. But certain brands have been unscathed, suggesting other factors are also at work.

Ultra high-end labels like Hermes and Brunello Cucinelli are still seeing relatively strong sales. Meanwhile, “mega” brands that pursued breakneck expansion are faring less well. Prada pinned huge hopes on the Chinese market when it chose to list in Hong Kong rather than Italy in 2011. That bet has not come good yet. The Italian company’s sales in Greater China declined 7 percent in 2014. LVMH also reported negative sales in the region as Chinese consumers cooled towards flashier labels like its flagship Louis Vuitton brand.

Contrast this with LVMH’s performance in the United States where annual revenue jumped 8 percent. The United States is surprisingly underpenetrated, accounting for a quarter of global GDP but only 15 percent of luxury consumption.

Meanwhile, handbags and jewellery are facing increasing competition from high-end consumer electronics. The Hurun Research Institute’s latest report shows that Apple products became the luxury gift of choice in 2014, displacing Hermes which slipped to seventh place. Samsung also entered the top ten. Rambourg recognises this trend and says brands should be thinking more about “budget competition” from aspirational luxury labels and tech companies.

He also makes a brief reference to how the country’s political history has shaped its luxury consumption. More detail about this fascinating topic would have given deeper insight than can be gleaned from cold data. After decades of Communist Party rule, how is the country figuring out what denotes status? How does this help explain volatile demand for western luxury goods that has at times flummoxed non-Chinese executives?

The author doesn’t see Western luxury brands facing much local competition any time soon. For now, the “Made in China” label faces the biggest prejudice from Chinese consumers themselves. The Cultural Revolution undermined a history of refinement and craftsmanship, and domestic production is dominated by a mindset that meets expectations at low cost.

But Rambourg could be underestimating a market that has evolved at breakneck speed. The country’s art sector already shows a nationalistic streak, with Chinese collectors preferring ancient calligraphy and native artifacts.

There is no doubt that China will be a key market for luxury goods. But slowing sales and unpredictable consumption suggest luxury groups should be careful not to take the Bling Dynasty’s rise for granted.


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