China ‘Kills’ Luxury: The Coronavirus May Have Changed Upscale Buying Forever
It looks like we can say good-bye to one old reliable pre-pandemic global trend. The days of China buying up all that bling are certainly over for now. If you’re a Louis Vuitton or a Burberry or TAG Heuer, it’s time to mine for new customers.
It was less than 12 months ago when Bain & Company put out this report on the luxury goods market. Here was their forecast at the time:
“Personal luxury goods would see sales growing at an annual rate of 3% to 5% through 2025, with that market size going from $310 billion in 2019 to as high as $425 billion in five years. By 2025, Chinese consumers will make up 46% of the global market — up from 33% in 2018 — and they will make half of their purchases at home in China — up from 24% in 2017.”
Here’s what that market looks like now. Pick a spot, and it’s pretty lousy thanks to the drop in the Chinese demand and the pandemic which began in Wuhan late last year.
In July, Burberry announced it would cut 500 jobs after Coronavirus lockdowns killed shopping on non-essentials. Their sales tanked 45% to $339 million in the first quarter versus a year earlier.
Burberry, which generates a large chunk of its turnover from big-spending tourists, has suffered mostly from European and U.S. sales. China sales have been improving in the second quarter.
Capri Holdings, the parent to Versace, Michael Kors and Jimmy Choo, saw sales drop to $451 million in its first quarter versus $1.35 billion last year. Michael Kors sales fell 68.7% to $307 million.
Like manufacturing, China remains the heartbeat of the market. When China falls, everyone does. It’s a totally unsustainable business model to make China your bread and butter.
The market is shrinking. It is now becoming an opportunity for sharks to buy up major brands. Everyone is looking at Millennials and their tastes. And some sectors are better off than others. Louis Vuitton: good. Watchmakers: not so good.
The China Impact
According to the Altagamma Foundation, Chinese nationals represent about 50% of demand for Swiss watches compared to about 35% for the rest of the luxury sector. Little wonder in 2020 Swiss watch exports have declined by 33% year-to-date, the sharpest and deepest decline in the last 20 years. Even in 2009, in the midst of the great recession, it fell by 23%.
The hardest blow was closing the borders. Hans Peter, a former CEO of Gübelin, one of the largest Swiss jewelry and hard luxury retailers, reckons that the impact on the industry, which derives about half of its sales from the affluent tourists from Asia, mainly China, could be prolonged.
“I am quite confident that the Chinese will eventually come back,” he says. “The question is…will they continue to shop as they did. It is quite possible that the Chinese government will encourage their citizens to buy luxury products increasingly at home.”
Astrid Wendlandt, author of the book “How Luxury Conquered the World” and a lecturer at the SciencePo School in Paris agrees, “They have duty free zones and then there’s Hainan – the new mecca of duty-free shopping for the Chinese.”
Giants, like LMVH, treat it as a cue to shrink in Europe and the U.S. and expand in China, but it’s a risky strategy. Peter says that, “not every brand is ready to be successful in China.”
The quality of the Chinese customer base is changing too. “They will be more educated, more demanding, less forgiving, less patient and less loyal. It is not just an adaptation to the new Chinese customer; it is actually an adaptation to the customer in general,” he says.
Peter singled out Parmigiani Fleurier, a high-end Swiss watch maker as one of the best at adapting to rapid change.
Davide Traxler, the new CEO of Parmigiani, luxury watch companies now must build a bridge between classic Swiss heritage designs and going after new audiences outside of the Western world of Wall Street and the C-suite and into fashion conscious new markets. His ‘crossover’ strategy for new models seems to have worked based on a Digital Luxury Group study that put them among the top three luxury brands most resistant to the pandemic.
Last year, they launched a first-in-the-world wristwatch with a perpetual Islamic calendar, ‘Hijri’, and Arabic calligraphy to lure luxury-buyers from the Middle East. Their new casual line called Tonda has watches priced over $20,000, but market analysts say the new style is going after “disrupters” and rich “entrepreneurs” rather than “old money” and the investment banker crowd.
They have also targeted new trends, particularly involving women. Expensive watches featuring fine jewelry have long been made to impress women, but were usually purchased by a man as a gift. Traxler bets on turning this upside down with women buying watches for themselves where it’s most convenient and comfortable — generally online or in luxury fashion stores.
“The industry has to realize that the times when luxury watches were ‘aristocratic boy toys’ for people signaling their social status and success has passed,” says Traxler, who was hired in 2018 to help the company to accomplish a successful turnaround.
Luxury lines are increasingly turning to experiential branding and – just as important – environmental issues. We have all seen teens with the $20 4Ocean bracelets made of recycled plastic. It’s not a luxury, but it’s a story. Attach a luxury feel to something like that and sell it for $2,000 and people will gobble it up.
According to Matter of Form, a London based business research firm focused on high end consumer goods, the experiential luxury market is growing faster than the personal luxury goods market.
China is Porsche’s biggest single market for the third year in a row, with the recent world premiere of the Porsche Macan held in Shanghai. The Porsche Experience Center Shanghai – the sixth worldwide and first in Asia – opened in 2018. Would-be Porsche buyers can book test drives via WeChat, and on-site there are racing simulators, off-road tracks and the ubiquitous fancy restaurant, and everything is geared towards sharing the experience with friends through social media posts.
In the past, it might have worked to have Tiger Woods wearing your watch (or in Parmigiani’s case Prince Charles). The market is too crowded now. Celebrity influence may have peaked, too.
For the world luxury execs like Traxler inhabit, there is quicksand under foot.
“What drives luxury is a feel-good factor. If you are very pessimistic about the world, you’re not going to indulge in luxury shopping,” says Wendlandt.
The Ex- Gübelin CEO believes that in a world of uncertainty and economic decline, the answer lies in appealing to people’s “feel good” sense of social and environmental mores.
“Brands must become even stronger in telling their story, in offering true values, in understanding the customer and its current sensibility towards issues of transparency, fair trade, and other issues,” Peter says.
For the brands selling mainly to local markets, the pandemic might only have a short-term impact. Global conglomerates like LVMH, Kering and Hermes have been doing better than Richemont, and smaller brands have had a hard time. Larger groups had the financial resources to cope, and are more diversified.
Of course tourists are missing in action. Travel retail sales are an important driver for the luxury industry as a whole. In Switzerland, about 50% of the total sales come from Asia buyers.
A shake-out in the luxury retail industry is expected. So are bankruptcies from luxury brands. The big question for this major market that employs hundreds of thousands worldwide is how long the situation will last. And once if it is over, will the Chinese still have the same buying behavior as they had before the crisis to help them recover?