Earlier this year Merryn Somerset Webb wrote in the FT, “Most analysts are still unrelentingly optimistic about luxury goods sales in China. I really wouldn’t hold any stocks that reflect this view.’ It is true that the level of optimism around China has been subject to rumours in the last few months. Some have even suggested that the luxury boom is not only slowing down in China, but also returning to Japan! Prada’s new flagship store in the Ginza District of Tokyo certainly displays confidence in Japan’s future prospects.
After the GDP-growth rates of Q2 were released, these suspicions picked up some traction. China’s dropped to 7.5% – the lowest seen in 23 years. Japan on the other hand, perhaps on the back of pre-Olympics optimism and post-tsunami recovery investments, rose from 2.6 to 3.8 %. Whilst Q3 saw the tables turn slightly, with a rise in China and a steep fall in Japan, Merryn Somerset Webb seems justified in her concerns about ‘just how unbalanced the Chinese economy really is.’
But then again, how important is a country’s GDP where luxury is concerned? Arguably, the real factor is the disposable income of the middle class. At the rate it is going, “urban-household income will at least double by 2022” (Source: McKinsey & Co. 2013). With this in mind, a whole new sector of the Chinese middle classes is set to make its first luxury purchase within the next year. And no one needs reminding what a ‘whole sector’ might mean for a country of well over a billion people. As the McKinsey & Co. report concludes, “the upper middle class is poised to become the principle engine of consumer spending over the next decade.”
The topic of China was met with caution rather than serious concern by the luxury CEOs we contacted. As one commented, “Of course a sector like watches or jewelry has seen a change since the anti-corruption laws, but Tier Two and Tier Three cities are much less affected.” This acts as a reminder of just how large the Chinese market is. As the same CEO said, “Soon there will be around fifty major cities. Compare this to India where there are around five, or even the US where there are, say, fifteen. The sheer number of opportunities in China is incomparable.”
If there is no smoke without fire, then where is the smoke coming from, one might ask? It seems that the answer might be behavioural rather than economics-based. Chinese consumers appear to be undertaking changing attitudes towards excessiveness. Whilst luxury once served as a means of validating one’s affluence, status and new-age liberty, a new kind of consumer is arising. This group is savvier to fashion, more in-tune with subtleties and wants to express itself by the things it buys, rather than be defined by these products.
“Consumers have moved away from excessiveness. They are normalizing”
-Major Luxury Brand CEO
For this reason logo-centric brands (e.g. Louis Vuitton) are facing new challenges whilst smaller, versatile, and indeed cheaper brands (e.g. Michael Kors) are enjoying a wave of attention (Source: L2 2013). High street fashion brands like Zara are also thriving in the wake of this.
So does the Chinese luxury market lie in the balance? There might be more in this than immediately suspected. As we have mentioned time and time again, luxury relies on the balance between accessibility and exclusivity. At the peak of the luxury boom in Japan, many brands were in danger of losing control of this. Indeed the shift from Japan to China may well have been a blessing in disguise, allowing brands in Japan to readdress the equilibrium, reconsider their strategy and protect their heritages. The idea of luxury in China ‘normalizing’ might be the much-needed opportunity for brands here to do the same. Whilst the luxury market must expand to survive, digging in along the way is essential to guarantee stability in the long run.