China, luxury remains weak. Limited effect from incentives

China disappoints expectations and postpones the resumption of luxury shopping until a later date. The incentives launched by the Beijing government, in this sense, will help but will not be decisive. And the return to growth could materialise in two to three years.

The decline emerges, as always, from the accounts of the luxury bigwigs: Lvmh archived the first nine months with -2% to 60.7 billion also due to consumer confidence in China, which cfo Jean-Jacques Guiony described as "at the lowest since the pandemic"; Ferragamo posted revenues of €744 million for the nine months, down 9.8% at constant exchange rates and 11.9% at actual exchange rates, with "the lower consumer propensity to buy, most evident in the Asia-Pacific region, representing the factor that has most affected sales performance," said CEO Marco Gobbetti.

While luxury has for years identified China as a golden goose, in the wake of staggering growth and projections that still see it as the world's leading market for luxury goods, the situation at the end of 2024 is that of a country that consumes fewer luxury products or at least chooses different ones than in the past and buys them very often abroad, where the price is lower: the domestic market is weighed down by the consumption crisis of the middle class, that of aspirational consumers, whose confidence has been sank by the bursting of the real estate bubble, despite the fact that Chinese GDP reached +5.3% in the first quarter of 2024. Chinese tourists, now concentrated in neighbouring countries such as Singapore and Japan, are the only ones pushing purchases, taking advantage of the favourable exchange rate.

The confirmation comes from analysts: "2024 has turned out to be a complex year for the luxury market in China, marked by a double-digit contraction compared to 2023," explain Filippo Bianchi and Veronique Yang, both managing director and senior partner of Bcg. "Domestic demand for luxury goods remains weak, while demand across borders is growing in triple figures, driven by the exponential growth of tourist flows (120% in the first quarter of 2024) and favourable exchange rates in Japan and South Korea. Narrowing the focus on purchasing behaviour and consumers, the drop in spending motivated by the real estate crisis, but also by the rise in the prices of luxury products, is flanked by what Bianchi and Yang define as "a real paradigm shift: while the spending of the aspirational segment continues to contract, high spenders are increasing their spending by 15%, concentrating on categories considered as 'refuge', i.e. those goods perceived as durable and with a high investment value, and making increasingly well-considered purchasing choices that are less influenced by the fashions of the moment".

The package of measures launched by Beijing, first with the September rate cut and then with the debt increase to provide further support, announced a few days ago, may not be enough to revive domestic luxury consumption, which the central government had always invested in with its 'common prosperity' policy. For Bcg's Bianchi and Yang, 'the measures will have a mixed effect and may not be enough to revive aspirational consumer spending. Luxury goods consumption may therefore continue to grow abroad, while domestically, the recovery is likely to be slow and concentrated mainly among high spenders'. According to Carole Madjo, head of European Luxury Goods Research for Barclays, "it is still too early to judge the effectiveness of the stimulus, but we do not expect it to lead to a drastic change in consumption, as consumers are likely to use savings from lower interest payments to repay their mortgages early or save for future use, considering macroeconomic volatility". In the report 'On the road in China' published in September, Madjo's team speaks of a third quarter 2024 with sales declines ranging from -10% to -50% depending on the brand, and a horizon for recovery that, according to some of the 60 interlocutors we met on site, for mainland China would be shifted to 2027, when the Chinese luxury market growth will return to high single digits. "Weak consumer demand in China, but also in the US and Europe, is the main challenge facing brands today. An improvement in consumer sentiment, especially in China, will be the catalyst that should lead to a return to growth," Madjo continues.