A slowdown in luxury spending levels in China – What does it say about spending patterns among consumers?

Bloomberg News Online reported on December 17, 2013 that recent research done by Bain & Co. indicated that China’s average luxury spending levels have only increased by approximately 2.0 percent during 2013, as compared to the an average increase of 7.0 percent in 2012. The overall expectations for 2014 luxury spending are expected to remain at stable levels.

This recent revelation is perhaps not too surprising given that the Chinese government is clamping down hard on public excesses, and local government budgets have been severely trimmed following the Central Government’s moves to reduce spending levels. This comes after the new Chinese administration under President Xi Jinping, and Premier Li Keqiang has been appointed in April 2013, when there have since been moves made by top government officials to clamp down the flaunting of wealth in the public and other signs of extravagance, including organising expensive wedding dinners. The steps taken at the higher echelons of the government has so far been quite effective, except for some occasional lapses. The recent revelations coming from the recently concluded trials of former Chongqing city mayor, Mr. Bo Xilai has highlighted some of the issues pertaining to corruption and luxury spending among high rank officials, and the new Chinese administration appears to be mindful of the public image they need to project to the Chinese people in order to maintain stability, and civil obedience in the country.

Bloomberg News recently did an interview with the Chief Executive Officer of Moncler SpA (MONC), Mr. Remo Ruffini, and his company’s new debut on Italy’s Milan Stock Exchange on December 16, 2013. During the interview, Mr. Riffini indicated that he was seeing luxury spending levels continue to rise in emerging economies. The trends seen by Mr. Ruffini have prompted him to accelerate the Company’s plans in opening up more stores in the Asia-Pacific region, including Hong Kong. Moncler SpA has an existing flagship outlet in Shanghai, China, and looks to expand further into places such as Beijing, and the inner provinces. The Company is famous for its USD 1,220 quilted polyester jackets. With the new IPO debut in Europe, Moncler SpA followed both Salvatore Ferragamo SpA (SFER) and Brunello Cucinelli SpA (BC) in offering stock to the public as Asian demand for luxury goods fuels earnings growth and attracts global investors. The relentless spending coming from Asia-Pacific region appears to remain intact. Although the latest Bain research has indicated an expected slowdown in luxury spending levels among Chinese consumers in 2013, it appears that European luxury manufacturers are thinking otherwise, as they expand their influence across the Asia Pacific region, including places such as China, and perhaps Vietnam as well. Many luxury outlets have already been firmly established in cities such as Ho Chi Minh City and Hanoi, the country’s capital city.

According to Bain, the crackdown on extravagance and the anti-corruption drives initiated by the Chinese government has made a significant impact on the common practice of ‘gifting’, which has been one of the main engines of growth in the industry in the past, and accounts for the majority of the sales of watches and menswear during 2013. Bain’s research revealed that due to the latest crackdown coming from the Chinese government, the sales of luxury timepieces declined by 11.0 percent during 2013.

However, despite the slowdown in luxury spending in Mainland China, there has been a gradual rise in spending patterns among Chinese women where luxury spending levels coming from this segment rose by approximately 10.0 percent during 2013. Most of the spending by these Chinese women went into women’s wear, and shoes. This is also perhaps not surprising given that many Mainland Chinese women have gradually become a dominant gender in the country as the male population in the country starts to decline, and there have been a growing number of single Mainland Chinese women. Moreover, wages have increased and this has fuelled the levels of women spending power.

Regarding the subject of overseas luxury spending by Mainland Chinese, research by Bain & Co. revealed that Chinese consumers have turned to other countries to satisfy their luxury spending indulgences, and such trends have led to a slowdown in store traffic and openings in the Mainland. It is perhaps not quite surprising given the level of affluence we’ve seen among Chinese consumers, and their desire to search and purchase unique gifts outside of Mainland China. The art and collectibles market is perhaps an example of Mainland Chinese wanting to search for highly prized collections which will hopefully bring in greater returns if these owners were to sell them to auction houses for a much higher price.

The latest research by Bain & Co. has highlighted some of the limits of growth in the luxury spending market across Mainland China. It does provide a good source of reference among potential and existing luxury retailers in coming up with a strategic marketing plan in order to ensure the viability of their business in the country. However that being said, given the backlash directed by the central government on luxury spending among its officials, it remains to be seen whether the Chinese people will eventually alter their pattern of luxury purchases, and perhaps shop more in overseas markets. Despite the recent crackdown on public extravagance among Chinese government officials, not all it lost for many of the luxury goods retailers, given that there has been a significant rise in women spending power and this might impact some of the existing and planned marketing plans. However, if luxury retailers were to adopt a different mindset, and to tailor their marketing campaigns appropriately based on research and spending patterns, issues such as over expansion, wrong selection of target audience might set some of the luxury retailers back to the drawing board for further analysis and revamp of the marketing plans.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc