Why China’s luxury market is stronger than ever after Covid-19 pandemic
- China’s luxury sector shrank last year amid citywide lockdowns, but years of self-imposed isolation have given rise to a more sophisticated domestic market
- The big question for Hong Kong is how it can lure mainland shoppers who have more compelling options for luxury purchases at home
Global sales surged 17 per cent year on year, with fashion and leather goods – the company’s biggest division – up 18 per cent. Yet, while sales in the United States rose 8 per cent, revenues in Asia excluding Japan increased 14 per cent, compared with an 8 per cent contraction in the final quarter of 2022.
The outperformance of Asia stems almost entirely from the reopening of China, which accounts for roughly 80 per cent of LVMH’s business in Asia. Since early October, the share price of LVMH has soared 47 per cent.
The Covid-19 pandemic has accelerated and accentuated trends that are reshaping the global retail landscape. Although China’s luxury sector shrank 10 per cent last year because of citywide lockdowns, three years of self-imposed isolation have given rise to a more mature and sophisticated domestic market.
The mainland’s share of Chinese luxury purchases surged from a third in 2019 to more than 90 per cent in 2021. The repatriation of spending has led to far-reaching changes in shopping behaviour and preferences.
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This underscores the pivotal role played by bricks-and-mortar stores. While digitisation in China is high and rising, most luxury categories’ online penetration rates are quite low. This is because physical stores – which have faced an existential crisis in Western economies because of the far more disruptive impact of e-commerce – continue to be the main channel for purchases and brand building.
CBRE also found that 71 per cent of respondents from mainland China planned to open new stores, the highest percentage in Asia. Although China’s retail market is experiencing a surge in new supply this year, partly thanks to the end of pandemic-induced disruptions, there is still a scarcity of prime shopping space in many emerging Tier 1 cities.
The investment is part of Swire’s strategy to leverage its brands in China and its expertise in experiential retail to exploit consumer spending power in key cities. “We were lucky to find suitable land parcels at prime sites last year where we can develop large-scale landmark developments,” said Han Zhi, director of retail at Swire Properties in Hong Kong.
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Still, Hong Kong has enduring strengths, particularly its status as a global financial centre and its strategic location. From a real estate standpoint, the city is also much cheaper than it once was, with prime high street rents more than 40 per cent below mid-2019 levels and more than 60 per cent down from the 2013 peak.
“Retail affordability has improved a lot,” said Marcos Chan, head of research at CBRE in Hong Kong. “It’s a good time for brands to expand their footprint in order to lock in lower rents.”
The big question for Hong Kong is how successful it will be in luring mainland shoppers who have more compelling options for luxury purchases in their domestic market. China’s reopening has just got under way, but the luxury market is stronger than ever.
Nicholas Spiro is a partner at Lauressa Advisory