Big brands are upset with China for rejecting middle-class luxury

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SHANGHAI / MILAN – Chloe Kou, a 26-year-old beauty brand marketing manager in Shanghai, won’t buy her usual “one or two” high-end handbags this year. Instead, he plans to save without spending and this is a problem for luxury brands.

China’s current zero-quad policy, its governing lockdown, restrictions and economic impact have had an impact on consumers’ financial security.

“Luxury clothes or handbags, I certainly think are unnecessary at the moment, [because of] Uncertainty surrounds my financial situation, ”Kou said.

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“I definitely feel the need to protect ourselves from this uncertainty around our economy,” he said.

If he is common to many young, urban, middle-class professionals in cities around China, it is bad news for luxury brands that have relied heavily on mainland China for tremendous growth in recent years.

Last year, the country accounted for 21% of the world’s private luxury goods market, behind North America and Europe, and is expected to become the top market by 2025, according to consultant Bain & Co.

As life returns to normal in many places, luxury sales have risen in recent quarters, especially in the United States, but declining sales in China have threatened the growth ambitions of luxury brands.

Executives at luxury companies ranging from LVMH to Swiss watches and Esti Lauder have admitted in recent weeks that their outlook depends somewhat on the length of the lockdown in China. However, the expectation of a rapid consumer bounce return – as seen after the initial COVID lockdown in 2020 – is common and there is a risk.

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“We are looking forward to a return, and we are ready for it. We bought inventory: We’re investing before the curve, “said Julie Brown, chief operating officer and chief financial officer of Barberry, this week.

Richemont chairman Johan Rupert, however, hit a cautionary note on Friday, saying he thought the Chinese economy would suffer for longer than many expected and that he expected consumer behavior to be more “conservative.”

“Even when China emerges from isolation, the bounce back will not be as rapid and immediate as we have seen in Europe and the United States,” he told reporters, adding that he expected several large companies to lay off people.

Like Richemont, Barberry – which collects about one-third of sales from Chinese buyers – says 40% of its retail network in mainland China is currently out of commission and online delivery has also been shut down as warehouses close.

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“We think it’s going to be a much better recovery,” said Imke Waters, a retail and consumer goods partner at consultant Oliver Weimann.

Middle class growth engine

Top luxury brands hit the market price last August after unveiling Chinese President Xi Jinping’s “general prosperity” policy to reduce income inequality. Middle-class Chinese shoppers were driving luxury spending, but now it seems, status symbols may be out of fashion.

Luxurious executives, however, said at the time that the policies could be more targeted at the super-rich.

“We see no reason to believe that this could be detrimental to the upper middle class, the wealthy, which is a large part of our customer base,” Jean-Jacques Guinea, LVMH’s chief financial officer, said at the time.

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Zero-covid, however, could pose a greater threat than general prosperity, as it could potentially affect most Chinese consumers – including luxury buyers.

It is difficult to predict when the current lockdown will end and when it will end.

But Alicia Garcia Herrero, chief economist at Natixis Asia-Pacific, said China’s long-standing growing middle class, a party now 400-million strong, was “clearly overwhelmed by the current epidemic.”

Young people have been disproportionately affected, says Ben Cavender, director of China Market Research Group.

“It’s not about buying things,” he said, adding that the balance of life and quality time with friends and loved ones could be more important than status-guaranteed luxury logos.

(Edited by Elaine Hardcastle)