The Chinese economy has awarded great advantages over the last ten years to companies producing fashion and luxury, enough to produce record profits and imply the shifting of the markets towards the east, where the most important investments have taken place, both in terms of distribution network expansion and advertising and publicity spending.
This span of time has been witness to an arms race between the leading fashion and luxury brands, intent on opening single-brand boutiques and sales points in department stores to take advantage of the growth in local business.
What is different today? Careful analysis reveals that the eagerly awaited empire of luxury has begun to slow its ascent, following a sharp weakening of the Chinese economy, which has grown only 7.7% this year, its weakest showing in 22 years.
Many analysts expected decisive action from the government, as had happened in the past, but it never came. In fact, towards the end of 2009, the Chinese government was able to fight the international economic crisis with a stimulus package worth more than 3 trillion RMB, and once it hit the market it generated enough liquidity to support the country and China closed 2011 with a growth rate of 9.3%.
And this year China’s companies registered the most progress, easily entering the double-digits and surpassing the numbers of 2010 by 30 to 40%.
Such growth, however, cannot be based on constant figures and this has created a deviating prospective for future development, especially for the fashion and luxury industry.
In 2012, and in June in particular, the market determined that the fashion and luxury sector has lost its position of dominance in the stock market and the high expectations of growth, led by the positive results of past years, rapidly fell apart.
Tiffany & Co., for example, launched its first profit warning over the summer, cautioning the world that its own growth outlook had been revised, caused primarily by the slowdown in the Chinese market.
In September, Burberry further fanned the panic when, contrary to the customary good news, they were forced to revisit their predictions, causing a sharp drop in the stock value of the British group that propagated the pessimism surrounding the fashion and luxury elite.
Chinese business, until just a few months ago, was the driving force behind growth for all of the competitors, but today it has become a source of concern and has shattered the ambitions of the most prestigious brands, who had planned on boosting their margins with profits generated in the Middle Kingdom, where import duties and luxury taxes keep them under pressure.
The negative market sentiment can be clearly seen in the words of Swatch CEO Nick Hayek, who stated in September that his group would have to work hard to reach their projected goals.
The reassuring words of the CEO of Hermes in previous weeks, declaring that their 2012 target would remain unchanged, were not enough to reassure the market and analysts were not convinced, sending the company’s stock to its lowest value in 15 months.
The luxury market is now no longer immune to the reality and trends of the worldwide economy, and it needs to consider government parameters and changes in the productive system that could weaken the backbone of the economy in an interconnected and completely comprehensive world.
To understand the growth trend it is necessary to observe the final economic balance of retail sales in Hong Kong, where transactions recorded during the Golden Week autumn festival have clearly cut an outline in keeping with worldwide trends today.
The habits and behaviors of Chinese consumers have changed significantly enough to erase the memories of long lines of tireless shoppers at the entrance to the boutiques on Canton road. Even the malls in Central, like the landmark IFC and Pacific Place, which represent the pinnacle of high street shopping, have seen weaker client traffic than usual in recent weeks.
The reaction of Chinese consumers following the publication of these figures has been a tendency towards savings (keeping in mind that the PMI index that measures industrial activity is still suffering a downturn with a value of less than 50), not to mention that the real estate situation is being artificially controlled by the government to prevent the financial bubble from bursting.
Numerically, visitors to Hong Kong are increasing and official data confirms that roughly 900,000 Chinese spend their vacation time on the island, which is an increase of 15% over 2011 but the expectations for spending by Chinese vacationers this years is no higher than the last. The cause of this stagnation is to be found not only in the economic crisis, but more importantly in Hong Kong’s position as a destination for travelers looking to shop.
So are the shopping destinations changing? If in recent years Hong Kong represented the main destination for wealthy Asian shoppers, they are now beginning to look to other shores such as South Korea or Taiwan, where they can visit new cities while doing their shopping. Not to be dismissed is also the RMB, whose exchange rate is encouraging the wealthiest traveler’s towards Europe’s classic shopping destinations like London, Paris, and Milan. There, Chinese customers motivate their purchases by comparing prices with China, where the same products can cost 30 to 40% more. Even in Hong Kong, once known for having prices more in alignment with Europe, prices have gone up thanks to the appreciation of the RMB with respect to the Euro.
Other popular destinations are across the ocean, where Chinese consumers from first-tier cities enjoy making purchases during short, intense holidays, but Hong Kong remains a classic destination for the Chinese tourist, although today it is more popular with third or fourth tier city consumers with limited spending capacity.
The current situation can be summarized as a period of stuttering growth for China’s fashion and luxury world: the market continues to grow, but at a slower overall rate than China has been accustomed to. Consumer confidence is down and people are more cautious about buying luxury goods. It is not a cause for immediate alarm, but it would surely be wise to pay close attention to the Asian market, which finds itself today in complete synch with the world economy.
Future Chinese macroeconomic trends forecast China keeping its leading role in the development of luxury and fashion brands, taking advantage primarily of growth in second and third tier cities in the western and central parts of the country.
Those cities that today are still not fully developed will be the driving force for the Chinese economy and will produce the famous “middle class” that China so desperately needs to balance its development.
The role of famous brands will not be lost, but they will need to concentrate on quality and uniqueness with fanatical attention paid to customer service, with the aim of providing a top level customer experience to ever more sophisticated and educated consumers who evaluate the entire product and not just the brand image.
It will be in this arena that future developments will play out, and as always they will be directed by level of investments in marketing wisely made by the parent companies.