Luxury Industry cannot count on Chinese reverse Silk Road

Luxury Industry cannot count on Chinese reverse Silk Road

What will be the luxury industry’s new China? Today’s standard answer has a familiar ring: new parts of China

In a reversal of the historic silk routes that shuttled luxury goods from China to Europe for almost two millennia, makers of expensive handbags and watches have come to rely on Chinese consumers. Global spending on personal luxury goods grew roughly 2 % a year between 2012 and 2015 at constant exchange rates, but would have fallen 2 % a year without the Chinese, according to consultancy Bain & Company.

This pattern broke down in the second half of 2015. This year Bain thinks the market will be flat, with falling sales to Chinese consumers for the first time in memory offset by growth elsewhere.

The timing of the Chinese correction remains somewhat mysterious, given that President Xi Jinping’s crackdown on corporate gift-giving started as early as 2013. Erwan Rambourg, an analyst at HSBC, thinks the renminbi depreciation in August 2015 triggered a collapse in consumer confidence. Terrorist attacks in European travel hot spots, where the newly-minted Chinese increasingly bought their luxury goods, also played a part.

There is much talk of a “new normal.” Yet the industry’s professional crystal-ball gazers tend to come back to China, rather than new markets like India or Africa, as the font of future riches.

China LuxBain’s latest report, for example, forecasts 3 % to 4 % industry growth from 2018, after two years of more muted sales, thanks to the “rising Chinese middle class” as well as a recovery in mature markets. Stock analysts echo that the demographics of China’s poorer inland provinces leave ample room for further growth in luxury spending—albeit without the corruption-driven froth of yesteryear.

One niggling problem with this consensual position, which is reflected in high price-earnings ratios across the listed sector, is that China is already a disproportionate spender. The country accounts for 30 % of global spending on luxury goods, but only 15 % of global output.

The precedent of Japan is instructive. Luxury brands used to be as dependent on Japanese consumers as they are today on Chinese ones, and the country is still a big spender. But sales have fallen by roughly a third since the 1996 peak, according to Barclays. If China’s coastal regions head the same way, it would detract from any boom inland.

Already there are signs that Chinese luxury tastes are maturing. Even as handbag and jewellery purchases have stalled, spending on expensive cars and restaurants is booming, notes Bain. And mixed third-quarter result – encouraging from bellwether Louis Vuitton, less so from Burberry or Tiffany, which reported their latest figures – suggest that volatile fashion trends may play a more important role in future.

The reverse silk route to China is still the luxury industry’s best hope for growth. But it’s no longer a one-way street.

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