China: Luxury growth rate to slow in 2022 with fewer entry-level shoppers

A new report predicts China’s luxury market rate of growth will slow this year, but will still increase by 15 to 18 %. The biggest hit? Entry-level shoppers.

By guest author Yiling Pan from Vogue Business

A reshuffle of the composition of Chinese luxury consumers is predicted this year with a slowdown in the surge of entry-level shoppers, according to a new report by Yaok, a Chinese luxury research firm. Overall, the luxury goods market in China is predicted to grow by 15 to 18 per cent in 2022.

Over the past five to six years, China’s personal luxury goods market has witnessed a rapid expansion of first-time, entry-level consumers into the market. These price-sensitive consumers have driven strong demand for relatively low-priced luxury products, but Yaok believes they will be less influential this year.

Zhou Ting, dean of Yaok Institute and author of the report, says the current Covid-19 lockdown in Shanghai will have an impact on the confidence of entry-level luxury consumers. However, she remains upbeat about the purchasing power of China’s high-net-worth consumers. “The lockdown will only affect the consumption direction of HNWIs [high-net-worth individuals] — they will become more practical and rational going forward, and conspicuous consumption will be further reduced.”

The Yaok report divides Chinese luxury consumers into two categories: core consumers (HNWIs) and mass consumers (entry-level). Core consumers are defined as those with personal net assets of more than RMB 10 million (approximately $1.5 million). They’re comfortable with spending up to RMB 30,000 ($4,600) on a luxury product online without thinking too much about it. For mass consumers, the pain point threshold is massively reduced to RMB 3,000 (around $460).

Meanwhile, the key financial city of Shanghai, usually thronged with luxury shoppers, is currently experiencing a prolonged lockdown, now in its fifth week, which has shuttered physical retail and hampered e-commerce too. Some 25 million people in the Greater Shanghai area are affected.

While reported deaths from Covid are minimal, the fear is that the Covid outbreak in Shanghai may be replicated in other cities, further stifling economic activity. This year is set to become exceptionally challenging for China’s luxury market and the country’s broader economy.

Under the circumstances, Yaok’s research predicting continued growth in China’s luxury industry could be interpreted as good news. However, the forecast growth rate for 2022 of 15 to 18 % compares with a growth rate of 45 per cent in 2020 and 37 % in 2021.

More investment in online

Online luxury sales are expected to exceed RMB 220 billion ($34.6 billion) this year. Yaok remains bullish about the development of the online market for luxury goods in China, predicting it will account for more than 30 per cent of total domestic luxury sales by the end of the year.

The ongoing lockdown in Shanghai is likely to fuel further luxury brands’ investment in online business. Zhou Ting says: “The Shanghai lockdown is not only moving luxury consumption online, but also giving people more time to browse luxury information online.”

Zhou notes that many brands have increased their online marketing efforts in recent weeks in response to the lockdown. They have stepped up the frequency of online communication with customers, added more products online and offered additional online shopping formats.

Looking forward, luxury brands in China will increasingly focus on online channels, the report says. They will step up online marketing and client acquisition, accelerating the integration of online and offline. The luxury sector will evolve into an online-centric industry.

Big data and algorithms will further reshape the online business development of luxury goods in China, with customisation ushering in opportunities for rapid development. Big data will allow brands to better understand consumers and provide them with more personalised products and services, closing the gap between personalised customisation and mass production.

Designer brands from around the world will continue to look to China for growth. Over the next three to five years, around 2,000 high-end niche or designer brands are predicted to enter the Chinese market, particularly through e-commerce platforms.

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