Coronavirus curbs trap $111bn of luxury spending power within China

Global luxury houses are rethinking strategies to reach Chinese consumers on the mainland

Before the pandemic, two thirds of Chinese luxury purchases were made abroad, according to consultancy Bain & Co. Bloomberg

Jeff Meng, 25, a watch lover from a well-heeled Guangdong family, had 160,000 yuan (Dh83,719) burning a hole in his pocket. He could not find the Rolex Daytona watch he wanted, called “panda” for its black-and-white face, anywhere in China.

Thanks to the Covid-19 pandemic that has halted travel and disrupted networks of parallel importers, high-end Chinese shoppers such as Mr Meng – who spend $111 billion (Dh407.7bn) a year on luxury goods, more than a third of the industry worldwide – are finding it hard to spend their cash.

That is forcing global luxury houses from Balenciaga to Montblanc to rethink how they can reach Chinese consumers on the mainland, despite long-standing concerns that range from counterfeiters to powerful e-commerce platforms that set the rules.

The travel disruption is also fuelling the rise of a second-hand luxury market in China as consumers seek certain styles or models they cannot find in local shops.

Before the pandemic, two thirds of Chinese luxury purchases were made abroad, according to consultancy Bain & Co. The spending took place either on shopping spree holidays or through resellers called "daigou". Meaning to "buy on behalf", these were platforms or people who used Chinese living, studying or travelling abroad to purchase sought-after goods from boutiques in Europe or the US and bring them back home.

“Now, travel is impossible, and daigou sellers are either back on the mainland or stranded in Europe,” says Mr Meng. “The pandemic made me realise you can’t easily get what you fancy in China.”

Cognisant of the potential of Chinese consumers who do not travel overseas, luxury houses had already been unveiling plans to expand on the mainland. The pandemic has now hastened that shift and imbued it with urgency.

With other factors such as perceived anti-Chinese racism in Western countries exacerbated by the coronavirus, and the Chinese government’s desire to bring spending home to boost its ailing economy, Chinese luxury buyers are not expected to revert to previous patterns even after the crisis passes.

More than half of Chinese purchases for luxury goods will happen domestically by 2025, Bain & Co estimated in May, compared to a third in 2019.

Even after global travel resumes, I will continue to shop more at home

“Chinese [shoppers] feel unsafe in foreign countries, which is why they consume at home,” says Amrita Banta, managing director at luxury consultancy Agility Research. “Brands should increase importing from [other] countries into China and offer a wider, well-priced range. They can now expand their reach to more cities – even smaller towns which have a propensity to spend.”

With China having largely contained the virus, shoppers are spending again. This is set to boost the luxury market on the mainland by as much as 10 per cent this year, compared to a 45 per cent plunge globally, according to estimates by Boston Consulting Group.

“Things are normal again internally, and we are seeing the results throughout our stores,” Richemont chairman Johann Rupert says of China, where it has around 460 boutiques.

“But they’re not travelling. Nobody is travelling. And until people feel sufficiently safe, I doubt that we will return to a pre-Covid-19 stage.”

The loss of Chinese travel spending has been cited as a blow to profits by companies including LVMH and Moncler in recent months. While luxury companies mostly do not reveal mainland China numbers, sales to Chinese tourists are expected to far outstrip revenue from local boutiques, analysts say.

The trend of more spending within China “will push us to reconsider our store network”, says Jean-Marc Duplaix, chief financial officer of Gucci-owner Kering during an April 21 earnings call. “It will lead to a clear reshuffling of the distribution.”

A wave of luxury brands such as Prada, Miu Miu, Balenciaga, Piaget and Montblanc have opened virtual shopfronts on Alibaba Group Holding’s Tmall luxury platform this year, some setting aside longstanding objections to working with third-party online channels.

Brands such as Louis Vuitton, Givenchy and Chloe have started using live-streaming to push products in China, a popular style of social commerce where an influencer speaks live to audiences for hours at a time, promoting and trying out items.

In the past, luxury houses were worried about diluting brand prestige and losing control of customer data by working with Chinese internet giants such as Alibaba, but the urgency of reaching Chinese shoppers has now eclipsed those concerns.

“Most luxury brands were too reliant on their offline experience and they lacked presence outside major cities where there is no decent shopping mall,” says Jason Yu, managing director at Kantar Worldpanel Greater China.

“Counterfeits and resellers were also prevalent on e-commerce platforms in the past. But that is fast changing now.”

Demand for some items has surged past supply in China. In May, Swiss watch exports to China fell by 55 per cent from a year ago, according to industry data, largely due to supply bottlenecks.

“Due to the travel curbs during the pandemic, all the consumption power is locked inside China, so our sales there are growing,” says Alain Lam, the finance director of Oriental Watch Holdings. The high-end watch seller has 46 shops in mainland China.

“But the supply is very tight, as Swiss factories are not yet fully returned to work.”

Before the pandemic, luxury brands largely avoided stockpiling in China and kept local manufacturing to a minimum. Brands will now need to rethink how to avoid delayed stock and lost sales, says Agility’s Ms Banta.

Chinese shoppers desperate for certain items are turning to second-hand luxury platforms to procure them, fuelling a surge of investment in such start-ups. Mr Meng finally found his “panda” Rolex watch on one such platform called Ponhu (Beijing) Technology.

Boosted by the pandemic, Ponhu’s gross sales will triple this year compared to last year, says founder Ma Cheng.

JD.com’s used goods platform Paipai saw sales in second-hand luxury goods jump 138 per cent during the 18 days of its annual summer sale period in June compared to a year ago, including a record 300 Rolex timepieces changing hands. The demand for luxury watches in particular is due to the delay of new stock supply to Chinese retail stores, says Paipai’s luxury business manager Tony Yao.

Facing its worst economic contraction since at least 1992, when official data was first released, China wants to keep spending within its borders.

Due to the travel curbs during the pandemic, all the consumption power is locked inside China

On July 1, it increased a tax-free shopping quota for travellers to its southern Hainan province, which has been designated a free trade zone, to 100,000 yuan annually per person from the previous 30,000 yuan.

Sales on the first day of the new policy at four malls amounted to nearly 60 million yuan, state media reported.

Some Chinese consumers say the pandemic has changed their perspectives: shopping at home can be convenient and pleasant in contrast to infrequent vacations or daigou platforms with no-returns policies.

“Even after global travel resumes, I will continue to shop more at home,” says Michelle Zhang, a finance executive from Fuzhou, Fujian province.

“I realise it’s so nice that I can try on the clothes in the malls, and salespeople treat me as a long-term client instead of just a tourist,” said Michelle Zhang, a finance executive from Fuzhou, Fujian province. “Even after global travel resumes, I will continue to shop more at home.”