What is really going on in the Chinese economy? And what will be its impact on the luxury industry?
A slowdown in the Chinese economy dominated headlines in January, prompting several companies, including Apple, to post profit or earnings warnings. Apple’s share price fell by 7% as a result, with similar cascading effects observed for luxury retailers with significant Chinese customer bases, such as Burberry, LVMH and Richemont. Coupled with a poorly performing stock market in 2018 and ongoing trade-war concerns with the US, many international luxury and consumer goods players have been nervous about how a slowdown in China’s economy would affect their future sales growth. Public statements made by important business figures about the country’s outlook have also fuelled the decline in Chinese consumer confidence.
Other observers such as Bloomberg have reported that the negative press about the Chinese economy and its impact on brands is more dependent on the brand itself and what it sells. Luxury products tend to be more recession-proof than others (the luxury sector was the only non-negative consumer sector in the 2007-2008 Financial Crisis), and the ability of a brand to withstand fluctuations in business cycles is strongly influenced by its brand power, innovation, and branding strategies.
Fine wines and spirits, for example, have done particularly well amidst the country’s slowing economy. Diageo, the world’s largest beverage company, reported that spirits such as whiskeys and cognacs had beaten sales forecasts and grown at an impressive 20% year-on-year. A similar sentiment was echoed by leading French spirits company Remy Cointreau. There is hence much optimism in the market that this trend will continue into and after the Lunar New Year. Luxury fashion brand Hermes and cosmetics brand Shiseido have also reported stellar sales performances despite the economy. The latter has outperformed the market with 32% yearly sales growth, so much so that this trend has been dubbed China’s “lipstick effect”. This could be explained by consumers’ willingness to spend on cheaper luxury items such as cosmetics during bad economic times.
Nonetheless, market watchers have stated that the event to watch is Chinese New Year, as the festive season would be a good indicator of the Chinese consumer’s real confidence in the market.
Written by Charmaine Leong
Charmaine is a fashion-tech and luxury enthusiast currently reading the Masters in Management 2019 and participating in the Walpole Programme. In addition to gaining a BSc (Hons) in International Fashion Management at the London College of Fashion prior to LBS, she also has experience in digital consulting, merchandising and fashion-tech incubator projects with Microsoft.