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Chinese will soon shop at home

6m Chinese forecast to spend +$100bn in ‘this’ Golden Week

Domestic outlays for luxury goods are estimated to grow 12 per cent this year, double the 6 per cent global average, even as the Chinese economy is widely anticipated to moderate, according to the report “Panda Luxury Staycation”, compiled by the bank’s global research department.

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Beijing has cut its economic growth target from 6.5 per cent last year to a range of 6 to 6.5 per cent this year amid headwinds that include the US-China trade war, high debt and a financing squeeze on private enterprises. China’s economy grew 6.6 per cent in 2018, the slowest pace in nearly three decades.

Current trends suggest that mainland consumers will soon make half of their luxury purchases domestically.

“Our belief is that the split between shopping abroad and shopping at home will shift from 75-25 a few years ago to an equitable 50-50 split within the next 12-24 months,” said analysts headed by Erwan Rambourg, global co-head of consumer and retail research at HSBC.

Shopping while travelling abroad is no longer the bargain it once was for mainlanders, as prices of luxury goods have been steadily harmonising with prices overseas.
According to HSBC calculations, luxury goods prices have fallen from a 38 per cent premium in 2015 to a 22 per cent premium in September 2018.

“The trend is downward for the premium,” HSBC said.

For example, the classic flap handbag by Chanel costs 5,800 euros (US$6,523) at retail in France and Italy, while on the mainland it retails for 48,300 yuan (US$7,200).

Plans by the Chinese government to reduce the consumption tax should help to further cool luxury goods prices. In March, Beijing announced that it would cut its value-added tax (VAT) from 16 per cent to 13 per cent this year.

“This should boost the consumption in China at the expense of consumption abroad, assuming brands pass on the cut to consumers,” HSBC said.

So far, big brands appear to be lowering prices as expected. On Wednesday, Italian luxury retailer Prada Group said it had reduced prices of its products in China by 3 per cent to reflect the lower VAT. Italian brand Gucci, owned by the French luxury goods group Kering, also rolled back its prices by the same margin.

In the past, luxury brands were reluctant to trust third-party e-commerce platforms in China, preferring to operate their own websites using the “.cn” suffix.
However, new e-commerce platforms and the rise of dedicated apps such as Xiaohongshu are leading to a “seismic shift” in how luxury brands view online sales in China, the report said.

“Western brands seem to trust the Chinese operators more than before,” HSBC said. “The increase in collaboration should help boost e-commerce traffic and strengthen the online presence of the luxury brands in China.”

HSBC also said that dedicated duty-free shops and a large number of luxury shops at airports would also boost spending at home.

Mainlanders spent US$297.8 billion on luxury goods in 2018, up 14 per cent from US$261.5 billion in 2017, according to data provider Euromonitor International.

Pascal Martin, partner at OC&C Strategy Consultants, said while brands from France and Italy would continue to corner a significant portion of luxury spending on the mainland, local brands are also gaining traction.

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“Chinese brands are gaining more and more credibility and popularity, particularly with younger customers. In terms of category, cosmetics continue to sustain spectacular growth despite a proliferation of brands,” Martin said. “OC&C also sees increasing interest in premium experiences and services, not just luxury goods.”

Meanwhile, mainland investment bank China International Capital Corporation said there have been encouraging signs of growing consumption in China, helped by strengthening of the yuan, as well as recent government policies to boost the economy.

 

(Source: SCMP)

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