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Luxury brands will continue to focus on China as economy improves

Disruptions caused by Covid-19 and China’s stringent measures against the pandemic kept consumers away from stores in 2022, some of which had to close temporarily or operate on shorter opening hours due to staff shortages. And, against this backdrop, foreign luxury brands faced strong headwinds in mainland China last year.

SEE ALSO: LVMH Asia sales ‘stable in 2022

Recent earnings updates from major luxury companies signalled such headwinds. In its latest financial update, Richemont, owner of the Chloe, Carter and Alaia brands, said it missed market estimates after sales in China plunged by a quarter, as customer traffic at its China stores dwindled, with many stores facing reduced hours or closing temporarily.

Likewise, Burberry in its most recent trading update said like-for-like sales growth slowed sharply to 1 percent in the quarter to end-December, after a 23 percent fall in mainland China, while French luxury conglomerate, LVMH Group, said its Asia region sales with “stable,” given the impact of China’s zero-Covid policy last year.

Looking ahead, Burberry said it believed consumers in China would start spending again in 2023 and Richemont said it witnessed a rebound in the country before the holidays, keeping it optimistic for the months ahead.

A sentiment that is echoed by industry analysts, who predict luxury brands will continue to focus on China in 2023, as the expected revival in its economic growth will drive up sales for them.

“Despite China’s discouraging market environment in 2022, luxury brands will continue to consider it an important market,” said Raviteja Neralla, retail analyst at GlobalData.

“Following the Chinese government’s adjustment to its Covid-19 policy towards the end of 2022, the Chinese economy is expected to remain resilient in 2023, which could act as a strong factor in driving luxury brands’ confidence in the market.

GlobalData said it forecasts that China’s luxury retail market will grow by 6.1 percent and 6 percent in 2023 and 2024, respectively. Sales of luxury jewelry, watches, and accessories will grow by 6.7 percent and 6.8 percent, respectively, in 2023 and 2024.

“The resilience of the Chinese economy in 2023 will act as a strong factor in driving luxury brands’ confidence on the market. GlobalData estimates China’s real GDP to grow by 4.82 percent in 2023, following the Chinese government’s adjustment to its Covid-19 policy towards the end of 2022.”

The research firm said a pent-up demand for luxury goods and Chinese consumers’ savings during lockdowns will play a significant role in driving up sales, causing a revenge spend across the nation.

Spending from high-income consumers is also likely to see an uptick during the Chinese New Year festivities which started on January 22 and will end on February 5, giving a boost to private consumption in the country.

The Chinese government has also eased its fiscal and monetary policies, “which will pave the way for better economic growth compared to western economies in 2023,” added GlobalData.

As a result, luxury goods manufacturers are likely to find themselves pulled away from the west towards China.

“In contrast, Western economies are likely to register significant slowdowns, sparking recession fears. The prolonged conflict between Russia and Ukraine and the supply chain disruptions resulted in severe inflationary conditions in the Americas and Europe. As a result, consumers’ purchasing power took a hit in these regions, with them cutting down on their discretionary expenditures.”