Luxury brands turn from Hong Kong to mainland Chinese consumers still eager to shop

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Zhang Peng | LightRocket | Getty Images

Despite the economic shock of the coronavirus, analysts say China’s demand for luxury goods hasn’t waned much – and it’s drawing top brands from Hong Kong to the mainland.

Consulting firm Bain estimated Chinese consumers accounted for about 35% of 281 billion euros ($317 billion) last year in global luxury spending, most of which has typically occurred overseas or in Hong Kong.

Now that the coronavirus is keeping most Chinese from traveling, several analysts expect them to buy more luxury products at home.

“All luxury brands are moving in this direction,” Federica Levato, Milan-based partner at Bain, said in a phone interview. “This is accelerated by Covid-19, but it was already happening.”

In five years, the Chinese share of global luxury spending will rise to nearly half, split evenly between domestic and overseas markets, Bain predicted.

Combined with the impact of last year’s violent protests in Hong Kong and this year’s restrictions on cross-border travel, many luxury brands are closing stores in the city and looking at expanding into mainland China through physical locations and e-commerce.

“(Like) New York, Hong Kong is one of the most advanced cities in terms of the number of stores, and given the customer flows will move from Hong Kong, probably brands are going to … review their network,” Levato said, adding the brands may reduce stores there as a result. 

Supportive policies from Beijing

New measures by the central Chinese government also aim to support more mainland Chinese luxury shopping within its borders.

As of July 1, authorities more than tripled the tax-free shopping quota to 100,000 yuan ($14,285) from 30,000 yuan. They also removed an 8,000 yuan per item limit on goods bought in the duty-free shopping hub of Hainan. 

UBS Securities China tourism analyst Chen Xin expects spending on the tropical island to more than double from last year to 28 billion yuan this year. In a June 30 interview with CNBC, he said most of the increase in spending will likely come in the second half of this year, and grow to 38 billion yuan next year.

Even if China’s overall economy is hit, Chen said the country’s consumers still aspire to buy luxury products. For cosmetics, which must be bought as they are used up, Chen said that once shoppers have bought from European or American brands, they won’t return to Chinese or Asian ones.

A lot of travelers to Hong Kong are from lower-tier cities (who) don’t have access to luxury stores in their hometowns … Livestreaming is a way to reach them. Online is another way to reach them.

Imke Wouters

Oliver Wyman

Even though the local economy contracted by 6.8% in the first quarter, Chinese are still willing to shop.  

“Luxury demand in China has recovered strongly in the last couple of months,” Morgan Stanley analysts wrote in a July 7 report titled “Consumers and China’s Stay-Home Economy.”

“Most established brands (LV, Gucci, Cartier, Chanel, Dior, etc.) saw sales increase by 40-90% in early June,” they said. 

Luxury brands move online

The demand is also pushing luxury brands to expand into China’s quickly growing online shopping channels, which some analysts note are more popular in the country’s less developed, or “lower-tier,” cities outside of major metropolises like Beijing and Shanghai.

“A lot of travelers to Hong Kong are from lower-tier cities (who) don’t have access to luxury stores in their hometowns,” Imke Wouters, partner of retail and consumer goods practice at management consulting firm, Oliver Wyman, said in a phone interview. “Livestreaming is a way to reach them. Online is another way to reach them.”

Wouters still expects overall luxury spending by Chinese consumers to be negatively hit this year, but the domestic market will likely see growth, primarily because of the low level of previous years.

In one sign of the Chinese demand, Chinese short video and streaming app Kuaishou said that a luxury goods livestreaming session with online luxury retailer Secoo on June 7 sold 105 million yuan of products in five hours. The most popular items for the heavily subsidized livestreaming sales session included LV bags, Prada bags and Armani watches, according to Kuaishou.

“Gradually, we’ve seen foreign luxury brands open their official shops (on) Tmall, Douyin, WeChat,” said Jialu Shan, economist and scholar in Asian and Emerging Markets at the International Institute for Management Development. She was referring to online stores on some of China’s most-used platforms backed respectively by technology giants Alibaba, Bytedance and Tencent

“I think the message is clear,” she said. “The way that luxury brand(s are) engaging with clients is changing. So livestreaming does not only serve as a sale(s) channel, but also an important part (of the) customer experience journey.”

That interaction, she added, ranges from story-telling marketing to a communication channel with clients.

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