Establishing a fresh standard for the expansion of personal luxury in China

Takeaways

• The Chinese luxury market experienced a 10% year-over-year decline in 2022, marking the end of a five-year period of rapid expansion. The downturn was attributed to business disruptions caused by Covid-19.
• Despite this setback, the foundations of luxury consumption remain robust, and a rebound in growth is anticipated for 2023.

Between 2019 and 2021, the luxury market in China experienced a remarkable period of growth, doubling in size. However, this trend came to a halt in 2022 due to the implementation of zero-Covid policies. Strict lockdown measures remained in place throughout the year, hindering economic and social activities and causing a considerable number of stores to remain closed. As a result, nearly every luxury category and most brands experienced a significant decline, marking their first major downturn in five years. 

Read further as Nicolas Nesme, VP at VISEO China, David Liu, Cegid Practice Manager at VISEO APJ and Calvin Zhang, Sales Manager at VISEO China explore the luxury retail sector in China and the key trends and challenges emerging the expansion of personal luxury in China.

All luxury categories were affected by the decline, although not to the same degree

Due to closed borders at the beginning of 2022, Chinese luxury customers primarily made their purchases within the mainland. However, Covid-related lockdowns in the second quarter created obstacles to purchasing. Major cities underwent sudden shutdowns, impeding in-person shopping.

Consumer sentiment weakened due to a decline in the real estate market, increased unemployment, and Covid-related anxieties. Despite restrictions being relaxed, many consumers chose to stay home. As a result, luxury sales did not experience as steep a decline as foot traffic, as conversion rates notably increased. Consumers opted for targeted and brief shopping trips rather than casually browsing stores, as had been the norm in the past.

All luxury categories were affected by the decline, although to varying degrees. Categories with a strong online presence were less impacted by lockdowns and fared better. For instance, luxury beauty, which boasts 50% online penetration, only contracted 6% according to Bain & Company.

The impact across non-beauty categories was consistent with previous trends. Jewelry and leather typically perform the best, while fashion falls in the middle, and watches perform the weakest.

Despite setbacks in 2022, China is still the most promising market for luxury goods

The recovery of luxury consumption is expected to take place as Covid-19 subsides, mall traffic improves, and consumer sentiment rebounds. Sales levels similar to those of 2021 are anticipated to be reached sometime between the first and second half of 2023.

Hainan is poised to rebound and regain its position as a key travel destination, particularly for the majority of Chinese travelers who lack passports. The demand for international travel will also bounce back, beginning with Asia-Pacific destinations such as Hong Kong, Macau, and Southeast Asia.

Chinese luxury consumers have unique shopping behaviors and preferences, and the differences between the Chinese and global luxury markets are expected to widen, particularly in terms of digitalization, retail environment, cultural references, and brand relationships. Brands that understand the nuances of the China luxury market are more likely to succeed in the long run.

However, there are also risks to consider. Brands must resolve pricing gaps between China and Europe before international travel resumes. While airlines have not yet fully resumed operations, demand and traffic are expected to pick up soon, and exchange rate fluctuations will continue to influence consumer travel decisions.

Over the past three years, brands have heavily invested in customer experience and service in China, leading to high customer expectations, regardless of location. Brands must ensure that their CRM tools work effectively across borders to continue growing and delivering excellent experiences worldwide.