Despite well-documented concerns over an economic slowdown in China, the country’s luxury goods market is still seeing opulent growth according to a new study. Behind secular and demographic tailwinds, the luxury sector is set to continue its torrid expansion in the face of volatility as it’s quickly becoming a defensive economic crown jewel.
Using proprietary analysis, company data, primary source interviews, and third-party research, Bain & Company dug into the ongoing expansion of China’s high-end market in a report titled “What’s Powering China’s Market for Luxury Goods?”
In recent years, China has become one of the largest markets for luxury good companies globally. And while many have raised concern around a drop-off in luxury demand, findings in the report point to the contrary, with Bain forecasting material growth throughout 2019 and beyond. The analysis provides a compelling breakdown of how the sector has seen and will see continued development, as well as a fascinating examination of what strategies separate winners and losers in the space.
The report is worth a quick read, as it manages to provide several insightful and differentiated data points with relative brevity, but here are the most interesting highlights in our view:
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The report avoids being overly optimistic by acknowledging that macro dynamics may bring the sector’s growth back down-to-earth a bit from consecutive years of 20%-plus rates. Yet contrary to sector bears, Bain’s analysis still points to growth in the low-to-mid-teens in 2019 and beyond, largely due to changes in policy, demographics, and digitization rates.
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Discussions around the impact from recent policy changes were particularly interesting, highlighting how China has loosened rules around repatriation, reduced import fees, and increased enforcement around illegally imported discounted goods. The report illustrates how the new regulatory environment has effectively tightened the price gap between domestic and foreign luxury goods, which has historically pushed Chinese luxury spending abroad.
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As a result, not only are more consumers purchasing more affordable luxury goods, but a growing portion of Chinese buyers are doing their luxury shopping within China, with Bain even now forecasting 50% of China’s luxury good spending will be done domestically by 2025, relative to just 23% in 2015.
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The report also takes a differentiated stance around the demographics driving expansion. While past write-ups have attributed the rise in luxury spending to China’s new millionaire class, Bain’s analyses found that growth was primarily tied to China’s millennial and middle-class groups, which represent growing portions of the country’s population, have increasing incomes-per-capita, and have shown both a willingness to spend and fairly inelastic demand.
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Analyses around the benefits from the rise in luxury e-commerce and online sales were fairly unsurprising. The more unique observation around digitization, however, was that online penetration remains quite low for Chinese luxury companies outside of cosmetics, implying ample runway exists for additional expansion. Bain is also seeing a couple of clear business models emerge in initial stages of luxury brand digitization — companies that build their own e-commerce channels, where they maintain full control over price, and companies built in partnership with JD.com or Alibaba where brands can leverage existing traffic sources and utilize discount prices.
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One of the more compelling realizations from the report was the fact that despite the luxury sector’s tremendous growth, performance has been widely divergent and polarizing, with clear winners and losers. The data shows that over the past several years, there were twice as many companies that grew by less than 10% relative to those that grew by 20%+.
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Affirming the rise of social e-commerce in China, the research found that the best-performing companies were overwhelmingly those that invested heavily in new digital and influencer marketing channels, with the top 40 luxury companies in China having doubled budgets on digital and influencer marketing since 2015, 40-70% of which was spent solely on WeChat.
Overall, Bain’s “What’s Powering China’s Market for Luxury Goods?” report is helpful in that it provides less familiar perspectives on a topic that has been widely discussed. However, the report’s biggest flaw in our view is the lack of clarity around its methodology, which makes it difficult to tell which perspective is right or wrong. In either case, the report challenges previously publicized theses, offers readers different ways to look at the Chinese luxury market, gets points for brevity, and is worth a quick skim if the topic fits your interest.
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