RETAILERS’ HEADACHE

But with the US trade war weighing on China’s stocks and currency, and President Xi Jinping’s government trying to bolster a faltering economy, more mainlanders are choosing to do their shopping inside China rather than on overseas trips.

“There’s clearly a shift that has started to happen in the consumption pattern: Chinese people are buying more in China,” said Pascal Martin, a partner in Hong Kong with OC&C Strategy Consultants.

Taxes on imported clothing, which had been as high as 25%, are now just 7.1%. A recent crackdown by Chinese officials on travelers returning home with undeclared goods is also encouraging local consumption.

The gap between Chinese overseas and domestic spending on luxury is shrinking and a 50/50 balance is “in sight,” according to an HSBC report last month.

Companies are scrambling to adjust, opening more stores in China or partnering with local online outlets such as Alibaba Group Holding Ltd.’s Tmall. Ermenegildo Zegna, which has stores in 35 Chinese cities, in December opened a flagship store on Tmall Luxury Pavilion, following a similar move by Italian fashion house Valentino in November.

“It’s much healthier to have Chinese consumers consuming your product in their own country, in terms of repeat business and loyalty,” said Thibaud Andre, research director at Daxue Consulting.

The change in consumption patterns is creating headaches for retailers like Tiffany, which has long counted on Chinese shoppers going to Fifth Avenue or Rodeo Drive. In November, Tiffany reported weaker-than-expected sales and highlighted a “clear pattern” of Chinese shoppers cutting back on spending when they’re overseas. Sales in China itself, however, remained strong.

The shift to more domestic purchases will also create more intense rivalry this year as more foreign players vie for consumers’ money in China, according the Bloomberg Intelligence analyst Catherine Lim. She added that the growth prospects on the mainland still remain attractive relative to other countries.

One of the key strategies the companies have is to focus on tech-savvy millennials and the younger Generation Z. The subgroup of shoppers is expected to make up 55% of total global personal luxury goods purchases by 2025, a Bain & Co. report said in November.

Retailers and investors are watching to see whether that spending holds up.

“Luxury brands still benefit from a formidable capacity to recruit new consumers in China,” HSBC analysts led by Erwan Rambourg said in the December note, but “while managers are preparing for a moderation of growth, most investors we met with in Hong Kong have more dire predictions.” —