Luxury brands feel the chill as Chinese shopping spree slows
● For the better part of a decade, wealthy Chinese tourists have been on a feeding frenzy for luxury brands, casinos and cruise lines. Now there are doubts about how long the buffet will last.
From Tokyo’s glitzy Ginza shopping district to Hong Kong, Macau and New York’s Fifth Avenue, there are noticeable cracks in what has been the very bankable strategy of catering to throngs of newly affluent Chinese travelling the world.
Explanations vary from China’s slowing economy to the government’s push to spur spending at home and fluctuations in currency values. Whatever the reason, the result is increasing worry across the globe.
“Luxury brands have gained a lot of traction and growth out of China, but the bloom is off the rose,” said Pam Danziger, president of Unity Marketing, which researches affluent shoppers. “You can’t blame them because that’s where the easy money was.”
Over the past few months, executives have been hounded by questions about high-end Chinese shoppers, who Bain & Co said generated a third of global luxury sales in 2017 — mostly outside China’s borders.
French luxury giants L’Oréal and LVMH have tried to ease concerns, saying travel sales remain robust. Meanwhile, jeweller Tiffany & Co; Capri Holdings, the owner of Michael Kors and Jimmy Choo; and Coach parent Tapestry said spending by Chinese tourists in cities including New York and Hong Kong has weakened.
Cruise line operators are grappling with this, too. Many poured resources into catering to the Chinese traveller over the past few years only to have demand disappoint.
Wealthy wanderers
In early 2017, Norwegian Cruise Line Holdings unveiled a ship “built for China” that included bigger rooms specifically designed for extended families. But the effort was a flop and the company is now spending $50m (R720m) to revamp the ship for Alaskan cruises.
Casinos are feeling the pressure, particularly in Macau, the world’s largest gambling hub. Daily visitors from the mainland are still streaming in, spurred by the opening of a bridge linking to mainland China and Hong Kong — but not the high rollers who have traditionally propped up casino receipts.
The Chinese tourists made a perfect target for luxury brands. Thanks to their homeland’s rapid economic growth, they are newly wealthy, full of aspiration and hungry to display their elevated status. Timing also made them invaluable, with their conspicuous consumption taking off just after the financial crisis.
As a result, China became the world’s biggest spender in international tourism in 2012, according to data from the World Tourism Organisation, a UN agency.
In Tokyo, they have been a ubiquitous sight, with shoppers filling up empty suitcases with high-end cosmetics in duty-free airport shops, and tour groups flooding into jewellery stores.
But China’s leaders would like more of those purchases made at home, and they’re taking actions to support that. The government reduced taxes on imported goods to encourage its citizens to buy domestically. It’s also cracking down on daigou — a grey market of surrogate shoppers who buy products such as designer handbags overseas for customers in mainland China. It’s a cohort that accounted for an estimated $6bn in sales in 2016, according to Bain.
Those efforts might be starting to work, given that companies such as Capri said its business in China is still growing but is struggling in Japan and South Korea because of fewer Chinese tourists. The Chinese have also long been savvy at arbitraging between currency fluctuations and taxes to determine which location is the most attractive to buy the latest handbags, fashion and perfume — a task often handled by daigou.
Tiffany has been particularly hampered by the slowdown. Last quarter, executives singled out lower spending by tourists, particularly from China, at its flagship store in New York, as a reason for missing analysts’ estimates.
“It’s something that we have to deal with,” Tiffany CEO Alessandro Bogliolo said in November. “In the luxury business, tourism is an important part.”
Inroads in China
Many North American luxury labels consider themselves underexposed to the Chinese market, especially compared with European peers who are faring better. Most are now making inroads in mainland China, mitigating the effects from shifts in tourism. The big handbag labels of Coach, Kate Spade and Kors all see China’s domestic market as key to their future and are opening stores there.
L’Oréal CEO Jean-Paul Agon was adamant last month: “We saw no slowdown in China.” Overall, the rate of growth in global luxury is expected to remain unabated, even amid macroeconomic uncertainties such as the trade dispute with the US, according to Bloomberg Intelligence.
That’s why any sign of volatility in the mighty growth engine is cause for concern. In Tokyo, a sudden drop in sales at high-end department stores in January triggered alarm bells, coming after Chinese visitors to Japan more than doubled since 2014. Sales rebounded in February at Takashimaya and J Front Retailing, which oversees one of the newest luxury shopping complexes in the heart of Ginza. Still, other retailers said sales were relatively flat from a year earlier during the week of the Chinese new year holiday.
“This shows you can’t depend upon Chinese tourism as the drivers of your business,” said Danziger, the luxury analyst. “It’s a dangerous place to be.”