China Still Shopping

Ever wonder who is buying the new Lamborghini Veneno? That’s the  $3.9 million car. Or the $43,000 Brioni Vanquish II men’s suit? Or the $30 cup of coffee made from Kopi Luwak beans? Despite the recession the luxury good markets continues to thrive. The US gilded class leads the world in luxury goods purchases with $74.6 billion in retail therapy. Japan is number2, then Italy, and France. The surprise is China which, after a giddy four years, has seen its high-end market go into a tailspin.

After double-digit growth from 2007 to 2011, luxury goods have fallen out of favor. Some say it’s been precipitated by a series of political scandals which cast a disapproving eye on ostentation. According to the Economist, “Sales of shark fin, the key ingredient of a soup served at fancy dinners, are down by around 70% year-on-year. Imports of bottles of Bordeaux costing more than $800 have collapsed.” And which country is taking up the slack? The United States, where luxury spending collapsed after the 2008 financial crisis but roared back to pre-crisis levels by 2012. Last year, the world’s No.1 and No.3 luxury groups LVMH and PPR saw higher growth rates in the United States than in China for the first time in years.

While many are sounding the fire bell for China, others see this as merely proof that retailers will have to go beyond Beijing and Shanghai to develop new markets. In 2002, 40 percent of China’s relatively small urban middle class lived in the four Tier-one cities: Beijing, Shanghai, Guangzhou, and Shenzhen. By 2022, the share of those megacities will probably fall to about 16 percent . If retailers can read the Chinese tea leaves and expand into the next tiers (cities like Jiaohe and Wuwei), they should be able to tap the new wealth. Bain & Company estimates that luxury sales in greater China (which includes Taiwan, Hong Kong and Macau) will grow by 6-8% this year, to exceed $35 billion, making it number two only to America. Then, there’s the whole issue of retail tourism, which has made Chinese consumers the most intrepid as they chase merch across the globe. Last year mainland Chinese took 83m foreign trips, up 18.4% on 2011 and the Chinese are the single biggest nationality represented among luxury-goods buyers. According to McKinsey, by 2015, barring unforeseen events, more than one-third of the money spent around the world on high-end bags, shoes, watches, jewelry, and ready-to-wear clothing will come from Chinese consumers in the domestic market or outside the mainland.