China, the Chinese Buyers and Luxury Goods

by Chikashi

There was a time when it was almost impossible to avoid being confronted by this question at least once a day: what are your plans in China? And then, the market started cooling off, and companies stopped opening new shops like fast food chains, in towns you never knew existed, in some remote areas in mainland China. More recently, international ‘luxury’ brands whose core business is chasing the mass affluent segment started shuttering some of those locations because there is just not enough business to be had in some industrial or agricultural outpost. Even very large domestic retailers have started to feel the demand slowing, with their share prices taking a beating as both Hong Kong and mainland China markets continue to soften.

I really don’t know if the merchants’ previous exuberance was ever justified simply because I don’t know if much of the market data and economic indicators coming out of China were reliable. Chuck Prince, a former CEO of Citigroup, said in 2007, just prior to the unravelling of the US subprime mortgage market, ‘When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.’ The official market data published by the Chinese government was the music, and everyone was too keen to be on the dance floor although I suspect that anyone with any sense suspected, even at the time, that the music might be from the Milli Vanilli’s Greatest Hits album. They said, 8% annual GDP growth, AGAIN. Sure, why not.

Chinese buyers are still out in force, just not at home. You see them everywhere, buying. They are still a very important group of buyers. A recent analysis by a Shanghai-based consultancy, Fortune Character Institute (I love that name, and incidentally, I still don’t understand why the Korean conglomerate, Lucky Goldstar, changed their name to LG Corporation since nothing says ‘Asian Tiger’ like a fortuitous name) reckons that 78% of the luxury goods purchases by Chinese consumers will be made abroad and that only 10% of global sales will be generated in China. It is important to note that they have defined luxury goods to include jewellery, watches, accessories and apparel, but to exclude cars, yachts, aeroplanes or art. I don’t know how they arrived at those numbers, but they sound like reasonable projections for the next year or two.

As such, thoughts should probably focus on the buyers, not their country of residence. Perhaps easier said than done…

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