China drives luxury brands

The rapid recovery in the Chinese economy has boosted luxury goods brands Compagnie Financière Richemont SA’s sales
for the three months to end December.

Though overall sales were only up 5% to €4.18 billion (R75.4 billion) in constant currency, the 27% rise in Asia Pacific to
€1.73 billion offset the 20% drop to €982 million its European market, the group said in a trading update on Wednesday.

The increase in sales for the quarter by the owner of the Cartier and Van Cleef & Arpels brands is a turnaround from the
26% slump in sales for the half-year to end September 2019.

Richemont’s latest quarterly numbers in a sense reflect the lumpy recovery of the world’s economy, which has seen some regions like the Asia Pacific accelerate, while others like large parts of Europe and the US have struggled because they have been unable to bring the deadly virus under control.

In Germany, for instance, the economy shrank 5% for 2020, and Italy’s economy is expected to contract 10.6% for the same period.

A re-emergence of the virus in Italy forced it to once again put in place a strict lockdown in three regions.

In contrast, despite early on being the epicentre of the Covid-19 pandemic the Chinese economy expanded 1.9%.

Richemont’s figures also reflect a shift in the luxury goods market that will see mainland China become the largest market by 2025, notes Bain & Company in its “China’s Unstoppable 2020 Luxury Market” report.

“The luxury goods market in mainland China will likely achieve 48% growth in 2020, reaching nearly RMB346 billion
[R798 billion]. This increase helped double China’s overall share of the global luxury market in 2020, with further growth expected through 2025.”

The report, which came out last year, says the Covid-19 crisis temporarily accelerated this shift.

“A drop in international tourism contributed to double- and even triple-digit increases in the rate of domestic luxury spending for some brands but an overall decrease in Chinese consumers’ total luxury spend.”

The Chinese middle class

The emergence of China as a consumer market is a big driver of this.

The Brookings Institution notes in its “China’s influence on the global middle class”’ report that in the ’50s, over 90%
of the global middle-class lived in Europe and North America. Now, over 20% reside in China.

“By 2027, we estimate that 1.2 billion Chinese will be in the middle class, making up one-quarter of the world total,” Brookings Institution says.

Though the US middle class, when measured in spending power per individual, has more clout than the Chinese middle class,
at $7.3 trillion, its total expenditure in 2020 eclipsed the US’s $4.7 trillion.

Its rising consumer power can be seen in the fact that, despite Covid-19 knocking sales, total sales in Shanghai alone on the
first day of shopping after the lockdown was lifted in May reached $2.2 billion.

While the Chinese market is proving to be a lucrative one for luxury groups like Richemont, this market’s affinity for buying online is a challenge for an industry that is largely built on in-store selling

This article first appeared on Moneyweb and was republished with permission.

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