Musings and observations from my China visit

Quale sarà il ruolo della Cina per l’industria del lusso è il più importante tema di discussione attuale, ancora di più dopo le trimestrali arrivate dalle società quest’anno. Qui il racconto di uno dei più influenti e preparati analisti di questa industria.

I last visited China at the end of 2019 ….obviously trips were off-limits 2020-22 for obvious reasons and I was unable to travel last year. So it was a revelation to travel there again after five years and very insightful to compare and contrast. Whilst I speak regularly to local experts and mall operators (80% of the Luxury spend in China is within malls, which remain far superior to the average European or US equivalent) and so remain very much in the loop at all times, seeing and meeting in person is always better. Also, timing was most interesting by accident as I was there when the first of the ‘stimulus’ measures were announced.

It was not a short trip but I focused on just two cities: Hong Kong and Shanghai (unlike pre-Covid when all the interest was in visiting Tier 2 and Tier 3 cities, it is the most prosperous Tier 1 and 1.5 cities that matter most in terms of understanding momentum).

I thought I would share my views on both visits when it comes to the local propensity to spend and general mood.

Hong Kong

I like the city, always have done, and this was my thirteenth visit. I was there twice during the demonstrations (the ‘umbrella’ movement) witnessing significant disruption. None of that today, but the CCP (China Communist Party) is clearly far more embedded in the city than ever with very visible signs of the 75^th anniversary of the founding of the People’s Republic of China celebrations everywhere. That said the city looked as busy as ever albeit with a lot fewer expats.

That said, Hong Kong’s status in the Luxury world has collapsed from the highs of 7-8 years ago when it alone accounted for 9% of global spend versus probably 2% today or €15bn or so less. There was a time when Canton Road in Kowloon saw an endless tide of ‘mainlanders’ bringing literally suitcases full of cash to buy Western Luxury goods and more than half of the world’s largest stores were to be found there (several brands selling €200mn+ in just one store there) and where the city had 3-4x the number of stores of a city like Milan.

No more: the sharp drop in ‘mainlander’ spend (more of that later) and the strong HKD which remains pegged to the USD plus the well-known political implications means the city is no longer major Luxury shopping destination. Traffic is down sharply versus pre-Covid levels (20 to 40% according to who you ask) and conversion rates are below average.

I visited some new malls (K11 Musea remains my favourite…a truly beautiful building on the water in Kowloon) and met with some of the well-established ones (IFC and especially Landmark who are essentially restructuring by focusing on just ten major brands with large locations to cater for the local wealthy clientele and will host a total of 16 Michelin stars under just one roof) but it is undeniable that spend is significantly down on past numbers. I fear this will not change.

Which is why Hong Kong is reinventing itself as a go-to-destination for culture, events (3 Coldplay concerts for next April sold out in minutes – most unusual there but understandable after Singapore ‘snatched’ Taylor Swift from all other Asian countries), food and edutainment (yes, it’s a term).

Still absolutely worth visiting to meet management as many are based there, but increasingly less relevant for Luxury channels which was not unexpected.

Shanghai

Visiting Shanghai was always a bit like travelling to the New York City of China of course: vibrant, very very modern (I saw my first cashless stores here) and international. No more sadly. Whilst it still is one of the world’s great cities and still quite buzzy and very modern, it certainly is no longer international. I was told 70-80% of the expats had left not to return (the 11-week Shanghai superstrict lockdown had something to do with it) but above all what was most obvious was how little English is now spoken, including at my 5-star hotel. To be clear, no hostility at all, but an overbearing sense of indifference (my idol Kubrick once wrote that what was terrifying about the Universe was not that it was hostile, but that it was indifferent…I felt the same). I do not believe that the locals care much for what happens elsewhere in the world.

Back to Luxury: I visited and met with five malls as well as many store channel checks. Some of the new malls were very beautiful indeed (eg TaiKoo Li), and disturbingly empty especially those just outside the city centres. Others, including the grand dame of Shanghai Luxury – the magnificent Plaza66 – had better footfall but clearly down on my last visit.

So why are we seeing this slowdown in China?

First and foremost, we need to distinguish between the Chinese cohort and China – not the same thing.

In 2019 it was estimated that 70% of Chinese spend took place outside of China ….today the average appears to be 30%.

That 30% is mostly wealthy consumers…some have left China altogether, some are able to travel to Europe, most travel in Asia and until recently many to Japan given the currency advantage.

So the first issue is that many wealthy customers no longer buy in China….but I do not think we will ever go back to 2019 mix.

Whilst the price difference between China and elsewhere remains significant (from 15% – before taxfree – to over 50%) this is less of a driver versus before.

Today, a smaller portion of Chinese travel and even less travel to buy Luxury away:

With Covid no new passports were issued or renewed….most had to restart the process and not all applications are now accepted on top of the visa complications. In the end, the CCP has no real interest in encouraging foreign travel and spend abroad at this time.

There is fewer air traffic capacity and flights are a lot more expensive (eg the China route from London is essentially almost just a China airlines affair)

Hotels abroad are more expensive than before

So you may see large groups of Chinese customers in Asia, not so much in Europe

Also, the underlying dynamics have changed:

All products tend to be fully available in China which was not the case before

Service, and related perks, are much better locally than in Europe (all mall operators gave me this feedback from their better customers)

So Chinese travel less, but those that do spend more…..which is why we think that China will be down 15-20% this year on average, but the Chinese cluster probably mid-single digit down. Still negative but hardly a collapse.

Why are numbers in China so poor then, beyond the ‘travelling’ customer?

One word: confidence.

The issue is not spending power at all: the Chinese consumer has much more savings than his/her European or US counterparts, but is also a major investor in the stockmarket (very poor prior to the measures announced, now +10%) but more importantly the property market. I met several middle managers who owned apartments (often not in Shanghai but rather the cities they came from) and are sitting on 30—40% losses given the state of the market. None had lost money, but all perceived a loss of personal wealth with no short term respite (I think 2026 personally given rate of real estate destocking). The stimulus measures announced so far, I was told, will help restaurants and bars and domestic holidays perhaps, but will do little to encourage paying €4000-equivalent for a bag that cost €2500 before Covid and that is the point perhaps.

Indeed, some the price increases forced through by some of the more popular brands have priced out a lot of consumers and hurt the propensity to spend 000s to buy ‘expensive things’ people don’t really need. That said, the wealthy are still very active and so this volatility does not apply to all brands, with the better names targeting the top end (Hermes, Loro Piana, Cucinelli) doing fine, as are those with strong brand momentum (Miu Miu and Prada generally of course, also Loewe, Goyard and premium brands such as Arc’teryx) but the sector spend is being hit and this has deteriorated further since the Summer with no real scope to stabilise until perhaps Chinese New Year now. Whilst I do not believe there is any real formal anti-corruption crackdown in place, it is clear that more ‘discrete’ garments or bags are favoured and that some of the better-known logos are being made a little less prominent when possible.

In short..fewer customers+lower propensity to buy things+excessive prices = a more muted outlook where Chinese consumers will commit much more to wellness or experiences as we are seeing in the West already instead of buying more handbags.

As I wrote earlier, it is important to distinguish between China and the Chinese consumer: both will be negative this year but to very different degrees. It is early to predict 2025, but assuming no further support from the CCP on top of what announced so far I have China on low single digit negative, the Chinese flat which would support 3-4% growth globally so at least rather better than the 1% I forecast for 2024.

Clearly, a trip in 2025 is a must now.

*Investment Manager of GAM’s Luxury Brands Fund

(in the photos: 1. Shanghai’s-best-Luxury-Mall-Hang-Lungs-Plaza; 2. HK’s beautiful K11 Musea mall on the waterfront; 3. Coldplay Sold out in minutes; 4. Moutai: the world’s most expensive spirit)