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Market analysis: The maturing Chinese consumer

by Chester Lau on September 24, 2015
The Collector's View

China. A country well-known for its vast population, rich culture, and rich tourists. After a decade of Chinese prominence in the eastwards expansion of luxury firms, retailers are now facing a cooling market. Both Kering and LVMH have reported slowing sales growth in China, and now approach expansion plans with caution. A dampened economic outlook aside, Chinese luxury also faces a government-led antipathy towards flashy luxury accessories, with gift-giving often associated with corrupt practices curbed by anti-corruption campaigns. However, China’s consumption of luxury goods remains unparalleled. The Fortune Character Institute released figures that put spending by Chinese shoppers at US$102bn, nearly half of its global market estimates.

go-senator-cosmopolite

A step up the value chain with the Glashütte Original Senator Cosmopolite. Glashütte is one of the more popular brands among watch connoisseurs in China, due to its early entry into the Chinese market.

The Curious Case of Chinese Consumers

Despite the plenty of luxury stores in China, the Chinese choose to take their shopping overseas. Neighbouring South Korea and Hong Kong are some of the shopping hot spots for the Chinese. This phenomenon is driven by the high prices of luxury goods in China. Firstly there is the import duties. Imported luxury goods are heavily taxed and that inflates prices by 30-60%. Furthermore, firms put premiums on their prices in China due to extensive logistical costs. As a result, the spread between identical goods in China and in the US can be almost 50% (more expensive in China) and 71% between China and France, according to China’s Ministry of Commerce.

That said, sales to Chinese consumption of goods in other countries are no doubt continuing to rise. According to World Tourism Organisation figures, China holds the world record for highest volume of international travellers and the highest per capita spending abroad. In 2012, the Chinese spent over US$100bn overseas. So for brands who did not venture into brick and motar retail in China, they also stood to gain from the influx of Chinese tourist shoppers. From the point of view of luxury firms like Richemont, Swatch group and LVMH, Chinese consumption of luxury goods over the last decade had coincidentally stemmed out the effects of USA’s economic downturn and the falling consumption levels of Europe. Chinese retail tourists were pivotal in the continued growth of these luxury firms despite the downturn. Despite this, as China’s economic growth slows, it is unlikely for European or American consumers to take over the consumption role to prop up this industry.

Note the near mint condition of this timepiece, done with minimal restoration work. exceedingly impressive for a timepiece dated to 1947.

Vacheron Constantin is another well known brand among Chinese collectors due to its strong brand presence in China.

Challenges ahead

Bain estimates have shown that growth in personal luxury sales in greater China (including Hong Kong, Taiwan and Macau) have fallen from 30% in 2011 to 7% in 2012 and to around 2% in 2013. As a result, luxury firms have chosen to slow down store openings and cut back on investments. A Hurun survey on Chinese consumer behaviour also estimated that China’s wealthy spent 15% less on luxury goods and 25% less on gift-giving in 2014 than in 2013. This slowdown is largely linked to a slowing economy with real GDP growth rate declining from 10.6% in 2010 to 7.4% in 2014. Future projections also predict a decline to around 6% by 2018 and below 4% by 2030, reflecting a move to a stable state from an exogenous model point of view.

That said, it is not the end for the luxury world. Some economists argue that Chinese consumption levels will still grow, given the Chinese government’s active intervention in the economy to stimulate growth and to encourage more consumption. However, the rate of growth will remain slow.

vc-malte-tourbillon-diamond-bezel

Vacheron Constantin Patrimony Traditionnelle 14-Day Tourbillon revealed in WW 2014- a piece we thought to be highly popular among Chinese collectors.

The Changing Consumer mentality

The Chinese Consumer is changing. Gone are the days when shoppers flocked to gaudy and bling items with visible branding all over them. One can imagine that the Chinese consumer is becoming more sophisticated. They are now looking for less ‘in-the-face’ items but more subtle forms of materialism. Some say that this is because of a cultural shift to disdain overt displays of wealth, and its unappetizing association with corruption. Subtle luxury has become the new hype.

With the Chinese Consumer maturing, ostentatious logo flaunting has gone down the abyss. “土豪” (tuhao), a Chinese term for “nouveau riche” with a literal translation, rich country bumpkin is a term reserved for those who try too hard being as flashy as they can to flaunt wealth. Gone are the days of ‘Bling’ with a growing portion of consumers becoming more ‘sophisticated’, looking for small logo products or more subtle luxury brands. For instance, a Vacheron Constantin ultra slim rather than a Rolex Day-Date in solid gold with diamonds. Apart from cultural changes, the overall sentiment to tone down with ostentatious products is closely tied to the calls for anti-corruption by the government. For all you know, wearing a bling Rolex might be the last thing you do before a “Spot the Watch” condemns you for some count of corruption.

iwc-75-8day

IWC Portugieser Hand-Wound Eight Days “75th Anniversary” – IWC a brand for the younger, more updated Chinese consumer, who have begun to shun the gaudy and bling.

The unraveled potential of the Chinese Consumer

The importance of China as a market remains strong. From a varying point of view, watch brands have begun to produce Chinese type products that reflect local cultures and traditions. This is without doubt with deliberate intent to capture the Chinese market. Zodiac watches from DeBethune, Vacheron Constantin, Ulysse Nardin to mention a few, and watches decorated with oriental dragons on Richard Mille, or Bovet with chinese numeral dials are just a handful of examples of the growing Chinese themed watch trend. We cannot deny that China’s consumer potential remains unraveled. According to a global consultancy, CapGemini, China’s high net-worth individual (HNWI, those with investible assets of over US$1m) has doubled over the past 4 years, and has reached more than 890,000 in 2014. This gives China the fourth-largest HNWI population globally.

De Bethune DB25T Zodiac. The watch indicates the time in hours, minutes and seconds. And features a rather special applique on the dial representing the 12 zodiac signs.

De Bethune DB25T Zodiac. The watch indicates the time in hours, minutes and seconds. And features a rather special applique on the dial representing the 12 zodiac signs.

The Chinese market continues to evolve with its own set of challenges and potentials. While there are macroeconomic downturns which may potentially soften the market, there are growing opportunities in finding a more mature and sophisticated consumer, especially for brands who emphasize craft over bling. We are excited about the changes in China and will perhaps do another article, one from hindsight, say a decade later.

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