CONSUMERS

What Does China’s Market Correction Mean For Luxury?

by

Philip Guarino

|

This is the featured image caption
Credit: This is the featured image credit

The Chinese market has hit a few bumps in the road lately, but the fallout could impact the luxury industry more than initially expected, explains Philip Guarino of China Luxury Advisors.

Over the last decade, collaborations between luxury brands and contemporary artists have gone beyond mere artistic partnerships towards a new kind of luxury branding.

PARIS – Art and fashion have always developed side by side, for fashion, like art, often gives visual expression to the cultural zeitgeist. During the 1920s, Salvador Dalí created dresses for Coco Chanel and Elsa Schiapparelli. In the 1930s, Ferragamo’s shoes commissioned designs for advertisements from Futurist painter Lucio Venna, while Gianni Versace commissioned works from artists such as Alighiero Boetti and Roy Lichtenstein for the launch of his collections. Yves Saint Laurent’s vast art collection, recently auctioned at Christie’s in Paris, testified to his great love of art and revealed the influence of a variety of artists on his own designs.

In the 1980s, relationships between luxury brands and artists were advanced when Alain Dominique Perrin created the Fondation Cartier. In the Fondation Cartier pour l’Art Contemporain, a book marking the foundation’s 20th anniversary, Perrin says he makes “a connection between all the different sorts of arts, and luxury goods are a kind of art. Luxury goods are handicrafts of art, applied art.”

The Fondation Cartier pour l’Art Contemparain building in Paris

The Chinese market has hit a few bumps in the road lately, but the fallout could impact the luxury industry more than initially expected, explains Philip Guarino of China Luxury Advisors.

The Chinese market has hit a few bumps in the road lately, but the fallout could impact the luxury industry more than initially expected, explains Philip Guarino of China Luxury Advisors.

While all eyes have been on the ongoing crisis in Greece, a possible “Grexit” and a questionable deal with European creditors, another worrying crisis has been unfolding in a far larger market — and one that has been critical to the luxury industry’s spectacular growth over the past decade — China.

In mid-June, the Shanghai stock exchange began a dramatic correction with significant knock-down effects. What does this mean for China and for the luxury industry? Perhaps more than we would like to acknowledge.

“ The run-up in Chinese shares has been nothing short of spectacular ”

The run-up in Chinese shares has been nothing short of spectacular. In a year, Chinese shares had risen over 135 percent on the Shanghai exchange, and even more — 150 percent — on the Shenzhen index. Since then, fueled by low interest rates and a “casino-like” exuberance, private investors rushed into the equity market.

Consumers were encouraged further by assertions of Xi Jinping’s “Chinese Dream,” or “zhongguo meng,” egged on by stories of people leaving their day jobs and housewives becoming wildly successful equity traders. Government officials were jubilant at first, keen to offset the dubious balance sheets of state-owned firms with inflows of private capital. “Another step in the modernization process,” it was hailed.

Yet as dramatic as the rise in equity prices has been, so has its fall. Since June 12th, the Shanghai exchange has lost just under 30 percent of its value, wiping a staggering $3.5 trillion off of the market.

“ The effects of the stock market crash are already being felt in a critical sector ”

The official response was swift. A moratorium on public offerings and a prohibition of share sales by company officials and large shareholders was followed by a suspension in trading of half of companies, and a $20 billion fund which brokerage firms were forced to reinvest in the market. The market has since stabilized and rebounded slightly — up just over 2 percent in the past week. But is the rout over, and what is the fallout?

Many analysts are bearish, doubting that the correction has ended and expecting further falls in equity prices. Prices still remain 82 percent above last year, in a market where macroeconomic conditions have shown a significant slowdown. Optimists cite that only 9 percent of household wealth has been invested in the stock market and that retail, not institutional investors, hold close to 80 percent of shares.

Yet the effects of the stock market crash are already being felt in a critical sector that represents 50 percent of Chinese personal assets — housing. Since June, there has been a surge in cancellations of real estate and mortgage transactions. Other high-ticket consumer items such as imported cars have also suffered. Mercedes-Benz and BMW, which have already been under heavy price pressure since the anti-corruption campaign began, are reporting a drop in foot traffic of 20-30 percent.

“ Luxury sales have already been contracting in mainland China ”

And herein lies the greatest threat to the luxury industry — consumer confidence. While a fall in share prices alone is unlikely to derail economic prospects, a lack of confidence will likely impact sales and margins as consumers seek more bargains.

Luxury sales have already been contracting in mainland China while they have continued to expand abroad. In a context of weak consumer confidence, the ongoing disparity between domestic Chinese prices and prices abroad (among other factors) will only exacerbate the divide between successful travel sales and waning domestic Chinese consumption.

Those brands which have been slow to understand or address the traveling Chinese consumer in a strategic manner will be forced to shift gears even sooner. They will have to be more agile — and rapid — in adjusting their consumer engagement strategies (digital, retail and CRM) to capture Chinese consumer attention whether it be in Paris, New York or Dubai.

By the same token, those that continue to misallocate assets by maintaining bloated and unprofitable retail operations, and spend lavishly on traditional advertising, should see their rationalization plans accelerate.
Perhaps Deng Xiaoping had a message for the luxury industry as well when he spoke of modernization.

To further investigate the Chinese luxury consumer on Luxury Society, we invite your to explore the related materials as follows:

China’s Import Tax Cuts Won’t Lift All Brands
Luxury Brands Play Renminbi Roulette
Targeting the Travelling Chinese Luxury Consumer

Philip Guarino
Philip Guarino

Partner/Director

China Luxury Advisors counsels luxury brands and retailers on their China consumer strategy, ranging from market entry to digital to attracting, converting, and retaining affluent Chinese customers worldwide.

CONSUMERS

What Does China’s Market Correction Mean For Luxury?

by

Philip Guarino

|

This is the featured image caption
Credit : This is the featured image credit

The Chinese market has hit a few bumps in the road lately, but the fallout could impact the luxury industry more than initially expected, explains Philip Guarino of China Luxury Advisors.

Over the last decade, collaborations between luxury brands and contemporary artists have gone beyond mere artistic partnerships towards a new kind of luxury branding.

PARIS – Art and fashion have always developed side by side, for fashion, like art, often gives visual expression to the cultural zeitgeist. During the 1920s, Salvador Dalí created dresses for Coco Chanel and Elsa Schiapparelli. In the 1930s, Ferragamo’s shoes commissioned designs for advertisements from Futurist painter Lucio Venna, while Gianni Versace commissioned works from artists such as Alighiero Boetti and Roy Lichtenstein for the launch of his collections. Yves Saint Laurent’s vast art collection, recently auctioned at Christie’s in Paris, testified to his great love of art and revealed the influence of a variety of artists on his own designs.

In the 1980s, relationships between luxury brands and artists were advanced when Alain Dominique Perrin created the Fondation Cartier. In the Fondation Cartier pour l’Art Contemporain, a book marking the foundation’s 20th anniversary, Perrin says he makes “a connection between all the different sorts of arts, and luxury goods are a kind of art. Luxury goods are handicrafts of art, applied art.”

The Fondation Cartier pour l’Art Contemparain building in Paris

The Chinese market has hit a few bumps in the road lately, but the fallout could impact the luxury industry more than initially expected, explains Philip Guarino of China Luxury Advisors.

The Chinese market has hit a few bumps in the road lately, but the fallout could impact the luxury industry more than initially expected, explains Philip Guarino of China Luxury Advisors.

While all eyes have been on the ongoing crisis in Greece, a possible “Grexit” and a questionable deal with European creditors, another worrying crisis has been unfolding in a far larger market — and one that has been critical to the luxury industry’s spectacular growth over the past decade — China.

In mid-June, the Shanghai stock exchange began a dramatic correction with significant knock-down effects. What does this mean for China and for the luxury industry? Perhaps more than we would like to acknowledge.

“ The run-up in Chinese shares has been nothing short of spectacular ”

The run-up in Chinese shares has been nothing short of spectacular. In a year, Chinese shares had risen over 135 percent on the Shanghai exchange, and even more — 150 percent — on the Shenzhen index. Since then, fueled by low interest rates and a “casino-like” exuberance, private investors rushed into the equity market.

Consumers were encouraged further by assertions of Xi Jinping’s “Chinese Dream,” or “zhongguo meng,” egged on by stories of people leaving their day jobs and housewives becoming wildly successful equity traders. Government officials were jubilant at first, keen to offset the dubious balance sheets of state-owned firms with inflows of private capital. “Another step in the modernization process,” it was hailed.

Yet as dramatic as the rise in equity prices has been, so has its fall. Since June 12th, the Shanghai exchange has lost just under 30 percent of its value, wiping a staggering $3.5 trillion off of the market.

“ The effects of the stock market crash are already being felt in a critical sector ”

The official response was swift. A moratorium on public offerings and a prohibition of share sales by company officials and large shareholders was followed by a suspension in trading of half of companies, and a $20 billion fund which brokerage firms were forced to reinvest in the market. The market has since stabilized and rebounded slightly — up just over 2 percent in the past week. But is the rout over, and what is the fallout?

Many analysts are bearish, doubting that the correction has ended and expecting further falls in equity prices. Prices still remain 82 percent above last year, in a market where macroeconomic conditions have shown a significant slowdown. Optimists cite that only 9 percent of household wealth has been invested in the stock market and that retail, not institutional investors, hold close to 80 percent of shares.

Yet the effects of the stock market crash are already being felt in a critical sector that represents 50 percent of Chinese personal assets — housing. Since June, there has been a surge in cancellations of real estate and mortgage transactions. Other high-ticket consumer items such as imported cars have also suffered. Mercedes-Benz and BMW, which have already been under heavy price pressure since the anti-corruption campaign began, are reporting a drop in foot traffic of 20-30 percent.

“ Luxury sales have already been contracting in mainland China ”

And herein lies the greatest threat to the luxury industry — consumer confidence. While a fall in share prices alone is unlikely to derail economic prospects, a lack of confidence will likely impact sales and margins as consumers seek more bargains.

Luxury sales have already been contracting in mainland China while they have continued to expand abroad. In a context of weak consumer confidence, the ongoing disparity between domestic Chinese prices and prices abroad (among other factors) will only exacerbate the divide between successful travel sales and waning domestic Chinese consumption.

Those brands which have been slow to understand or address the traveling Chinese consumer in a strategic manner will be forced to shift gears even sooner. They will have to be more agile — and rapid — in adjusting their consumer engagement strategies (digital, retail and CRM) to capture Chinese consumer attention whether it be in Paris, New York or Dubai.

By the same token, those that continue to misallocate assets by maintaining bloated and unprofitable retail operations, and spend lavishly on traditional advertising, should see their rationalization plans accelerate.
Perhaps Deng Xiaoping had a message for the luxury industry as well when he spoke of modernization.

To further investigate the Chinese luxury consumer on Luxury Society, we invite your to explore the related materials as follows:

China’s Import Tax Cuts Won’t Lift All Brands
Luxury Brands Play Renminbi Roulette
Targeting the Travelling Chinese Luxury Consumer

Philip Guarino
Philip Guarino

Partner/Director

China Luxury Advisors counsels luxury brands and retailers on their China consumer strategy, ranging from market entry to digital to attracting, converting, and retaining affluent Chinese customers worldwide.

Related articles

CONSUMERS

5 Must Know Facts About China’s Millennials

CONSUMERS

Report: Decoding Luxury Marketing Milestones in China: Lunar New Year

CONSUMERS

In 2024, expect more of the same. Now is the time to optimise.