Chinese Luxury Consumption Poised for Continued Growth

Over the past 20 years, we’ve seen vast increases in Chinese consumption of luxury goods. Today, Chinese consumers represent more than 35% of global luxury goods spend. However, the majority of that spend (roughly 70%) has historically taken place outside of mainland China—mostly in regions like Europe where there are strong pockets of luxury goods manufacturing in countries such as Italy and France.

Luxury goods purchases outside of mainland China by Chinese consumers have been driven primarily by two factors. The first is the price discrepancy of luxury goods across regions. Luxury goods have historically been cheaper to buy in Europe than on mainland China—sometimes even 20% to 50% less expensive. That price differential is exacerbated if the renminbi is strengthening against the euro, for example. Also, import duties or tariffs and distribution costs can vary greatly across markets. The second factor is the existence of the daigou in China—an unofficial personal shopper who buys luxury goods overseas on behalf of their clients in mainland China. Daigou became a more substantial piece of luxury consumption roughly five years ago—they would use word of mouth, personal networks and social media to make purchases for their clients. Today the daigou market is worth billions.

Another trend driving Chinese consumption of luxury goods has been the adoption and acceleration of online sales or e-commerce—which has allowed luxury goods companies to penetrate even deeper into lower tier cities where historically they didn't have as much of a physical presence. E-commerce has provided luxury goods companies the ability to sell products through their own websites or via online shopping outlets such as Tencent’s WeChat or Alibaba’s Tmall Luxury Pavilion, a marketplace for luxury goods sales in China. Social media and e-commerce have made aspirational purchases and luxury goods more universal and more accessible to all Chinese consumers. For example, an individual may not be able to afford a Louis Vuitton handbag that costs somewhere in the range of $2,000 to $3,000, but a Christian Dior perfume that sells for $150 is certainly more attainable and provides that aspirational luxury feeling to the consumer.

Then of course the coronavirus emerged in China. Despite being the epicenter of the outbreak, the country handled the pandemic far better and faster compared to some other countries mostly owing to the Chinese government's heavy hand in terms of quarantines and travel restrictions. Its approach helped accelerate a return to normalcy, which in turn sped up the recovery in consumer spending.

The other unique trend that has helped luxury goods companies throughout the pandemic is the repatriation of sales in mainland China. As mentioned, a large majority of Chinese consumption took place abroad as Chinese nationals traveled overseas to Europe or other parts of Asia or purchased goods via daigou. Because of COVID-19 travel restrictions, these typical consumption habits shifted in large part due to myriad policies that the Chinese government instituted during the pandemic. For example, the Chinese government developed a duty-free zone on Hainan Island, a tropical resort island in southern China. Hainan is easy for domestic Chinese consumers to travel to because it is only a few hours away by plane and it’s part of China—no need for visas or permits to go there. Hainan serves as an attractive alternative to duty-free purchases that used to take place abroad. Additionally, the government increased the duty-free allowance to $15,000 per person per year and allows consumers to buy duty-free products online for six months after returning home, which helps luxury goods companies capitalize on the Hainan marketplace.