Setting a New Pace for Personal Luxury Growth in China

Bain & Company’s new report reveals that China’s personal luxury sales contracted 10% year on year in 2022, ending its five-year run of exponential growth. However, positive conditions are expected to return before the end of the first quarter of 2023.

Despite a strong start to 2022, Covid-related lockdowns from the second quarter created barriers to purchasing. A decline in the real estate market, higher unemployment, and anxiety around Covid also weakened consumer sentiment.

All luxury categories were affected by the decline to varying degrees. Categories with strong online penetration were less affected by lockdowns and fared better. For example, with 50% online penetration, luxury beauty only contracted 6%.

Online penetration was lower in other segments (10%–15%), leaving them more exposed during lockdowns. The watch market saw the steepest decline, with sales falling 20%–25% from 2021. Fashion and lifestyle categories experienced a 15%–20% decline. Jewelry and leather goods performed slightly better, contracting 10%–15%.

The impact across non-beauty categories was consistent with historical trends - jewelry and leather performed the best, followed by fashion, and watches trailing last.

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Bruno Lannes

Senior Partner at Bain & Company based in Shanghai

While most brands saw declines in 2022, a few stayed flat or grew despite challenging conditions. Three factors contributed to their success – first, bigger brands out-performed smaller players on average; second, brands with iconic portfolios did better than those with trendy or seasonal merchandise and finally, brands with a higher concentration of Very Important Clients (VICs) fared better

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The report outlined three major trends and how they could influence the luxury market’s comeback.

The expansion of VICs

China’s luxury market typically attracts a high concentration of VICs, and this trend expanded in 2022. The economic slowdown affected entry-level luxury consumers, more than high-net-worth individuals (HNWIs). Coupled with a decline in mall traffic due to Covid restrictions, sales skewed toward VICs in 2022. Some Chinese luxury brands achieved higher VIC sales than the global average of 40%.

VICs also played an important role in online luxury sales. Those who bought more than three times a year accounted for over 50% of sales and are the fastest-growing segment, according to leaders at Tmall Luxury Pavilion.

The duty-free ecosystem

In recent years, duty-free shopping in Hainan contributed to China’s luxury market boom. However, Covid restrictions in 2022 resulted in duty-free sales in Hainan to fall 30% to RMB 35 billion. The decline was slightly offset by an 8% increase in spending per shopper.

Meanwhile, China Duty Free Group (CDFG) and its affiliates have been aggressively pushing for domestic e-commerce options to offset declines caused by limited airline travel. Duty-paid accounted for roughly 40% of CDFG’s revenue during the first half of 2022.

However, discounted duty-paid business makes it harder for luxury brands to harmonize pricing across channels. In mid-December 2022, the price gap between domestic and duty-paid beauty prices was 60%–70% for some leading brands. In the short- to mid-term, this trend could devalue luxury beauty brands.

In addition, visits to South Korea in 2022 were over 90% lower than in 2019, but sales remained at approximately 70% of their 2019 level. This suggests significant cross-border exporting activities or daigou shopping. South Korea’s duty-free market will continue to play an important role in the broader luxury beauty ecosystem in China.

Global pricing strategies

Since the closure of Chinese borders in 2020, most brands have not sought to harmonize pricing between China and the rest of the world. Similar to pre-pandemic times, some luxury prices are now observed to have significant price gaps between China and Europe. Only a few brands maintained global pricing strategies over the pandemic years.

A sample check of leading SKUs in the leather segment found a price gap of 25%–45% between China and Europe—before accounting for value-added tax (10%–12%). The price gap was larger for entry-level products than for more expensive merchandise.

The price gap for shoes was significant (25%–35%), while jewelry and watches were less affected as many of these brands adopted global pricing strategies years ago and maintained their strategies despite borders being closed.

Outlook for 2023

Despite the 2022 reset, Bain & Company expects growth to resume in 2023 as China recovers from Covid. The fundamentals of consumption in China are still intact. Compared to other emerging markets, China is a behemoth for luxury growth. It has a larger number of middle- and high-income consumers, and these populations are projected to double by 2030.

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Weiwei Xing

Partner with Bain & Company’s  Consumer Products and Retail  practices in Hong Kong

Luxury consumption will recover as Covid subsides, mall traffic improves, and consumer sentiment rebounds. We expect to see 2021 sales levels sometime between the first and second half of 2023,While optimism abounds, there are also risks. Brands need to resolve pricing gaps between China and Europe before international travel resumes. In addition, as more Chinese HNWIs are residing outside of China, luxury brands must deliver excellent experiences everywhere in the world.

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"Ultimately, brands that understand the nuances of the China luxury market will succeed over time," Lannes added. 

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