Consumer trends report Q2 2022: China’s luxury industry after Omicron-driven shutdowns

Shanghai suffered the brunt of China’s latest outbreak, the country’s worst since the pandemic started in early 2020.¹https://www.cnbc.com/2022/06/15/luxury-brands-say-chinas-latest-covid-wave-whacked-consumer-demand.html Residents were ordered to stay at home and businesses were forced to close for over two months from March until June. As the beginning of the spring/summer fashion season, the timing could arguably have not been worse. Shanghai also represents 10-15% of China’s entire luxury business and handled a fifth of Chinese freight last year, a director at LVMH Fashion (Shanghai) Trading Co Ltd told Forum.

The specialist said in April that lockdowns in Shanghai and Shenzhen could drag Q2 2022 sales down by 10%. The market was projected to grow 23-25% YoY but may now only reach +13-15% – and Shanghai in full lockdown could have a “domino effect” across other areas, they added. However, our expert was optimistic that numbers should “pick up very quickly”, with cities including Chengdu, Chongqing and Beijing expected to help Shanghai shift excess inventory. 

For mainland China, we were told that the entire luxury business could still achieve 20-25% sales growth in 2022, compared with 33% last year. “Our expectation for Q3 and Q4, before entering this year, was 25% for Q3 and 27% for Q4, but, given that there are a lot of axes at the moment, we [will] probably dial back a bit and give Q3 maybe 23% and Q4 25%,” the LVMH director said. With that said, the same expert in June told us that in April mainland China sales declined 30-40% YoY and May was “even worse”, declining 40-45%. Still, the expert said it is too soon to predict what the full-year picture will look like. Indeed, also in June, a former SVP at Christian Dior Couture said Dior’s estimate is that its China business is growing at 10-20% post-lockdowns, and that it could add 5-10 retail stores in the region over the next two years.

In the Forum Interview, we also heard that as well as now being a core part of youth culture, China’s luxury industry has become more resilient, with the country a significant contributor to global growth and market share. The pandemic has forced large brands to create more stable retail networks, including establishing e-commerce partnerships and diversifying warehouse reach. As we heard, e-commerce can save 30-40% of sales lost during lockdowns and is playing an increasingly critical role in China’s luxury space, with 16-18% of 2021 sales purchased this way and online orders spiking 10-15% further in 2022. “For some of the brands, e-commerce even occupies about 25% of their general sales,” our specialist said. 

For German e-commerce luxury fashion company Mytheresa, which has experienced a slowdown due to promotional pressure and global demand deceleration, China could be a “positive surprise”, a former senior adviser at Yoox Net-a Porter Group SpA told us. A portion of retail sales have shifted to online retail, they said, supporting luxury e-commerce growth in China. Like many other players, Mytheresa has also circumvented China’s COVID-19 challenges by relying on air shipments. 

Turning to the competitive landscape, our specialist said the luxury market has become highly competitive and crowded, also noting some changes in the positioning of key brands. “I think it’s interesting that we now talk about the top-four club,” they said, highlighting Hermès, Dior, Louis Vuitton and Chanel. However, Gucci, Burberry and Prada are “not in a comfortable place”. For Gucci, we were told revitalising the brand to appeal to a wider Chinese customer is paramount, Burberry would do well to focus on a “hero” product, and Prada would benefit from engaging with a more senior clientele, not just Gen Y and Z. 

We also heard that hard luxury has outgrown soft luxury as a product category over the past two years, with the former surpassing beauty and cosmetics too. People are spending more on items that last longer, our expert told us. “With this trend continuing, hard luxury, particularly jewellery… will flourish further.” This could also tie into the trend of the rising sophistication of Chinese consumers. “That’s why, I think, LVMH acquired Tiffany, because we’ve seen tremendous prospects for hard luxury brands in the marketplace.”

Overall, the LVMH director remarked that if China’s luxury goods industry achieves -5% to -10% growth in Q2 2022, full-year rates should remain at 13-15%. “Perhaps Q3 will outgrow our expectation, maybe edging towards 20% positive, and Q4 is also historically a very good quarter for us, but my estimation… counts a lot on what Q2 will bring us.” 

With shopping malls now open again, revenge spending is in play but is expected to be shorter and more intense than 2020 levels. “We’ve seen major luxury brands like Hermès, Prada, Chanel, people are happy to queue up for those brands, and it’s something that we have expected and it’s happening.” 

Still, there remains considerable uncertainty over the future of the industry in a country with such a strict zero-Covid policy. This year, many businesses stopped recruiting in retail and are even downsizing compared with 2021, when headcounts rose by 15-20%, the LVMH director said. And although e-commerce has lifted the industry during the recent shutdowns, consumer confidence has been tumbling in response to economic pressures, which could dampen appetite for investment in non-essential items.