In China, Luxury Shopping Faces Ongoing Headwinds

This article is part of our special section on the DealBook Summit that included business and policy leaders from around the world.

Toward the end of 2021, a glittering luxury shopping center called Taikoo Li Qiantan opened its doors in Shanghai. The 120,000-square-meter center (the equivalent to a stretch of 17 soccer pitches) is made up of nine buildings, landscaped gardens and stores from Western brands such as Balenciaga, Bulgari, Cartier, Gucci, Hermès and Tiffany & Company. The expectation for this colossal state-of-the-art mall in China’s commercial capital, owned by the Hong Kong conglomerate Swire Properties and the Lujiazui Group, was that it would soon attract hordes of shoppers who were eager to snap up luxury wares.

But for much of 2022, it often stood empty; China’s zero-Covid policy and mass lockdowns underscored a government commitment to eliminate local cases of the virus, no matter the economic or social costs.

Last week, Beijing largely did away with rules requiring mass testing, limited the scope of lockdowns and scrapped mandatory hospitalization and mass quarantines. Local media reported that residents would no longer be required to show negative Covid test results to enter supermarkets, shopping centers, the city’s main airport and other public places. Still, tensions remain high.

For more than a decade, the world’s most populous country with 1.4 billion consumers has powered the Western luxury market. And then the global pandemic arrived in 2020. Although that year and 2021 for China ultimately proved less damaging than expected for China’s luxury sector (which globally suffered its worst year of trading on record), this year has proved to be a different story: The government maintained painful and often sudden multi-month lockdowns in major cities, blocked borders, forced quarantines and conducted broad surveillance that has sparked mass protests in recent weeks.

With youth unemployment reaching a record 20 percent and economic growth falling well below Beijing’s own projections, those with hopes riding on a stellar Chinese rebound in 2022 were disappointed. Bloomberg Intelligence research estimated that China’s luxury goods market share could have halved in 2022 thanks to shuttered stores in the first half of the year and a reticence from customers to return to stores beyond the initial reopening euphoria.

“Most luxury brands were bracing for a very steep V-shaped recovery in sales in mainland China after the end of the Shanghai and Beijing lockdowns, which affected the business in the spring,” said Erwan Rambourg, global head of consumer and retail research at HSBC. “There has been a V-shaped recovery, but not really the one they were hoping for. Apart from Hermès and Moncler, who experienced strong growth in the market, the rest of the sector has seen very muted growth or — more commonly — no growth at all.”

In an October trading call for LVMH Moët Hennessy Louis Vuitton, the luxury conglomerate’s chief financial officer, Jean-Jacques Guiony, remained cautious on the outlook on China. As he said, “We are not operating in normal conditions.”

Before the pandemic, the majority of luxury spending by mainland Chinese shoppers did not happen at home, thanks to comparatively higher local prices.

Instead, the bulk of sales happened in European cities like Paris and London, and more regional Asian cities like Seoul and Hong Kong, though many major brands continued investing in a local Chinese infrastructure, including stores and concessions.

But when the virus spread, international travel was (and still remains) severely restricted. Hong Kong’s position as a luxury shopping mecca was hampered after the city maintained some of the world’s strictest border rules. In mainland China, boutiques in second- and third-tier cities have opened to better cater to the tens of millions of shoppers unable to travel far, particularly in places like Chengdu and Hangzhou.

One particular hot spot has been Hainan. Several years ago, the Chinese government — keen to preserve the repatriation of luxury consumer spending to help bolster the economy — turned the tropical island, known as China’s Hawaii, into a duty-free shopping hub.

Alongside moves to further consolidate his grip on power, Xi Jinping has also called for wealth distribution “to keep the means of accumulating wealth well-regulated” — part of a wider “common prosperity” drive. Although few expect a widespread crackdown, the sky-high returns once enjoyed by Western luxury brands in China also no longer feel like fail-safe guarantees.

As a result, and because of the geopolitical instability related to the war in Ukraine, some chief executives have been reassessing their geographical spread of investments in order to have a more balanced mix of sales.

Notably, some have redirected cash away from China toward what remains luxury’s largest market by sales: the United States. Despite the decline of department stores — once a cornerstone of business — luxury sales in the U.S. grew almost twice as fast as the global average in 2021, and one and a half times faster in the first half of 2022, according to Citi Research.

“Developing the U.S. market was not a major priority in the last decade when there was so much to do in China, but brands are now recognizing that there is much more than can be done, particularly beyond the two coasts,” said Luca Solca, the head of luxury research at Bernstein, highlighting Texas and Tennessee as key states of focus.

This year has been volatile for Western brands operating in mainland China — and for Chinese consumer psychology. “Revenge spending,” or the tendency of consumers to spend after a period of enforced abstinence, originally drove many shoppers back toward stores, but that trend has largely faded.

“Consumer confidence has suffered significantly due to the restrictions,” said Chloe Reuter, a founding partner of Gusto Collective, which helps luxury brands navigate expansions in China and Asia. “It is challenging for businesses to plan with no clear road map for a relaxation of the restrictions.”

Many companies, she added, were now holding off on new stores or large-scale offline events and adopting a “wait-and-see” approach in the short term, with few expecting any recovery until at least the middle of 2023.

In the longer term, however, China remains a critical piece of the global luxury puzzle with huge potential. According to a recent study by Bain & Company and Altagamma, Chinese shoppers will make up 40 percent of all luxury consumers by 2030. That means Western brands must still maintain a close eye on how they deepen their popularity and longevity in a country with a changing and unpredictable economic landscape.

“An over-dependence on China is risky, but not as risky as not being there at all,” said Claudia D’Arpizio, the head of Bain’s luxury goods practice who conducted the study. “There may be a rebalancing of growth globally, given the strong sales in America, Europe and Southeast Asia and the domestic situation in China, but ultimately it remains the most important luxury market for the big Western brands.”

Look no further than Gucci, the largest brand by sales for French luxury conglomerate Kering, which has revamped its management structure in China this year and parted ways last month with longtime creative director Alessandro Michele, partly upon speculation that his aesthetic had fallen from favor with Chinese consumers.

“Sooner or later, things will go back to normal,” Ms. Reuter of Gusto Collective said. “But I think brands and consumers of luxury can all agree that 2022 has not been a great year.”