The new threat to China’s luxury boom: what you need to know

Rambourg agrees: “I don’t think they would increase VAT on luxury goods. You could say the world is closed today so people have no choice but to buy locally, but eventually the world will reopen. “

Already, other actions have been taken. China has launched an antitrust investigation into Alibaba; and on August 18, China’s Ministry of Commerce released proposed rules on live broadcasts hosted by key opinion leaders, including speaking Mandarin and dressing in accordance with public order and “good law”. manners ”.

Continuous request, display muted

Analysts say the regulations won’t hurt demand from Chinese luxury customers, but the way wealth is displayed could change. According to Jefferies’ research, the bulk of luxury spending by Chinese shoppers will not be affected, while spending on super-spending and very wealthy Chinese VIPs (by people who spend more than $ 100,000 a year on products luxury, or 23% of total luxury spending in China) is the target.

“The long term fundamentals of the luxury industry are still there”, Mario Ortelli, Managing Director of Ortelli & Co. “I do not see, at the moment, a cultural shift in the desirability of luxury goods.” Government measures such as tax increases could lower the purchasing power of [high networth individuals], or their willingness to spend could be affected for fear of being watched, he adds.

The government’s statements come fourteen months ahead of the 20th National Congress of the Communist Party of China, scheduled for October 2022. “The congress itself is probably not a catalyst. What could influence the psychology of consumers and weigh on purchases are the administration’s statements by then. Is this a one-time ad or is it the start of several ads? Said analyst Rambourg.

“The real problem is that another rhetoric can take a harsher point of view and trigger more concern,” Jefferies analysts Flavio Cereda and Kathryn Park say. “More widespread wealth (ie greater growth of the middle class) is good for luxury, but only if the big spenders are ‘managed’ rather than punished. “

The opportunity of the middle class?

More widespread wealth, which means a better-off middle class, could have a positive effect on luxury, suggest Cereda and Park. But the outlook for the purchasing power of the middle class is uncertain.

“For now, we could see it in a benign way: the Chinese leadership wants the very rich to donate while the middle class continues to rise. It might not be so bad for luxury, after all, ”notes Bernstein’s Solca.

Luxury brands are not guaranteed to benefit from a strengthened middle class, even if the efforts to redistribute wealth are effective, says Rambourg. “It can boost sales of affordable luxury goods, cosmetics and sportswear, but not necessarily from a Louis Vuitton or a Gucci.”

He adds that the administration’s announcement, combined with the increase in Covid cases in China and the United States, could dampen investor enthusiasm for luxury in the short term.

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