The slowdown in China’s economy may be rocking the world’s stock markets, but that doesn’t mean Chinese luxury consumers won’t buy Jimmy Choo pumps or Cartier Trinity rings.

That’s crucial news for the luxury world, which relies on the appetite of Chinese consumers for the finer things in life. “The biggest consumers in the world are still the Chinese and they still buy luxury good products,” says Mario Ortelli, a senior analyst of European luxury goods at Sanford C. Bernstein.

But the pummeling of the Shanghai Composite since last June and terror attacks from Bangkok to Paris have had some effect on the luxury consumer mindset, drawing them more to entry-level luxury products and brands like Furla and Coach over premium names like Bulgari and Van Cleef & Arpels.

“In this crisis environment, value-for-money propositions do better,” says Erwan Rambourg, global co-head of consumer and retail research at HSBC. “In watch brands, the steel version will do better than gold, simply because selling diamond-encrusted watches or gold watches in the current psychological environment is hard.”

Rambourg’s team at HSBC expects luxury sales growth of about 5.5% in 2016. That’s up from about 2.5% to 3% for 2015 (figures for the year haven’t all come in yet), but worries about stock market gyrations or global unrest means spending will not see a “reversion to the mean”, he says, noting, “This space used to grow at very high rates.”

Similarly Bernstein expects luxury spending will rise slightly this year over last, although their estimate is for 4% growth.

Estimates of 4% to 6% growth certainly aren’t bad, yet a few dynamics are at work to tamp down exuberance. For one, wealthy Chinese who initially propelled the luxury binge beginning around 2008/2009, are focusing less today on Hermès calfskin bags and Omega gold watches and more on paying for services and experiences that boost their quality of life, like travel, premium food and health care, Rambourg says.

This shift will be counterbalanced by millions who have only recently entered the ranks of the wealthy and are beginning to discover the luxe life, he says.

Most of China’s luxury spending happens outside of China. Bain & Company estimates 31% of global luxury sales in 2015 were by Chinese consumers and 80 percent of their purchases were made overseas. That’s a clear reflection of the number one leisure activity for China’s “super wealthy” (those who have of least US$15.2 million): travel, according to the Hurun Report.

And Chinese travelers buy a lot when they’re abroad. The per capita shopping purchases of high-net-worth travelers from China in 2014 (with wealth of at least US$1.6 million) averaged US$22,600, Hurun found. After “local specialties” the top buys were handbags, apparel, watches and jewelry.

Eye-popping numbers aside, the full potential of the Chinese traveler hasn’t been realized. Fear of terrorism, an outbreak of Middle East Respiratory Syndrome in Korea and the depreciating renminbi kept many Chinese at home last year. Less than 60 million Chinese likely traveled outside the mainland, Hong Kong and Macau in 2015, HSBC analysts say. Given that about 75 million Chinese likely own passports, they add, more are likely to hit the road this year.

As Rambourg detailed in his 2014 book The Bling Dynasty, Chinese travelers have several reasons for buying abroad, including assurance they are getting legitimate goods, as well as status: why buy Louis Vuitton in Shanghai when you can buy it in Paris? But price is big reason too, even for the luxury shopper. That’s because luxury goods have cost significantly more in China than elsewhere. In a February 1 note, HSBC says luxury goods sold in mainland China cost 37% more than comparable goods sold in the Eurozone.

Yet, thanks largely to the Chinese traveler, who will buy where prices are best, there’s evidence such price differentials are beginning to narrow. Prada will charge 10% more on new collections sold in China this spring, down from about 40% more now, HSBC says. Brands like Chanel and Burberry have also cut prices in China.

This leveling off of price differentials, as well cancelled travel plans post-Paris attacks, have boosted luxury spending at home, Rambourg says. There’s also help from the Chinese government in form of lower taxes on imported goods and new duty free shopping areas. The Haitang Bay mall in the resort town of Sanya, Hainan, sells 300 brands with Hong Kong price points, which is a “nice discount relative to mainland China,” Rambourg says. “There are more reasons today to shop at home.”

Another ongoing trend expected to gain steam is for women to lead the way on luxury spending. Since corporate gifting, particularly to government officials, ended in President Xi Jinping’s corruption crackdown in 2012, Chinese men , who had dominated luxury spending, have given way to women. That means less spending on watches, technology products and bottles of Lafite Rothschild, and more spending on jewelry, handbags and apparel.

Consider the most recent Hurun survey which found women boosted gift giving by 24% in the last six months of 2015, while men boosted gifting by 15%.

Jewelry created by name brands is likely to be the biggest beneficiary of this trend. Bernstein is anticipating 8% compound annual growth in the category through 2019, in part because of the increased buying power of women in emerging markets. At HSBC, Rambourg expects both high-end jewelers like Cartier and Bulgari will benefit as well entry-level brands like Pandora.

“People are getting richer and they like to give luxury goods,” says Ortelli at Bernstein. “

Women also are spending more because they’ve earned money in their own right and because they are getting gifts from men, who are no longer giving to male government officials. “There is a clear rebalancing of spend from men’s luxury products to women’s luxury products,” says Ortelli at Bernstein.

- Source: Barrons

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