Affluent Chinese tourists have supported the global luxury-goods companies in recent years. Many countries still stand to benefit in the short term from China’s demand for luxury, but longer-term we think Chinese consumers will shift from shopping abroad to buying at home.
Key structural factors that previously discouraged luxury consumption in China are resolving, driving the change in consumption patterns. These include price harmonisation, the development of e-commerce platforms, and investment in infrastructure and travel retailing that will encourage shopping at home.
A few years ago, 75 per cent of Chinese luxury sales happened outside the country: we see that moving to 50 per cent either this year or next. As these shifts continue, we expect China’s luxury sales to grow at 12 per cent in 2019 – twice the rate of the rest of the global industry.
A survey of higher-earning Chinese consumers conducted this year for HSBC found that 70 per cent were planning to travel abroad no more than twice in 2019 with 12 per cent expecting to make no trips at all. China itself was one of the top five countries where respondents now prefer to buy luxury.
Domestic travel has steadily grown over the past decade, increasing by 11 per cent to 5.5 billion journeys last year alone, and local spending grew twice as much as spending abroad in 2018.
Prices of premium products in China are now closer to prices abroad with luxury brands targeting more subtle price gaps between markets. Beijing’s decision in March to cut VAT from 16 per cent to 13 per cent to stimulate the economy should also boost consumption at home at the expense of purchases abroad.
Compared with France or Italy, luxury prices have fallen in China from a 38 per cent premium to 22 per cent over a year. Our survey found that cheaper prices are a key reason for buying luxury abroad, so as prices fall people should shift their consumption to the mainland.
E-commerce has made shopping simpler, driven by the shifting preferences of the younger generation – particularly China’s tech-savvy, cash-rich millennials – and improved internet penetration in a country where 75 per cent of potential customers live outside the top 15 cities. Online sales answer the challenge of building enough bricks-and-mortar stores to reach all possible buyers.
Meanwhile key changes to travel retailing and developments in domestic infrastructure projects mean more consumers can be reached without suppliers having to expand into lower-tier, less exclusive, cities. Airports are second only to e-commerce as the fastest-growing channel for luxury brands, while sales are falling in town-centre boutiques and department stores.
Duty-free outlets top the list of preferred sales points for wealthy Chinese consumers when overseas but domestic duty-free stores are a growing trend.
China relaxed restrictions in December 2018 to allow travellers and locals to buy duty-free products worth up to about USD4,400. The downtown duty-free shops will enable consumers to buy at home instead of queuing at VAT-refund booths in foreign airports and hauling shopping bags through the departure and arrival halls.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Erwan Rambourg
Equities: Stock ratings and basis for financial analysis
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