Luxury-goods brands fear their golden goose - China - is cooked

By Tanner Brown

With sales of high-end goods in decline and economic expansion continuing to moderate, luxury companies are gradually coming to recognize that China isn't the reliable growth driver it was once was

Liu Wenning wanted to get his girlfriend of four years a ring for China's Valentine's Day, which was last Saturday.

Because of China's tepid economy and Liu's precarious employment at a Beijing internet firm, he concluded that spending so much during insecure times would be beyond irresponsible.

"We went to a movie and dinner instead. I'm lucky that she [his girlfriend] understands the difficulty in China's current economy," he said.

China, once a cash cow for luxury brands, has lost its appetite, or ability, to consume in the current financial climate.

Last month, leading luxury brands reported huge declines in their China sales, walloping their bottom lines.

Burberry (UK:BRBY) (BURBY), Hugo Boss (XE:BOSS) (BOSSY), Richemont (CH:CFR) and Swatch (CH:UHRN) (SWGAY) all posted significant losses in their most recent financial results. Richemont, the Swiss firm whose luxury items range from jewelry to pens, saw a 27% drop in its most recent quarterly sales.

'The only part of the world where consumer confidence remains very low is China.'Nicolas Hieronimus, L'Oreal

British fashion house Burberry has fallen 21% on a year-on-year basis over the last quarter, with the company's chair saying on an investor call that sales in China were "weaker than we expected." He attributed this to "deteriorating consumer confidence" - which has been blamed for weak sales across China's retail spectrum.

Around the same time, L'Oreal (LRLCY) CEO Nicolas Hieronimus told analysts on an earnings call, "The only part of the world where consumer confidence remains very low is China."

The shriveling of luxury purchases in China is especially remarkable considering the rapid growth and massive sales in very recent times. Luxury-goods sales tripled between 2017 and 2021, according to a Bain & Co. report earlier this year.

COVID-19 restrictions decimated the sector in 2022, but China's overall economy continued to wither even after the lifting of those restrictions, which has left potential buyers with skittishness about their financial security and huge losses in the country's central investment area: real estate.

The tightened spending mirrors the fall in sales across China's broader consumption market. Dozens of Chinese citizens have told MarketWatch they have come to accept that the new normal of slow economic growth is here to stay, and they must adjust accordingly.

"Times are different, and so are our buying habits, from food to things we used to do for fun, like traveling and seeing movies," Wen Meili, a manager at a Shanghai grocery store, said in a phone interview.

See: Consumers are still spending. But on TikTok 'underconsumption' is trending.

As usual, the Chinese government is sending mixed signals. There is a crackdown underway on ostentatious displays of wealth, particularly on social media.

At the start of the campaign, China's Cyberspace Administration, the national internet regulator, issued a warning to influencers who "create a 'wealth-flaunting' persona, deliberately showcasing a luxurious life built on money, in order to attract followers and traffic."

Accounts have been shut down and fines levied.

Dozens of Chinese citizens have told MarketWatch they have come to accept that the new normal of slow economic growth is here to stay, and they must adjust accordingly.

Yet Beijing has tried and failed since the end of the pandemic to kick-start lackluster general consumption. The government has long hoped the sector would supplant industrial production and exports as the main driver of the economy - but 18 months on there is little sign their policies have put as much of a dent in the problem.

China's refusal to adequately stimulate consumption through methods that worked in the West, such as direct cash transfers, and Beijing's stubborn continuation of plowing funds into infrastructure and investment have baffled outside economists.

Now Chinese experts have seen enough of failed consumption policies to publicly voice their concerns. This Tuesday, numerous Chinese economists were quoted in the China Daily making the case for more direct consumer help.

"China's central government should consider additional direct support to consumers worth at least 1 trillion yuan [or $139 billion] - either cash or vouchers - in the rest of the year to effectively address the pressing challenge of lackluster domestic demand," the article said, going on to quote leaders of domestic think tanks who support the idea.

"Compared with the past, it is true that the probability of the central government providing direct support to low- and middle-income groups has increased notably," said Zhang Ming, deputy director of the Institute of Finance & Banking at the prestigious Chinese Academy of Social Sciences.

"At this time, directly backing households can revitalize people's expectations and confidence and bolster household consumption," he added. This could have positive effects across the wealth spectrum, including in the market for high-end goods.

Liu Wenning, who considered the Chinese Valentine's Day ring purchase for his girlfriend, said such measures might not be enough for him to bite the bullet on that purchase. "But," he said, "it would certainly put the thought back in my mind."

Tanner Brown covers China for MarketWatch and Barron's.

More Tanner Brown dispatches:

Chinese social media is brimming with anti-Kamala Harris, pro-Donald Trump posts

The world's largest pension fund may be running dry

I spent a week on the Chinese version of E-Trade. Here's what I found.

China's economy is finally showing bright spots. Worrying signs remain.

China prognostication is challenging. Witness 2023. And 2024 warning signs are flashing.

China is experiencing an exodus of foreign investment and talent. Xi Jinping is getting worried.

-By Tanner Brown

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08-19-24 0734ET

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