INSIDE OUT
Inside Out
by

Luxury goods down but not out with another 100m consumers in waiting

China's rich now account for almost one third of global luxury spending, and it is likely HK will prosper from their affluence for years to come

PUBLISHED : Sunday, 29 November, 2015, 7:34pm
UPDATED : Sunday, 29 November, 2015, 7:34pm

As a balding, 65-year-old English male, brought up in a working-class Methodist household in Britain's uncharismatic Midlands, it should be clear that I and the luxury goods industry do not sit easily together. I don't understand it, and it does not understand me.

I find it incomprehensible that a woman can splash out HK$100,000 on a Birkin handbag - even though I recognise there is a strange chemistry between a woman and her handbag that a man can perhaps never comprehend. All my fuses exploded when I discovered the watch on a colleague's wrist cost more than my parents' house. But I am resigned to the reality that it is me that is the odd one out. Maybe I am simply driven by envy.

You can nevertheless understand when I say I am unmoved by the news that the world luxury goods industry has hit upon hard times. And as in so many other areas of the global economy, it is the Chinese that are being blamed for the downturn. If there were not so many hundreds of thousands of hard working people's jobs on the line, I would not shed a tear.

After all, would the world really be worse off without one of Imelda Marcos's diamonds? Or a red-soled Christian Laboutin shoe? Or an eighth Ferrari in some guy's oversized garage?

To ask such a question in Hong Kong is of course walking on Faberge eggshells. We may be home to a million people living below the poverty line, but we are also home to some of the hardest-spending luxury addicts in the world. That is why Christies and Sotheby's thrive here, and why more fine wine is traded here than anywhere else in the world. And it is where our mainland "nouveaux riches" come to get their first taste of luxury.

The speed with which China's emergent rich have become the world's biggest luxury spenders is quite staggering. According to consultants Bain & Company, the world's total of luxury consumers exploded from 140 million in 2000 to 350 million today. In 2000, Chinese luxury spenders accounted for barely 2 per cent of their spending, but this year they will account for almost one third.

On the back of this explosion, the world's luxury-goods industry has flocked into China. Brand names like Louis Vuitton, Chanel, Prada and Gucci have proliferated across China's top cities. But paradoxically, in spite of explosive sales growth for most of the past decade, these China-based stores have struggled. This is because over 65 per cent of the US$65 billion luxury goods bought by Chinese in 2014 were in fact bought outside China - either during overseas holidays (there were 120 million by Chinese last year), or through a shadowy daigou network. These daigou are based in key cities like Paris or Milan, and take orders for whatever the Chinese tai tai demands, then mailing the goods back to China below the radar of frustrated customs officials.

Fascinatingly, one response has been to go "virtual", with some luxury-goods companies foregoing the posh high-street shop, and focusing all efforts on selling online.

The canny Chinese habit of buying tax free overseas has for many years enormously benefited Hong Kong, which is of course normally the first overseas destination for mainland travellers. But this Hong Kong windfall has faltered, and not just because Hongkongers have proven so xenophobically unwelcoming to mainlanders in recent years. Nor is it because bankers' bonuses have withered as 325,000 banking jobs have been shed worldwide.

It is happening because so many of China's increasingly sophisticated travellers are now doing their shopping further afield - in South Korea and Japan, or directly in Europe. Bain predicts that luxury-goods sales will contract in Hong Kong by 25 per cent this year. And with this, and stores being closed - most recently Coach, TAG Heuer and Burberry.

Of course, aggravating this decline has been Beijing's anti-corruption campaign, which has lasted for longer, and reached deeper, than anyone predicted when Xi Jinping came into power. At last count, 59 provincial or ministerial level officials have been arrested and investigated, with many thousands at more junior levels beneath them.

Along with the anti-corruption purge has come a massive crack-down on "flamboyant" gift giving, with a marked impact on luxury goods sales across the country. Such sales in China contracted by 1 per cent last year to US$15 billion - a sharp reversal after more than a decade of double digit annual growth - and this has in turn impacted luxury spending by mainlanders both in Hong Kong and Macau.

Burberry reflected broader sentiment when it warned in October that "an increasingly challenging environment for luxury, particularly among Chinese customers" would hurt its global performance.

Given my prejudices, I will not grieve over their pain, though I do mourn for those youngsters whose jobs are being shed. And on the brighter side, this downturn appears to be having a long-overdue impact on Hong Kong's astronomical retail rentals. For the year to end-June, rentals have fallen 12 per cent in Causeway Bay and Tsim Sha Tsui, and nearly 14 per cent in Mong Kok.

I wonder if this points towards a future less obsessed by accumulating "stuff" - whether luxury or not-so-luxury - but of course I know this hope is impossibly naive. On top of the 100 million or so Chinese that have joined the luxury-gobbling classes in the past decade, there are at least 100 million more who will soon be queueing at Chanel shops to spill their new-found wealth.

So despite their current tribulations, I suspect our luxury retailers will soon recover their stride. And despite Hong Kong's recent eccentric hostility towards affluent mainlanders, I suspect we will be prospering off their affluence for years to come.

David Dodwell is executive director of the Hong Kong-Apec Trade Policy Group