Can ‘revenge spending’ save luxury brands in China as shoppers emerge from coronavirus lockdown?

As the global Covid-19 situation worsens, brands are prioritising the slow recovery of China’s market. Photo: Jing Daily

China is embracing springtime, as the Covid-19 outbreak continues to slow. On Thursday, March 26, China reported no new cases of domestic coronavirus infections for the first time since the outbreak began, and recent new cases have mostly come from overseas, signalling that the worst has passed for now.

Management staff checks the temperature of a woman entering a shopping centre in Wuhan on March 30. Photo: Reuters

But as more residents go outside and resume activities, a term that’s been discussed frequently in the media is coming to the fore, “revenge spending”. The phrase describes how shopping-starved consumers will come out of quarantine and overcompensate by making more purchases than normal. Brands have already seen a modest jump in sales, but how much can they rely on these predicted spending sprees?

Gucci staff prepare for a ceremony inside a shopping centre as it opens in Wuhan on March 30. Photo: Reuters

Offline stores are already welcoming the recovery of foot traffic. Pictures of people lining up outside SKP Beijing and at Bicester Village in Shanghai have been circulating online.

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It was reported that the high-end Hangzhou Tower mall opened for five hours on February 22 and achieved more sales than on the same date a year ago.

Is the worst of it over? Shopping momentum is picking up pace at Sanlitun Taikoo Place shopping area in Beijing (March 17). Photo: Bloomberg

To confirm, we visited the busy local shopping district Sanlitun in Beijing on the afternoon of Saturday, March 14, where the recovery foot traffic was readily apparent. Even though few customers were spotted in stores, many people carried shopping bags, posed for pictures, and documented their new-found freedom in and around the malls. Long queues were forming outside the local bubble tea shop Heytea and the Apple Store.

Shoppers queue to enter the Nike store at Sanlitun Taikoo Place in Beijing on March 17. Photo: Bloomberg

China’s e-commerce market was also showing promising signs of life. The last major marketing event on International Women’s Day was a crucial indicator of how China’s consumption was bouncing back. In March, many major brands on Tmall experienced double-digit sales growth as compared to last year. Beauty brands like Estée Lauder and Lancôme stood out in particular, and since the virus outbreak called for a health focus, sportswear companies such as Nike saw sales increases.

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Emphasis on domestic shopping

Shoppers are back on the streets in Wuhan. Photo: Reuters

As the global Covid-19 situation worsens, brands are prioritising the slow recovery of China’s market. Amrita Banta, the managing director of Agility Research, a consultancy dedicated to providing global high-net-worth individuals (HNWIs) spending habits to brands, said in an interview with Jing Daily that “domestic shopping will continue to increase at even higher growth rates than last year”.

Certain types of luxury goods may experience a warm-up in consumer demand. However, brands are facing a bigger challenge in addressing the cutback on spending
Gao Ming, the Ruder Finn Group

Domestic flights are also recovering. Shenzhen airport is back to 70 per cent of its flight capacity – quite a contrast to mid-February when 85 per cent of all its domestic flights had been cancelled. Even though we can’t equate growing domestic travel with more luxury spending, it reinforces how brands should hone in on China’s market as the virus situation worsens elsewhere around the globe. But China’s spending uptick doesn’t mean brands will weather the global storm.

“It isn’t going to recover losses by any means, and store customer capacities are still being kept lower than normal,” said Banta. “We also observed brands offering deeper discounts at outlet boutiques than normal.”

A shift toward conscious spending

Coronavirus precaution notices are still prominently displayed in shopping malls in Beijing (March 30). Photo: AP Photo

Recent consumer research on affluent Chinese consumers showed a rise in conscious shopping, signalling to luxury brands that they can’t simply bet on “revenge spending” for recovery.

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According to the latest report from global communications consultancy group Ruder Finn, 82 per cent of more than 800 consumers surveyed in mid-March with an annual family income of more than a million yuan think the virus is negatively impacting the Chinese economy, particularly those between the ages of 36 and 45. They are planning to cut back on spending in the jewellery, handbag and beauty sectors but showed more willingness to spend on travel, fine dining, and high-end leather accessories.

Protective masks remain a necessity on the streets of Bejing (March 25). Photo: Reuters

“Revenge spending won’t become a mainstream phenomenon,” said Gao Ming, senior vice president and managing director of luxury practices in Greater China at the Ruder Finn Group. “Certain types of luxury goods may experience a warm-up in consumer demand. However, brands are facing a bigger challenge in addressing the cutback on spending, and they ought to learn how to build relationships with consumers in the post-virus era.”

Recovery depends on the consumer segment

People queued up to enter a shopping mall outside a Gucci store in Wuhan on March 30. Photo: Reuters

Another report on the HNWI consumer segment showed similar results: that the experience of going through a devastating pandemic has led consumers toward conscious spending shifts that range from choosing sustainable brands to saving more money for retirement. Among the 250 Chinese millionaires that Agility Group researched in mid-February, 86 per cent of affluent consumers had a positive outlook on the future.

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“HNWIs are more resilient than [middle-income] or affluent people since they have some security already,” Banta explained.

Meanwhile, the general sentiment among mass consumers runs on a similar trajectory, but it varies slightly by age and city-tier, offering new opportunities for brands. A survey of more than 1,000 consumers over the past three weeks – conducted by the Chinese investment bank China Renaissance – showed that consumers from first- and second-tier cities were more willing to save and purchase a house, car, or insurance, while consumers from fourth-tier cities were the least likely to save.

People between the ages of 18 and 35 were thinking about tightening their budget, but people over the age of 45, as well as students, showed greater confidence in spending.

What should brands focus on next?

Signs of activity are returning to shopping districts in Beijing (March 25). Photo: Reuters
  • - Expect consumers to cut back on spending; don’t rely on revenge spending for growth;
  • - Adjust recovery plans by both region and consumer segment;
  • - Prioritise building customer relationships.
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    This article originally appeared on Jing Daily.

    Shoppers are slowly returning to the streets and are ready to spend – but will the buying binge be enough to resuscitate struggling brands in China?