By
SamaGame
Published
December 22, 2023
2024 is the year of the dragon, but it may not be as lucky for luxury brands. Although Chinese consumers can now travel to Europe individually or in groups, investors should not expect them to rush to stock up on Cartier watches and Hermès handbags. The much-vaunted recovery in Chinese travel to the continent may not materialize until late 2024 or 2025.
Before the outbreak of Covid-19 in 2020, some 170 million Chinese shoppers took overseas leisure trips, with France and Italy popular destinations beyond Asia. As a result, more than half of their luxury spending took place outside their home market, according to Oliver Wyman.
Many still yearn to travel. LookLook, an analytics company, recently conducted extensive research with its “LuxuryVerse,” a panel of 100 spendthrift Chinese women aged 24 to 42. It’s no surprise that after lockdowns, what they seem to value most is freedom.
At the start of 2023, almost half of the LookLook community has prioritized a new handbag. Today, that figure is less than one in five. On the other hand, around one in three people want to invest in travel. Europe is their main destination, while many are nervous about traveling to the United States.
Yet even these wealthy women must overcome significant obstacles to embark on the trips of their dreams. Visa issues are cited as a constraint by around a third of the LookLook panel. Spending by Chinese tourists in Europe and flight capacity increased in November, according to duty-free shopping specialist Global Blue, but both remain well below 2019 levels.
Additionally, skyrocketing hotel costs in Europe have made vacationing even more expensive. The cost for a Chinese couple for a week-long trip to Milan, including the purchase of a luxury handbag, is about 53,000 RMB ($7,456.18), almost double of the 30,000 RMB it was in 2019, according to analysts at Jefferies.
If the financially comfortable cool off on international travel, the emerging wealthy will suffer even more. This means that tours by Chinese groups in Europe may not resume anytime soon. Oliver Wyman surveyed more than 7,000 middle-class Chinese in September and found that their willingness to travel abroad had declined. As the post-reopening recovery falters and economic uncertainty increases, they are choosing to save rather than splurge on vacations abroad.
Plus, why travel abroad when there are great options within the country?
VIP customers now benefit from superior service, for example in China. Many Western companies have introduced WeChat programs that allow them to communicate with and serve their best customers. Some brands have also narrowed the price gap between China and the rest of the world, while the weak renminbi means fewer bargains overseas. Fashion houses also bring a much wider range of products into the country and showcase them to VIPs at exclusive events. And in recent years, shoppers have become accustomed to buying luxury products when they want, rather than waiting for an international trip to embark on an adventure.
At the same time, major brands have also invested in their stores in Chinese cities so that the retail experience is second to none. Luxury shopping has boomed not only in Shanghai and Beijing, but also in cities like Chengdu. Louis Vuitton menswear creative director Pharrell Williams recently visited stores at all three locations. Hainan is also growing rapidly. DFS Group, the travel retail arm of LVMH, announced in October that it would build a major shopping and entertainment complex on the duty-free island in a bid to capture growing tourism in the region.
Domestic spending will take off even further if Hainan becomes completely tariff-free in 2025, as planned. It could double its share of the national luxury market from around 9% today, dominated by beauty, to 18% in 2028, according to Oliver Wyman. The flip side is that Chinese luxury spending abroad may not rise to more than 20% to 25% of their total spending in the medium to long term, according to the professional services company.
In addition to spending on long-haul travel, security fears could also lead Chinese consumers to continue opting for destinations closer to home. Wars in Ukraine and the Middle East, as well as the recent attack on tourists in Paris, could make them think twice before traveling to Europe.
Luxury groups, including LVMH and Richemont, have noted a recovery in tourism in Hong Kong and Macau. LVMH recently held its first-ever fashion show in Hong Kong, in partnership with the billionaire Cheng family. The unveiling of Williams’ pre-fall menswear collection highlights efforts to revive Hong Kong as a tourism and business hub.
Japan is also proving popular, thanks to the weak yen, its status as a trend influencer and the fact that luxury brands are investing in stores there. The situation is similar in South Korea, which, alongside Singapore and Thailand, could also benefit from more Chinese visitors. As a result, HSBC analysts expect sales of luxury goods to grow the most in Japan and Asia more broadly next year.
Given the prospects for Chinese leisure travel in Europe, major luxury brands must ensure that their stores and services in China remain top-notch. At the same time, they must also prepare for a possible resumption of part of Chinese tourism in Europe.
Most consumers who make the trip are probably very wealthy. Brands need to ensure they are treated as well or better than they would be at home. They need to make sure that VIPs are not waiting in line and that they receive the most attention from Mandarin-speaking salespeople in private rooms. Special local experiences will be imperative. It will also be crucial to communicate with VIPs via WeChat and stock enough of the most in-demand handbags, watches and jewelry, as well as shoes and clothing in appropriate sizes.
Chinese tastes are changing rapidly, as LookLook has found, with big-spending young women quickly moving away from flashy, logo-intensive designs and toward versatility and understated luxury. Get it wrong and valuable sales will be lost.
With at least six months or a year before Europe experiences large-scale Chinese tourism, companies have time to perfect their offers. This should give luxury houses the best chance of making Dragon Year spending roar.
