General Prosperity, President Xi Jinping’s policy directive, will not remove luxury goods from Chinese malls. But it would herald a new era where there are fewer diamonds on watches and logos no longer adorn jackets and jewellery. Earlier this year, Beijing announced the creation of an “olive-shaped” society with a more equitable distribution of wealth. This was followed by regulatory action on tech firms and the online education sector. Whereas state planners have long talked about sugar. With the population moderately prosperous, Beijing’s sole focus is to move the country away from a winner-all-economy.
Much of the rhetoric around common prosperity has focused on better health care, rising household incomes, increased benefits, and using taxes to calibrate income distributions. This is not a conducive environment for lucrative shopping. Five years of growing demand in China will require luxury groups to reevaluate their aesthetics, products and marketing.
Luxury is likely to be characterized by more subtle designs and less pretentiousness. Some young Chinese shoppers are already curbing their passion for luxury, according to research from LookLook, an insight group that in September surveyed 100 Chinese women under 40 to find out what percentage of top-end goods they buy. Years spend at least $10,000. They are mainly retreating in anticipation of traveling abroad again. But one in 10 said they were impressed by the government’s stand against excessive display of funds. LookLook analyst Jia Lin said she was surprised to hear some young women want to keep a low profile.
Sensing the new mood, homes with more thoughtful designs, such as Prada Spa, and Kering SA’s Saint Laurent and Bottega Veneta, appear to be well positioned. Gucci’s creative director, Alessandro Michele, is already adjusting its trademark maximalism to appeal beyond the brand’s millennial fanbase. The recent collection has been further understood. But more work may be needed to catch up with China’s new enthusiast: The Gucci name and logo are still in evidence a lot. Getting the tone right is important for parenting. In 2019, Gucci accounted for about 60% of sales.
But there are other ways the industry needs to adapt. If China’s policy raises concerns at the highest level but expands the middle class, it could increase demand for entry-level handbags, which cost at least 10 times as much, rather than around $1,000. “Brands will need to “really care for the first-time buyer as well as the billionaire,” says luxury consultant Mario Ortelli.
Small leather goods can be promoted, as well as affordable treats such as grooming and fragrances. This will be good news for the global cosmetics giants. Pandora AS, known for its cheap charm, achieved strong growth in the wake of its anti-corruption campaign. LVMH Moet Hennessy Louis Vuitton SE’s flagship Louis Vuitton brand, with its distinctive monogram, is vulnerable to turning away from an instantly recognizable label. But this may be offset by its product range, which starts with the relatively affordable Neverfull Bag, for example. LVMH also generates a quarter of its sales in the US, where consumers are still buying Rolex watches and Moncler coats.
The flip side of the new mood is attracting a more ‘awake’ Chinese consumer. Brands will have to improve marketing techniques such as collaborating with key opinion leaders (KOLs), live-streaming on shopping platforms and using virtual KOLs. They also have to think about running their shows online. According to HSBC analysts, the social e-commerce market is estimated to be worth $186 billion this year.
China has an impressive economy, but choosing and taking advantage of the right KOL has become more important. This is because Beijing is moving away from fan culture and certain types of gender imagery.
Brands are also trying out different offline formats. For example, Prada got creative and took over a local market in Shanghai to wrap basic food items in the company’s packaging. It was well received by the local audience. Other brands are tapping into social issues. To do this well, they have to make sure their fingers are on the local pulse.
Perhaps the current mood will drive Chinese buyers to move away from global labels to indigenous luxury. Handbags are likely to remain preserved in European homes, but local players like Cindy Chao are gaining traction in jewellery. According to LookLook, Chinese brands are also making headway in beauty and fashion.
Such changes are unlikely to have immediate consequences, but a Covid resurgence and a slowing Chinese economy may well do the trick. At least it gives the world’s luxury giants time to reinvent themselves if stealth wealth instead of bling becomes China’s hottest look.
Andrea Felstead and Anjani Trivedi are Bloomberg Opinion columnists, covering the consumer and retail industries respectively; and industrial companies in Asia.
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