Chinese exposure crucial for luxury brands
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Chinese exposure crucial for luxury brands

It has become almost bring to state that Chinese consumers power luxury spending worldwide, but the extent to which that is true – and the reason behind it – remain absolutely vital for a solid understanding of luxury retail. Globally, the Chinese account for almost a third of all luxury purchases, and the majority of those purchases are made outside of China. According to researchers at Bain & Company, many Chinese shoppers have come to regard Europe as “the world’s largest in-season outlet,” simply because prices there are so much lower than they are in China.

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Researchers at Exane BNP Paribas recently sent a note to investors breaking down the price differential across different regions, and it paints a clear picture as to why the Chinese do their luxury shopping abroad. In China, luxury goods cost some 21% more than the global average price; in France and Italy, they cost some 22% less than the average price.

The research tracked 4,846 products, available in all markets as of March 2017, and found some shocking statistics. Balenciaga products cost 25% more in China than France; Louis Vuitton products, 50%; and Armani products, a staggering 70% more. The cause for the discrepancy is mainly down to taxes and duties levied in China, but also affected by currency effects and distribution costs faced by luxury brands.

As a result, many luxury outlets in Europe are now reliant on foreign customers. 70% of luxury purchases in Italy and France are now made by foreign shoppers, and the largest demographic slice of that pie is Chinese.

This is changing. The Chinese government is trying to encourage people to shop for luxury domestically, and price transparency thanks to the internet and Ecommerce is likely to see prices move closer together across regions. Exane’s note said:

“We expect greater price convergence going forward on the back of middle class consumers driving demand and the price transparency offered by the internet. However, price gap reduction can only go as fast as EU stores shrink in the global luxury goods retail network mix – expect this to proceed in slow motion.”

What this means (for the near future, at least) is that luxury brands known in China will see more purchases not just in that country, but worldwide.

Disclosure

Dominion holds a number of European luxury brands across a variety of sectors that are exposed to the Chinese market.


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The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Fund Management Limited. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.