Retail in China Remains Resilent But Luxury Consumption Has Become More ‘Complicated’

on January 8 2015 | in Retail Trends | by | with No Comments

luxury shopping

China’s economic growth may be slowing, but retail spending in the country is expected to remain stable.

In the third quarter of last year, China’s gross domestic product grew at a slower rate than it has in five years, and the country will now probably fall short of its annual growth target of 7.5 percent. However, slowing investment, rather than slowing consumption, has accounted for much of the decline.

Julian Evans-Pritchard, China economist at Capital Economics in Singapore, notes that retail sales in general show little sign of slowing down.

“It’s been sort of a misinterpretation that slowing growth means fewer employment opportunities and job losses, but the service sector has picked up,” he said in an interview with Women’s Wear Daily. “I think it’s quite positive for most retail sales.”

The luxury sector, however, is more problematic, as brands struggle to establish and maintain loyalty from China’s consumer base. Three years ago, the “power” luxury brands outperformed, according to Aaron Fischer, analyst at CLSA in Hong Kong, with some of them experiencing 100 percent year-over-year growth. Now, consumers are seeking out “more unique products.”

“There isn’t the same level of brand loyalty [in the luxury sector] as in other markets, and that makes it harder to retain customers,” Fischer said. He predicts a modest 10 percent year-over-year growth in luxury spending.

Fischer also noted that although the average Chinese consumer has more spending power than ever before, offering luxury products at affordable prices is becoming a central trend.

“We tend to favor a wider range of price points. One company we like because of its wide offering is [Hong Kong-based jeweler] Chow Tai Fook. Income levels [in China] are still quite low. Most can’t go and spend 3,000 euros [$3,650 at current exchange] on a handbag.”

Hong Kong remains a shopping touchstone for Chinese consumers. Outbound departures from China to Hong Kong are projected to grow at an 11 percent compound annual growth rate and reach 200 million by 2020. Yet the city is also losing market share, and more and more Mainland shoppers are also choosing to travel to farther destinations for shopping trips. Some also believe that the strength of the Hong Kong dollar is encouraging consumers to shop in Korea or Japan instead.

Chinese textile and apparel manufacturers are also facing challenges as the costs of materials and labor rise; they are also “losing market share to cheaper factories in Southeast Asia.” Attempts to “move up the value chain and improve efficiency” have met with little success. Roger Lee, chief executive officer of TAL Apparel Group, says that rising wages will only make matters worse.

“If [the Chinese government] continues to raise wages 15 to 20 percent every year, in five years’ time, China cannot be competitive,” Lee said. “If you move further [upstream] you need fewer workers, but the population is not shrinking like in other countries. It’s a wait-and-see game. We can’t sustain cost increases.”

 


image credit: ivanwalsh

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