This past week has seen the financial markets punish luxury stocks on fears of a China economic slowdown. (http://tgr.ph/pWac64)
The European Union is struggling to shore up their already debt laden banking industry as Greece teeters on the brink of default. Meanwhile, the United States continues to battle high unemployment, low consumer confidence, and fears of a double dip recession. Some economists perceive these events as omens pointing towards a second global economic crisis.
But how does China measure up amid these dire monetary projections? The answer, for now, is not too shabby. Despite concerns that the economy is easing its pace, with some predicting that growth will drop below 5% by 2016, the Chinese retail consumer continues to act as a buffer from outside recessionary forces. Retail spending in September raised the purchasing managers’ index 2.4 points from a record low of 50.6 the previous month. This indicates an expanding, rather than retracting, economy. And this is all in spite of rising consumer prices (up 6.2 percent in August), a shaky Asian stock market (MSCI Asia Pacific lost 1.6 percent today), and the fear that U.S. pressure to appreciate the Yuan will spike Chinese unemployment and reduce economic growth.
How has this been affecting the luxury brands? So far, some automobile dealers have begun offering price promotions in order to keep their inventory turning amid fears of an economic slowdown. Fashion companies like Burberry have not shown any downturn as of yet. In fact, Burberry is expected to post a 29% increase in 6-month sales this week, largely driven by growth in China and from Chinese tourists. (http://bit.ly/qEAWUE)
Edouard Crowley, an analyst at BNP Paribas, said there is no signs of a slowdown in Chinese sales among the luxury goods firms. Many analysts cite the fact that even with slower growth rates, huge numbers of new consumers will be entering the middle class, and will be hungry to buy the aspirational products they have long been coveting.
Although China’s contracting manufacturing sector and signs of a real estate cooling are putting pressure on the overall economy, luxury brands can take solace in the fact that most Chinese consumer spending is driven from wealth, not from income. Furthermore, Chinese wealthy are cash rich, and don’t have the high consumer debt ratios that consumers in other markets tend to carry, thus making them less sensitive to economic slowdowns than those with high mortgages and credit card balances.
Not to mention that the one child policy turbo charges young consumers with four wallets backing them up, so even if one income slows, there is still significant family support.
This doesn’t mean that luxury brands should be complacent about the China market. It may mean that success is harder won than in the past, and will be awarded to those who forge deep connections with consumers and make their products accessible and relevant. And, don’t forget that many luxury China customers are already purchasing luxury goods outside of China to sidestep the country’s hefty VAT tax (17.5%) — a trend that is likely to accelerate if the Chinese economy does slow down.