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Chinese consumers are buying more luxury goods during the pandemic — but they're shopping closer to home, and European brands could feel the pinch
Summary List Placement The pandemic hasn't slowed consumer spending on luxury goods — at least not...Summary List Placement The pandemic hasn't slowed consumer spending on luxury goods — at least not in China. Three in 10 Chinese consumers spent more than usual on high-end retail between January and July, a poll by UBS Evidence Lab found. This is despite global luxury sales in the first half of 2020 being down around 30%, according to Daniel Zipser, senior partner at McKinsey & Company. Prada, Dior, and Gucci all reported rising sales in China in 2020, while revenues in other markets often stagnated or even dropped. Chinese consumers are spending a bigger proportion of their money on luxury retail as spending on tourism dropped during lockdown, UBS reported. But with international travel restrictions still in place, Chinese shoppers are buying these products closer to home. This means the domestic market in Mainland China is "probably growing stronger than ever before," Zipser said, adding that sales are going "through the roof." Meanwhile, luxury goods shops in Europe are losing out — and analysts say the future of the market on that continent could be shaped by house Chinese buyers act in the coming months and years. Prior to the pandemic, Chinese consumers made around three-quarters of their luxury goods purchases abroad, Bain & Company reported. The UBS survey found that, because of the travel restrictions, more than three in four Chinese consumers plan to buy luxury goods within Mainland China over the next year — a significant increase from 62% at the same time last year. During China's Golden Week from October 1 to 8, when citizens take holiday from work to visit relatives or travel round the country, retail sales rocketed. Duty-free sales on its island province Hainan more than doubled during the week from last year's holiday, and across the country sales were up nearly 5% as shoppers splashed out on luxury products. The Chinese government had been pushing this Chinese luxury spend repatriation for a long time by changing duty-free regulations, cutting important tariffs in 2018, and moving GDP towards consumption, Luca Solca, senior research analyst at Bernstein, told Business Insider. Even before the pandemic happened, Chinese domestic retail spending was expected to grow. Bain & Company estimated that Chinese consumers would make around half of their luxury purchases in the country by 2025. The pandemic is accelerating this trend. Luxury sales in Europe are down, but its brands are flourishing in China But the growth of luxury retail in China comes at a cost to sectors abroad. Chinese consumers are the world's biggest luxury goods buyers. Last year they made a third of all luxury purchases, and accounted for 90% of the industry's total market growth. Most of this was spent abroad. In 2019, Chinese tourists spent around 70 billion euros ($83 billion) on luxury goods overseas, Solca said, and this is expected to grow as China's upper-middle-class expands. But the pandemic has changed the rate of China luxury spending overseas. Only 9% of respondents to the UBS survey said they planned to buy luxury goods in the US over the next year — less than half of the 22% recorded in 2019's survey. This is even more concerning for Europe. Travel to Europe is expected to be 54% lower this year than in 2019, according to research from the European Travel Commission (ETC). Yet tourists make up half of the region's luxury goods sales – and in particular Chinese tourists, UBS reported. The number of respondents planning to buy luxury goods in Italy over the next year fell by a third compared to last year's survey, and by nearly 50% for the UK, UBS reported. Europe has already seen a huge drop in tourists so far this year. After Asia and the Pacific, Europe suffered the largest drop in international tourists, the United Nations World Tourism Organization (UNWTO) reported, with 66% fewer visitors visiting the continent in the first half of 2020. Visitors dipped by almost two-thirds in March compared to last year after travel restrictions were introduced, and plummeted to just 1.4 million this April compared to 56.8 million in the same month last year. Though Chinese consumers aren't travelling abroad to buy luxury goods, they continue to buy from European luxury retailers who have stores or e-commerce in the country. And e-commerce in China has boomed during lockdown. French luxury goods conglomerate LVMH, which owns Dior, Louis Vuitton, and Fendi, noted a "strong rebound in China in particular" during its second quarter, which was echoed by Jimmy Choo and Versace. And Italian fashion house Prada saw sales in China jump 54% in June – after dropping by around 80% in February, when the country's lockdown was at its peak. In the first half of 2020, Asia Pacific accounted for almost half of the brand's sales. Paris-based Kering, which owns European luxury fashion houses including Gucci, Balenciaga, and Yves Saint Laurent, reported falling revenues in most markets, but rising sales in China. It credited this to higher consumer confidence in China compared to the US and the Eurozone, and the repatriation of Chinese spending as shoppers stayed in their home country. Will luxury consumers come back to Europe? For smaller European luxury brands with no presence in China, there is still cause for optimism in the industry. Around 72% of the Chinese respondents to the UBS survey said they plan to travel in the next 12 months, including 54% to Europe. Solca said he also expects Chinese travellers to return to Europe after the pandemic, and "inevitably some of their luxury goods spend will go with them – at least as long as price differences make it compelling to buy in Europe." And overall the luxury industry is recovering, and The Savigny Luxury Index reported that early economic recovery in Mainland China alongside significant growth in online sales have "kick-started" this.SEE ALSO: Chanel is reportedly buying its flagship London store from landlords for about $402 million, 30% above asking price Join the conversation about this story » NOW WATCH: Why thoroughbred horse semen is the world's most expensive liquid
Luxury fashion brands have been aiding the fight against the global pandemic — here's what comes next for them
Luxury retail has been severely hit by the COVID-19 pandemic and has lost billions in sales....Luxury retail has been severely hit by the COVID-19 pandemic and has lost billions in sales. We have some insights as to what comes next for them. Research firm Bernstein believes that a change in consumer behaviour due to the lockdown will massively affect long-term luxury brand sales. Visit Business Insider's homepage for more stories. Sales of luxury brands have been hit hard by the coronavirus pandemic. That did not stop some of the most popular names in the luxury retail world from aiding the fight against the virus. However, luxury retail might be losing sight of broad-term implications by focusing too much on the present, according to a recent study by research firm Bernstein. The study suggested what might come next for luxury brands. It observed that luxury brands are heavily reliant on consumers from China: 70% of luxury goods purchases are made by Chinese tourists abroad. In a world where people travel less, a recapture of Chinese spending in the global retail market would resemble a similar challenge faced by luxury brands in recapturing Chinese spending in Hong Kong last year, the study said. Here are some other things the report said: Travelling like before seems far-fetched In the absence of a "miracle"— in the form of a successful coronavirus vaccine — travel restrictions could endure for two to three years if the 1918 Spanish flu is taken as a benchmark. Since most luxury purchases are made by people who travel, the stronger brands that enjoy "must have" status will be the ones standing tall. Hong Kong is a major Asian market hub for luxury retail trade, especially due to its affordability and cheaper rates compared to mainland China. Last year, protests in Hong Kong had hammered its luxury sales as Chinese consumers chose to travel elsewhere. Bernstein says the key to luxury brands surviving will be the adoption of price differentials, like in Hong Kong's case. Travel retail spending is expected to be on the back foot for a long while. European businesses, built to serve overseas customers, are likely to suffer further. Tiptoe-ing back to normalcy Bernstein expects consumers will exercise caution in social gatherings, including going out to restaurants, shopping malls, or to the cinema. This change in consumer behaviour would imply a slower recovery for wine and spirit sales. Staying at home would have an impact on the use of beauty products, as well as fashion and other accessories. This would be the case even if social media activity is high and working remotely requires people to keep up appearances, the study said. Consumers are likely to be poorer, on average Each month of lockdown will cause a dent of 5-6% to GDP, according to Bernstein. Small and medium businesses will be hit hard, many may not survive the shock. The tourism sector will be especially fragile, the report said. Much of the luxury goods industry relies on middle class consumers who feel wealthier relative to the recent past. In the near future, even rich people may not be in the mood to spend money, feeling relatively poorer due to the stock market being in doldrums. Market resilience and looking forward The good news, Bernstein says, is that investors believe long-term prospects for the luxury sector remain strong and the pandemic will be an interim hindrance. Although Chinese domestic demand is on the rebound, this is unlikely to reappear as soon in the US and Europe given the coronavirus prevention measures there. The shape of recovery and its speed - especially outside of China - may be shallower and slower than the market expects, the report said.SEE ALSO: Grocery and food delivery apps are increasingly crucial amid coronavirus, but these may be out of reach for the most vulnerable Americans during the pandemic Join the conversation about this story » NOW WATCH: Why thoroughbred horse semen is the world's most expensive liquid