According to recent figures from Bain & Company, China’s luxury market was hard hit in 2022 with sales down by 10% marking the first decrease in five years. The country’s successive lockdowns were the main culprit, but other headwinds contributed to this faltering performance. Despite this, Bain & Company forecasts that the market will begin to pick up this year.
China’s luxury market exits first drop in 10 years in 2022, says a new study by Bain & Co. Predictably, product sectors with high online penetration fared better in light of the country’s successive lockdowns: luxury beauty sales, which have an online penetration of 50% in China, were down by 6% compared to 10% for the overall luxury market. Jewelry and leather goods saw a decrease in sales of 10-15%, fashion and lifestyle goods fell by 15-20%, while the luxury watch market clocked the strongest decrease at nearly -25%. In addition to the impact of the lockdowns, Bain attributes this sluggish performance to a soft real estate market, a spike in unemployment and Covid-related “consumer anxiety”.
Some luxury brands did see growth during the period, noted Bain & Company Senior Partner Bruno Lannes, while others reported flat sales. “Bigger brands out-performed smaller players on average; brands with iconic portfolios did better than those with trendy or seasonal merchandise and finally, brands with a higher concentration of Very Important Clients (VICs) fared better”. Indeed, entry-level luxury consumers are typically harder hit by economic headwinds than those with more spending power. “Coupled with a decline in mall traffic due to Covid restrictions, sales skewed toward VICs in 2022,” affirms the company.
The growth of the VIC segment is one of three factors that Bain believes will set the China market back on track in 2023. It also points to initiatives from duty-free players, who are looking to compensate for declining sales linked to travel restrictions. (Sales at China’s main duty-free shopping destination Hainan dropped by 30% in 2022 to reach RMB 35bn.) China Duty Free Group, for example, is “aggressively pushing” for domestic e-commerce operations to fill the gap left by lower traveler numbers. Yet Bain points out that this strategy could have repercussions in terms of pricing: “discounted duty-paid business makes it harder for luxury brands to harmonize pricing across channels. In mid-December 2022, the price gap between domestic and duty-paid beauty prices was 60%–70% for some leading brands. In the short- to mid-term, this trend could devalue luxury beauty brands.”
With the closure of borders last year, a majority of luxury players had not harmonized their prices between China and Europe with price gaps for a sample of bestselling items ranging from 25-45% in the leather goods segment (pre-VAT) to 25-35% in luxury shoes.
Despite the market's lackluster performance in 2022, Bain & Company is forecasting a return to growth this year. “The fundamentals of consumption in China are still intact,” argues the firm. Time will tell.