4 Takeaways from Morgan Stanley’s Report on Shifts in Chinese Luxury Consumption

It appears to be more than just a trend. Just ask Tiffany and Louis Vuitton. With more and more of China’s luxury shoppers staying home to shop, Western luxury brands have been enjoying increased sales performances on the mainland. Recently, Morgan Stanley researched this phenomenon and presented their findings in an insightful report, Chinese Luxury Consumption — Reshoring Disruption. According to the investment bank, Chinese travelers’ shift to less shopping-focused travel, competitive pricing and offerings, as well as improved accessibility to brands throughout China are key factors driving this latest market trend. Here, Jing Daily details four key takeaways from the report.

More long-haul, less travel shopping

As the Chinese outbound travel market matures, the destinations of Chinese travelers have been shifting from the Greater China region to other parts of the world. The report expects the market share of Chinese tourists to Hong Kong/Macau/Taiwan to decline to just 33% by 2025, compared with around 50% in 2018. Instead, key Asian destinations and Europe will gain in Chinese tourists, from 25% and 9%, respectively, in 2018, to 34% and 12% by 2025. It’s also worth noting that Europe has become one of the most popular destinations on the wish-list of Chinese tourists, outperforming other long-haul Western destinations like the U.S. and Australia.

The preference of European destinations may be related to Chinese outbound travelers’ changing travel agendas. According to a survey by the World Tourism Cities Federation, for Chinese outbound travelers, the purpose of shopping has declined from 44% in 2013/14 to 31% in 2017/18. The shopping budget of Chinese tourists has also decreased in major international shopping destinations. Today, Chinese outbound tourists prefer sightseeing, leisure/vacation, cultural/lifestyle experiences, and food tourism over shopping.

Competitive pricing and product offerings

In addition to China’s shifting outbound travel preferences, the global harmonization of “pricing” and “product offerings” are additional key factors driving the flow of Chinese luxury consumers. As China has been reducing import tariffs, VAT, and postal taxes in recent years to increase domestic consumption, Western luxury brands have been consistently adjusting pricing globally to prevent arbitrage. As Jing Daily reported, Louis Vuitton cut prices in China by roughly 5%, in July 2018, followed by Gucci.

The diminishing gaps in pricing between mainland China and in overseas tax-free markets makes traveling to these destinations to shop less attractive. Morgan Stanley compared the pricing gap with air travel/train ticket expenses and found very little difference when traveling to Asia or Europe now. Although handbags in Europe (UK, France, and Italy) are on average 27% cheaper than in China, the price gap of other luxury categories like jewelry has been significantly reduced.

Moreover, the competitive product offerings onshore further boost domestic luxury consumption. According to the report, even though China continues to slightly lag in overall SKUs (around 15% compared to major European cities), SKUs, in terms of variety and color among popular products in China could be 5% more than in other Asian and European locations. Brands are also launching more on-time products in China. Apple, for example, has made China a key launch location for new product releases since 2015.

Recommended Reading7 Reasons Why U.S. Retail Can No Longer Rely on Chinese TravelersBy Ruonan Zheng

Brands are improving accessibility in China

The availability of luxury goods is at best uneven in China, as most of the luxury stores and malls are currently concentrated in several first-tier cities. The report, however, points out that brands are improving sale channels throughout  China — both online and offline — which will continue to drive domestic luxury consumption in China.

The report also expects an expanding network of physical luxury malls in China and an e-commerce penetration throughout the country. Meanwhile, Western luxury brands have been improving their in-store services to increase sales performances, as well as expanding their footprint in more luxury malls beyond first-tier cities to capture more of the rising consumption potential in China’s many lower-tier cities.

And then there is the rapid development of e-commerce platforms in China, which offers both brands and consumers more shopping options. According to the report, the number of brands joining Tmall’s Luxury Pavilion rose from 17 in August 2017 to 115 by  July 2019. Online platforms also offer an advantage for on-time launches. Earlier this September, both L’Oréal and Shiseido announced that over 50% of the new product launches in China in the future, will be conducted through the Tmall platform. The ever-increasing penetration of luxury e-commerce throughout China offers not only a broader selection of products to potential consumers, but also yet another advantage to drive higher domestic consumption.

Luxury malls and duty-free perform well, while HK is experiencing a structural slowdown

According to Morgan Stanley, China’s many malls are catching up to Hong Kong in retail sales, with seven mainland malls sales exceeding one-quarter of Harbour City’s (one of HK’s key luxury malls) retail sales in 2018. Additionally, China’s duty-free stores, as one of the important luxury shopping destinations, have also been driving the reshoring of Chinese luxury consumption.

The Hong Kong luxury retail market relies heavily on Chinese tourists; however, this “shopping paradise” has been losing market share among first-time outbound Chinese travelers even before the protests — the amount spent shopping from overnight Chinese visitors to Hong Kong has declined 33% from HK$6.4K per person in 2013 to HK$4.3K per person in 2018. The report estimated that, with the influence of ongoing violent protests in the city, Hong Kong’s tourism and luxury retail market will be structurally challenged. Chinese tourist arrivals may recover in 2020, though minimal pricing gaps of luxury products between mainland China and China’s duty-free prices will continue to prompt less tourist spending.

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