China's luxury sales outpace slow growth

Updated: 2013-05-24 11:44

By Yu Wei in San Francisco (China Daily)

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China's luxury-goods market is likely to grow by a world-leading 20 percent this year, accounting for more than a quarter of global luxury sales, according to a new report by Deutsche Bank AG.

The bank's economists believe that, despite several months of sluggishness in various economic indicators in China, the second-half outlook remains positive. That's partly due to weak inflation and the foreseeable likelihood of China's central bank keeping interest rates low to spur consumer spending.

"It is hard not to be optimistic about the future of luxury goods in China," said John Zhang, a marketing professor at the University of Pennsylvania's Wharton School.

"Chinese people have always tried their hardest to enjoy better things in life even in bad times, and there is still a good deal of pent-up demand," he said. "In addition, the Chinese economy is still growing at a very fast pace, relative to every other economy in the world, despite its recent slight slowdown."

Zhang believes that while the high level of income inequality in China is bad for other sectors, it tends to equate to fast growth in sales of luxury products.

While positive in its outlook, the Deutsche Bank report cites as the main risk Chinese government policies on consumer spending and travel. Last year, authorities introduced bans on bureaucrats' use of public money to buy luxury items.

According to Zhang, sales could hit a speed bump, but the effects would likely be brief. In the long term, nothing short of prohibitions will stop deep-pocketed Chinese consumers from snapping up the finer things in life.

"For instance, anti-corruption has slowed down conspicuous spending on banquets in fancy hotels. However, consumption in private clubs and in less conspicuous restaurants is picking up," the professor said. "I think that both consumers and luxury-goods manufacturers will quickly find ways to adapt to the new political environment."

The Deutsche Bank report also predicts Chinese will continue to shop outside their country in search of lower prices and greater variety.

According to the United Nations World Tourism Organization, the number of international trips by Chinese travelers rose to 83 million in 2012 from 10 million in 2000, the fastest rate in the world.

China last year became the No 1 source of tourist spending, at $102 billion, overtaking Germany and the United States (both $84 billion).

"There is no question that Chinese tourists have a voracious appetite for luxury goods when they travel to the West. This is partly due to the fact that luxury-goods prices in China are routinely 40 to 60 percent higher than what one may find in the West," Zhang said.

Shoppers also can't always trust that goods sold in China are genuine, he added. But as the country grows both economically and as a source of tourism, Western retailers will adapt to the demand.

"Eighty million tourists may not be a big number for China, but that number is bigger than the population in almost all European countries except Germany and Russia," Zhang said.

Milton Pedraza, CEO of the Luxury Institute, a New York-based research and consulting firm, said Chinese tourists have helped keep Europe's luxury-goods companies afloat amid economic slumps across the continent.

"The Chinese tourist to Europe has saved the European luxury market from going down dramatically during the European recession," he said. "Now, the US luxury retailer is embracing the Chinese tourist and trying very hard to appropriately welcome and develop relationships with Chinese tourists.

"The Chinese tourists know what they want. They buy large quantities and are not expecting discounts as much as they expect great design, quality, craftsmanship and great service," Pedraza said. "The Chinese local and touristic consumer is king in the luxury world today and he/she delivers great profitability to luxury brands."

(China Daily USA 05/24/2013 page1)