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Chinese consumers are a confusing bunch. The appetite for luxury brands among China’s rich remains unquenchable, yet the disposable income of ordinary city dwellers is shrinking in real terms.
Both observations are true. Sales of luxury goods in China are expected to grow 30% this year and, if overseas sales are included, mainland shoppers will spend 26% more in 2012 than last year, according to Mariana Kou, a research associate at CLSA, a Hong Kong-based brokerage.
Chinese people became the biggest single group of tax-free shoppers in the world last year, accounting for 19% of total sales. Mainland shoppers also account for a third of the sales of global luxury brands such as Gucci and Prada, according to the brokerage.
CLSA had previously forecast that Greater China would become the biggest consumer market by 2020. Indeed, the demand for high-end products has been so strong that retailers have been able to raise prices substantially. Chanel, for example, increased the prices of its goods by 20% in Hong Kong last year with no discernible effect on sales.
“The retailers understand they can’t increase prices in Europe and Japan, but Hong Kong has seen such strong demand from mainland shoppers,” said Aaron Fischer, regional head of consumer and gaming research at CLSA.
Factors supporting the sales growth are wealthy Chinese consumers’ growing spending power, their obsession with luxury brands and their growing exposure to new brands as they travel outside China more frequently.
Chinese visitors account for more than half of the sales of luxury brands in New York, Hong Kong and key European cities, noted CLSA. The firm reckons that the low 0.18% market penetration of luxury goods in China means there is plenty of room for growth. At 2.72%, Hong Kong has the highest penetration of all the markets that CLSA covers.
Unfortunately, a cash-rich tourist craving Louis Vuitton bags and enjoying double-digit annual income growth doesn’t tell the whole story.
“Overall wages are increasing in the first- and second-tier cities but disposable incomes are not, due to high inflation and soaring general living costs. Their purchasing power is actually decreasing,” said Elyse Wang, a retail consumption analyst at Haitong Securities.
The main driver of fast-growing wages comes mainly from the poorer hinterlands, far from the coastal cities and other urban centres, where the salary base was very low to begin with.
“China is between the rock of inflation and the hard place of unemployment,” said James Rickards, a partner of JAC Capital Advisors, at Macquarie’s Greater China conference yesterday.
Beijing’s underground railway system has become a focal point for ordinary Chinese people sick of the rising cost of life in the capital. Ticket prices have been stuck at Rmb2 ($0.32) for the past 10 years, but any proposal to lift fares has met with a strong public outcry. After all, every yuan counts for many Beijingers, even though the city is home to many of China’s wealthiest individuals.
“Because of the labour shortage, factory workers nowadays have almost the same level of salary as white-collar office staff,” said Haitong’s Wang. “So only the high- and low-end of consumer goods will see sales growth, while retail sales from the middle classes are unlikely to record substantial growth unless the government comes up with effective stimulating policies to encourage consumption.”
Not all luxury goods are set to continue rising. After recording 46% growth last year, jewellery sales are down this year, dropping to single-digit growth during the first quarter, said Wang.
