Emerging from an Hermès store in Shanghai with a shiny new watch costing “tens of thousands” of renminbi, Zhao Feifei is emblematic of a younger generation of Chinese consumers driving a rebound in sales of European luxury brands. “I’m earning more than before so I’m more willing to spend,” says Ms Zhao, who works in an internet finance company.
The 30-year-old is one of the many customers at the Plaza 66 mall, a cathedral to luxury with nearly 100 stores including Louis Vuitton, Chanel and Cartier. Customers are again flocking to such venues which lost many of their faithful amid an economic slowdown in China and a crackdown on government corruption.
Chinese consumers, the drivers of global luxury for more than a decade, once travelled overseas to the European fashion capitals of Paris, London and Milan to take advantage of lower prices. Now they are increasingly inclined to spend at home. Last year Chinese consumers made two-thirds of their personal luxury goods purchases domestically, compared with roughly a third in 2013, according to the Boston Consulting Group.
Hermès said on Thursday that it is boosting its leather goods production in France to meet surging demand in Asia for handbags such as its Birkin and Kelly models, as the luxury house revealed double-digit sales growth for the first quarter. “We’ve really seen a recovery of China,” says Hermès chief executive Axel Dumas, “and the beginning of growth again in Hong Kong and Macau.”
Its rivals tell a similar story. LVMH, the world’s largest luxury group by revenues, recorded double-digit gains in the first quarter of this year, and on Tuesday its major shareholder Groupe Arnault announced it would pay €12.1bn for the minority stake that it does not already own in Christian Dior Holdings. Kering, whose brands include Gucci, revealed a record quarter with 31 per cent revenue growth to €3.57bn.
The year-on-year basis of comparison for the sector is favourable — 12 months earlier sales plummeted in the aftermath of the Paris terrorist attacks. Nonetheless, the overall picture is that the upturn in the sector — estimated by consultants Bain to be worth €249bn globally — is looking sustainable. “It’s an industry that was growing at 8 to10 per cent a year,” says Olivier Abtan, a partner at BCG. “Now it will grow at 3 to 5 per cent a year in the years to come.”
In an era of lower growth, brands are trying to adapt to changing consumer demands and the disruption of digital while keeping the creative process at the heart of it. “Creativity and audacity is what allows you to elicit desire [and therefore sales] over the long run, telling a story that people want to discover, chapter after chapter,” says François-Henri Pinault, chairman and chief executive of Kering.
But some have been quicker to adapt than others. “The luxury sector as a whole is doing well but there are winners and losers,” says Jean-Jacques Guiony, chief financial officer at LVMH.
‘Watches are back’
Rampant consumption from China’s emerging middle class powered the surge in luxury sales during the noughties that was largely indiscriminate across brands. They responded by opening more stores in China and other emerging markets, and bumping up prices. It was an easy formula for success in the good times. And China continues to dominate the market.
“Chinese consumers account for over 30 per cent of global luxury consumption and this will be 35 per cent by 2020,” says Claudia D’Arpizio a director at Bain.
But just as China fuelled the boom, it also derailed demand in the sector, starting in August 2015 when the renminbi was devalued. At the same time an anti-graft crackdown, driven by President Xi Jinping, knocked demand for watches and jewellery, and the sector was further hit when tourists curtailed travel to Europe amid terrorism fears.
From the middle of last year, however, there were tentative signs of a rebound. Shares in the European luxury sector were up 24 per cent on average in the second half of 2016, versus 10 per cent for the Eurofirst 300.
Even though overall economic growth slowed in China, a flood of credit pushed house prices in major cities to rise as much as 20 per cent in 2016, creating a significant wealth effect that drives spending. That comes on top of signs that the Xi campaign against graft is slowing, with fewer officials disciplined in the first quarter of 2017 compared to the same period last year. “Watches have been under pressure from the anti-corruption campaign, but watches are coming back,” CLSA analyst Mariana Kou says.
Yet brands can no longer rely on opening lots of new stores to fuel growth. Instead they have to keep costs down, revamp their existing stores to make them more profitable, and seek new customers through avenues like digital.
“The business model of luxury has completely changed,” says Erwan Rambourg, global co-head of consumer and retail at HSBC in New York. “Either brands understand that and make the changes themselves, or they don’t and they leave themselves open to activism or M&A.”
Among the laggards, Prada is in the throes of a revamp as it tries to reverse a drop in sales; Ralph Lauren, the preppy American clothing line, is closing its flagship Fifth Avenue Polo store and cutting jobs. And Jimmy Choo, the shoemaker made famous by the US sitcom Sex and the City, has been put up for sale following disappointing performance.
Activists are agitating for change at underperforming companies: Belgian billionaire Albert Frère snapped up shares in British trenchcoat-maker Burberry in February; and US activist Jana Partners has shaken up the board at Tiffany jewellers.
From a deal perspective, with luxury company valuations up between 20 and 25 per cent in the past nine months, it should be a seller’s market. LVMH CEO Bernard Arnault told the Financial Times this week that it is not actively looking at big external acquisitions. It is a similar story at Kering. “M&A is not in our short-term plans,” says Jean-Francois Palus, group managing director.
Compared with other consumer brands, luxury has been late to the digital party. Phoebe Philo, the then creative director at fashion house Céline, told Vogue in 2013 that “the chicest thing is when you don’t exist on Google”. But that view now looks unsustainable.
Six out of 10 sales are digitally influenced, says BCG, which estimates that online commerce will grow from 7 per cent of the global personal luxury market today to 12 per cent by 2020.
Within digital, the holy grail is so-called omnichannel — the ability to offer a seamless experience to customers that blends digital and bricks-and-mortar stores, and includes initiatives like click-and-collect. “Blending the physical and the digital is the future of the online flagship stores,” says Federico Marchetti, chief executive of the YOOX Net-a-Porter Group.
The emphasis is on the customer experience. Net-a-Porter is launching a same-day delivery service in September for its top clients in London called, “You try, we wait.” Customers will be able to try on their online order at home or in the office while the delivery van waits outside.
Separately WeChat, China’s most popular social media platform with more than 800m daily users, will start offering its ecommerce platform for European companies to sell goods in China. More than 65 per cent of Chinese people who buy luxury have bought online, with higher ratios among millennials, says Thibault Villet, founder of one of China’s largest online luxury retailers Mei.com. Groups such as Burberry, Coach and Chanel already use WeChat to tell consumers about new arrivals and trending items, or campaigns linked to events like Chinese new year.
As ecommerce gathers steam and groups collect more and more data on their clients, the next stage is machine learning and artificial intelligence, believes Mr Marchetti. In this vision of the future algorithms will act as virtual shopping assistants, suggesting items that the customer might like, “enabling us to speak to each customer on an individual basis rather than to the whole customer base”, he says.
Luxury brands are also increasingly using blogs, online “influencers” and social media platforms such as Instagram to generate visibility and lure potential buyers.
All of this is happening at a time when the definition of what constitutes luxury is expanding beyond physical possessions to include experiences both as a competitor to, and opportunity for, the traditional houses.
“Luxury brands are now competing with the plastic surgeon and the luxury travel agent,” says Mr Rambourg. “For a similar price you can have a Louis Vuitton handbag, a facelift or a trip to the Maldives.”
With the crucial Chinese customer back — for now — luxury executives are quietly confident that growth will continue. But they are well aware how quickly sentiment can change.
“Our pulse is the Chinese customer,” says LVMH’s Mr Guiony: “It made the sector worse a couple of years ago and it has made it better now. We have to be aware of that. Trees don’t grow to the sky.”