Bain Warns China Luxury Growth to Further Decelerate in 2022

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LONDON — Riding on the back of 8.1 percent GDP growth in 2021, the highest in the past decade, China’s luxury goods market logged another good year, with strong double-digit growth overall in 2021 and with some brands exceeding a 70 percent increase, the Bain & Company’s annual China Luxury Report revealed on Thursday.

But with rising tension with the U.S. and a series of social issues that have made global headlines, China’s domestic sales of personal luxury goods slowed down from a 48 percent increase in 2020 to 36 percent in 2021, totaling nearly 471 billion renminbi, or 74.26 billion, Bain said.

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The report flagged that the growth might further slow down in 2022.

All categories saw strong year-over-year increases of between 40 and 100 percent in the first half of the year, while growth throughout the second half of 2021 dipped to an estimated 0 to 25 percent as China began to crack down on the tech, entertainment, real estate and tutoring sectors under the name of common prosperity, as well as sporadic COVID-19 outbreaks in cities across China.

Another warning sign is that China’s population growth is now at a 60-year low, despite Beijing’s efforts to tackle the issue, such as promoting the third child policy. The total population stood at 1.41 billion at the end of 2021, an increase of 480,000 from the previous year.

“After two years of extraordinary growth in mainland China, we expect 2022 to produce more moderate growth,” Bain said, adding that continued sporadic COVID-19 outbreaks throughout 2022 will have a corresponding negative impact on shopping-mall traffic in affected cities.

At the same time, Bain believes there are increasing differences between Chinese luxury consumers and luxury consumers elsewhere.

“These disparities include demographics, digitalization, retail environment, cultural references and relationship to luxury brands. Therefore, the luxury goods market in China will likely be increasingly influenced by its own dynamics,” it added.

Bruno Lannes, partner at Bain & Company, said China took up around an additional 1 percent of the global luxury market in 2021, compared to 2020, to 21 percent.

“We anticipate this growth to continue, putting the country on track to become the world’s largest luxury goods market by 2025 — regardless of future international travel patterns,” he added.

When looking at individual brands and categories, growth varied, ranging from 10 percent to more than 70 percent. The report said that leather goods was the fastest-growing category at about 60 percent. It was followed by fashion and lifestyle at about 40 percent.

Jewelry clocked lower growth than in 2020, coming in at about 35 percent, while high-end watch purchases rose about 30 percent and luxury beauty spending increased about 20 percent.

The report identified three trends that are expected to shape the luxury market for years to come. They are Hailan Island’s offshore duty-free shopping; further digitalization; and continued repatriation.

Hainan’s duty-free stores emerged as a new luxury hub last year, with sales there growing by more than 120 percent in 2020. In 2021, these sales increased about 90 percent, reaching nearly 60 billion renminbi and contributing about 5 percent to China’s overall luxury goods market growth. Personal luxury makes up around 95 percent of Hainan sales, with luxury beauty accounting for more than 50 percent of that number, the report said.

“As more operators arrive, we expect retail shopping opportunities on the island to continue expanding. With more options for buyers, price competition is likely to become more intense. For example, we estimate Hainan to represent already about 25 percent of the luxury beauty official market. Hainan is just one pricing disruptor that has affected shopping habits in China, especially the beauty market. Daigou agents, fueled by other travel retail operators, also played an increasingly important role in luxury sales in 2021,” it added.

As for digitalization, due to the pandemic, online luxury sales in China grew faster than offline across all categories, with online personal luxury sales growing almost 56 percent, while offline sales grew by 30 percent, even as brick-and-mortar remain the primary channel for brand building and purchase conversion.

Due to China’s zero-cases policy with the coronavirus, Bain expects that brands should anticipate the progressive reopening of international travel beyond 2022, with implications on pricing harmonization across geographies. But in the short term, it expects that 2022 will produce low-double-digit growth for personal luxury overall. This growth might be slow for the first half of the year with stronger increases in the latter half, factoring in 2021 comparables.

“Overall, we expect Chinese consumers’ personal luxury purchases to recover to pre-COVID-19 levels between the end of 2022 and the first half of 2023. This will be supported by continuous repatriation of spending and boosted by the gradual reopening of international travel, first in Asia and then globally,” said Weiwei Xing, partner at Bain & Company.

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