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Asia’s Recovery Roadmap for Luxury

As demand in western markets lags behind, Asian shoppers hold more power than ever over luxury brands' bottom lines. From China to Japan and Singapore to South Korea, here’s where demand is roaring — and where it’s reeling.
How is luxury consumption faring across Asia's top markets? | Collage by BoF
By
  • Zoe Suen
BoF PROFESSIONAL

LONDON, United Kingdom — Though indiscriminate, the coronavirus pandemic has reinforced inequality among individuals and businesses currently struggling to find their feet in the face of a new reality. The same can be said within luxury: the sector's giants will largely brush off losses and supply chain disruptions while small and medium-sized players suffer.

Zoom out further and the luxury markets themselves aren’t recovering at the same pace either. It comes as no surprise that mainland China, hit first and hard by Covid-19, has seen a rebound in luxury demand, buoyed by an advanced e-commerce infrastructure. But even within the technologically fast-moving Asia Pacific region, few markets can expect a similar trajectory.

For luxury brands, the global health and economic crisis has only underlined the importance of markets in the Asia Pacific region, which according to Euromonitor generated luxury goods sales worth $438 billion in 2019, more than any other region globally.

A year earlier, Bain & Company found that Asian shoppers were already responsible for the majority of spending in the global luxury market (54 percent in 2018).  Shoppers in the West (Americans and Europeans) were only responsible for 40 percent.

While the US and some European markets remain in varying states of lockdown, rallying economies like China and South Korea are helping to offset brand losses by injecting much-needed growth into otherwise bleak financials.

Here’s what brands and retailers need to know about recovering from the crisis across Asia’s top personal luxury goods markets, according to analysts and local industry insiders.

Mainland China

Personal luxury goods market value: $28.5 billion as of 2019, according to Euromonitor International. However it is worth noting that this domestic figure belies the true scale of Chinese luxury consumption as the vast majority of transactions have been made overseas. Bain & Company forecasts that Chinese consumers will account for nearly 50 percent of the global luxury market by 2025 (up from 35 percent in 2019).

Status: After more than 10 weeks in many provinces (including Hubei which is where the pandemic's epicentre Wuhan is located), most restrictions were lifted by early April.

Customers wearing face masks line up to enter Wushang Plaza Shopping Centre in Wuhan, Hubei Province of China | Source: Getty Images

The first country to enter and emerge from a full lockdown, China’s economy and industries were hit hard by Covid-19 — it recorded its first-ever GDP contraction during 2020’s first quarter — but luxury has fared relatively well and seen a healthy V-shaped rebound, according to Erwan Rambourg, global co-head of consumer and retail research at HSBC.

"China is booming," said Rambourg. "The psychology is pretty positive, the confidence is back...you'll have brands seeing double-digit growth, possibly triple-digit growth." Case in point, Burberry Chief Executive Marco Gobbetti announced during the brand's preliminary results on May 22 that sales in the mainland were up double digits in preceding weeks. For the likes of Burberry, funnelling marketing dollars into Chinese social e-commerce and livestreaming platforms has helped.

However, others caution that the current exuberance may be driven in part by pent-up demand and that brands should watch unemployment rates and travel habits closely to see how sustainable the mood is in the longer term.

For his part, Rambourg concedes that the current sales boosts are largely a result of repatriation — Chinese spending what they'd otherwise spend on luxury abroad, at home — and with global travel at a standstill, brands would need to see China sales double or even triple in order to recapture global spend.

Lane Crawford and Joyce Group, which owns the two luxury retailers of the same names, has seen double-digit week-on-week growth and higher transaction sizes in the mainland, said President Andrew Keith. "Growth might be an artificial spike due to people coming out of lockdown and needing a fashion fix, [but] it does suggest that there is buying sentiment in the market."

Japan

Personal luxury goods market value: $30.8 billion as of 2019, according to Euromonitor International.

Status: The government imposed a 'mild lockdown' (that didn't force citizens to stay at home, though many did) and lifted a national state of emergency on May 25, before which many department stores had already reopened.

Stores have reopened in Asia’s second-largest luxury market. “The worst has apparently passed,” said Yo Douglas, Gartner's senior specialist for research and advisory in the APAC region. Though Douglas expects domestic demand to recover soon, the country still relies heavily on mainland Chinese and other Asian tourism, meaning sales won’t see a full rebound until inbound flows resume. HSBC’s Rambourg echoed these sentiments, labelling Japan’s recovery a “timid rebound.”

The pandemic has shed light on the country's reliance on physical retail channels. Moving forward, smart brands will focus on investing in e-commerce locally to avoid losses when another crisis strikes. Moreover, those looking to offload excess inventory via discounting will meet challenges. "[Japanese consumers] are savvy about the latest luxury items. They won't buy previous season's collection even with discounts," Douglas said, referring to a distinction in the Japanese consumer psyche between outdated luxury and second-hand luxury of an older vintage which is popular in the country.

South Korea

Personal luxury goods market value: $12.7 billion as of 2019, according to Euromonitor International.

Status: The South Korean government did not impose a lockdown. Stores that did close reopened beginning mid-April.

South Korea successfully flattened the curve without shutting down the economy. As many stores remained open, the country’s luxury sector is now seeing a “flat V-shaped rebound,” said Rambourg. “The only two markets that are open and growing right now are mainland China and South Korea.”

The country's local demand for luxury (which Rambourg estimated accounts for over 60 percent of sales) is "incredibly healthy right now" — last month, over a hundred shoppers waited in line outside a Chanel store in Seoul to beat imminent price hikes, despite concerns over further outbreaks. However, a lack of tourists has halted the world's largest travel retail market, which generated a record $21.32 billion in duty free sales last year.

The only two markets that are open and growing right now are mainland China and South Korea.

Even so, South Korea is doing better than most. Like China, Burberry’s Gobbetti said that sales in the country were “already ahead of the prior year and continuing to show an improving trend,” while growth has already outpaced last year’s levels.

Part of this can be attributed to its sophisticated e-commerce infrastructure. According to Jason Lam, MatchesFashion’s head of brand and communications in Asia Pacific, the luxury e-tailer has seen a double-digit boost in visitors to its Korean site during April and May, leading to double-digit growth in the full-price, non-discounted sales.

Hong Kong

Personal luxury goods market value: $9 billion in 2019, according to Euromonitor International.

Status: Hong Kong avoided a full-on lockdown and most businesses reopened by early May.

Riot police stand in front of a Tiffany & Co in Hong Kong | Source: Getty Images

Pro-democracy protests have resumed in the semi-autonomous city, casting a cloud over its retail sector, which was just seeing signs of a post-Covid-19 recovery. Shoppers from mainland China — who will likely visit in smaller numbers (if at all) due to the unrest — have yet to return. "Mainland China accounts for [up] to 75 percent of the luxury business and that's not happening today," said Rambourg. "There's a lot of wealth in Hong Kong, but if you only rely on locals it's going to be a real struggle."

Local demand may be recovering post-pandemic, but the city's strategic importance for brands is hanging in the balance. "The pandemic has very much stabilised over the past six weeks and sales are growing week on week, but the year-on-year comparison is dramatic," said Lane Crawford and Joyce Group's Keith. He noted that the group, which is based in Hong Kong, is holding more discussions with brand partners to rethink their footprint in the city, particularly when it comes to physical retail.

“The scale of Hong Kong luxury retail may change as no one anticipates the same volume of in-bound traffic as before,” said Keith.

Taiwan

Personal luxury goods market value: $6.9 billion in 2019, according to Euromonitor International.

Status: Like South Korea, Taiwan's government didn't impose a lockdown.

Taiwan has emerged from Covid-19 relatively unscathed. “Top players, like Louis Vuitton, Hermès, Chanel, weren’t affected,” said Sophie Jiang, chief executive of Taipei-based PR firm E&A, which also has offices in mainland China and Hong Kong. “From what my clients have told me, companies are doing much better than neighbouring markets like Hong Kong.”

Even so, brands shouldn’t get too excited. “Even though sales are probably healthy and brands are seeing growth year-on-year, it’s not going to do much in terms of mitigating the misery you’re seeing in the west,” said Rambourg. “It’s a healthy market, but it’s a small market.”

Growth is not going to do much in terms of mitigating the misery you're seeing in the west.

Taiwan is now largely a domestic luxury market, said Jiang. Like Japan, the island has a dense network of brick-and-mortar stores that have held brands back from making inroads into e-commerce. But unlike Japan, mainland Chinese platforms like Tmall are already active in the country (alongside global players like Net-a-Porter) and are more influential than international platforms because of the proximity of mainland China, she added. Brands looking to grow their business in Taiwan (and likely already partnering with the Alibaba-owned luxury retail destination) know what to do.

Singapore

Personal luxury goods market value: $4.1 billion in 2019, according to Euromonitor International.

Status: The country began gradually easing its partial lockdown in early June. Retail shops will be allowed to reopen from June 19.

Though Singapore's lockdown measures (collectively coined a "circuit breaker") were eased recently, many physical luxury stores — which were closed for over nine weeks — are still closed, said Ian Lee, editor in chief of L'Officiel Singapore.

Orchard shopping mall in Singapore | Source: Shutterstock

Most luxury brands don't operate dedicated e-commerce channels in Singapore. The few that do — like Louis Vuitton, Hermès and Cartier — were able to engage sales, but other players resorted to messaging or calling consumers directly to encourage offline shopping, said Kenneth Goh, editor in chief of Harper's Bazaar Singapore. According to Goh, the likes of Celine, Gucci, Fendi, Dior and Bottega Veneta now allow shoppers to place orders on the phone. These efforts have helped, but health concerns and conservative spending habits are keeping local sentiment stagnant.

“Traditional retail won’t start up again till the second phase of our circuit breaker, rumoured to happen in the later part of June, when stores are able to open,” Goh said. Until then, brands will continue resorting to WhatsApp and phone calls to stimulate local demand.

Moreover, sales are lacking due to the notable absence of tourists — particularly those from mainland China and Indonesia — who make up 50 to 60 per cent of total sales in the retail sector in the country. Singapore's government last week reported that sales had slumped 40.5 percent year-on-year in April to hit 2.1 billion Singaporean dollars (around $1.5 billion), after seeing the steepest drop in sales in 22 years in March.

Rambourg anticipates that the Chinese government will soon open up a “travel corridor” for citizens to visit regions deemed safe, which would “massively move the needle” for retailers in Singapore. If implemented there, it could happen anytime from “the next few weeks [to] at worst towards the end of summer.”

India

Personal luxury goods market value: $3.8 billion in 2019, according to Euromonitor International.

Status: India, which imposed one of the world's strictest lockdowns beginning March 24, started reopening stores on June 8.

Larger retail venues like shopping malls (where most luxury stores are based) in cities like Mumbai remain closed, said AT Kearney Partner Neelesh Hundekari, who is based there. High street stores have reopened with restrictions. “I don’t know if the worst is over yet,” he added, forecasting that though sales in May could be down almost 60 percent for most brands, growth will return to Q1 2020 levels by the first quarter of 2021.

India’s luxury market is largely driven by locals purchasing goods abroad in Dubai, Singapore, Hong Kong, across Europe or the US. A post-lockdown rebound is likely, said Hundekari, but could hinge on travel routes normalising.

Indian women enter a high fashion store at the DLF Emporio luxury shopping mall in New Delhi | Source: Brian Sokol/Bloomberg via Getty Images

Due to the lack of local e-commerce infrastructure besides major marketplaces Amazon India and Flipkart, health-conscious luxury shoppers have held off from making purchases, he added. Others have reached out to store staff during lockdown to get catalogues and merchandise sent to their homes, but this won’t offset the wider losses that brands feel in the market. “Overall this year, our aggregate sales might be 20-40 percent lower than last year,” he noted.

Moreover, India’s wedding season — a major driver and occasion for luxury consumption — has been decimated and events that do happen in the near future will do so on a smaller scale. Even when malls do reopen, Hundekari predicts consumers will be wary of crowded stores. Meanwhile, brands will be focused on setting up their digital and direct-to-consumer channels.

“The Indian e-commerce market belongs entirely to [mass] marketplaces so brands [that] have not invested that much in their own channels…realise that they need to do it now,” said Hundekari.

Thailand

Personal luxury goods market value: $2.3 billion in 2019, according to Euromonitor International.

Status: The Thai government has set July 1 as its date to lift all travel and business restrictions. Most low-risk businesses reopened in May.

Until Covid-19 hit South-east Asia, Thailand’s luxury market was essentially split in half between local and tourist spending, said Rambourg. “For now, you can consider that half of luxury demand has gone.”

You can consider that half of luxury demand has gone.

Major mall operator Central Group reported a net profit of 890 million baht (around $28.5 billion) for the first quarter of 2020, down 63 percent from the same period in 2019. (The group didn’t respond to a request for comment.) Meanwhile, Economic Intelligence Center (EIC) data forecasts that the country’s retail sector will contract by 14 percent — around 500 billion baht ($16 billion), compared to 2019’s market value of around 3.5 trillion baht. EIC expects that inbound tourism will drop 67 percent year-on-year, which could dent tourism-related retail revenue by as much as 270 billion baht ($8.6 billion).

Rambourg estimates that local demand has grown as Thai consumers, like the mainland Chinese, have been forced to repatriate luxury spending that would usually take place abroad. But the overall impact won’t offset travel retail losses. “With moderate growth from locals and negligible sales with tourists, [the] Thai market overall is unlikely to be great for luxury right now.” The return of tourism on July 1 couldn’t come sooner for Thai retailers.

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