SHANGHAI, China — A number of major fashion and beauty players have lifted the lid on their quarterly performance since China announced its dramatic 6.8 percent economic contraction, shining a light on the progress of the country's post-coronavirus recovery. So far the picture is mixed.
There are obviously still a lot of “known unknowns,” to paraphrase a former US Secretary of Defence, when it comes to China’s consumer recovery. We don’t yet know, for example, how much poor overall economic performance in the first quarter will impact on consumer confidence in the second quarter.
On the other hand, there are many more things we now know that we didn’t even two weeks ago. From regional variations in consumer confidence to resilient categories across luxury and beauty segments, attention is now turning to what lessons can be drawn from these new developments.
The rebound is happening in different ways, paces and frequencies across China's various cities and provinces.
Distilling those lessons into actionable insights is more important than ever. China is not only the world’s largest fashion market, it is also the growth engine for the luxury sector, accounting for nearly a third of luxury purchases worldwide, making China’s recovery a determining factor in the recovery of the global fashion industry.
With so much riding on this one market, what early conclusions can brands draw from the collective performance of giants like Hermès, LVMH, Kering, Li Ning and L'Oréal that will help them build a post-pandemic playbook for the China market?
1. Prioritise investment in the right locations because the rebound is uneven across China’s cities, provinces and regions.
China’s “patchwork quilt” recovery — as AgencyChina’s Michael Norris describes it — is far from uniform. It is not a coincidence that reports of buying binges at Hermès and Chanel documented on Chinese social media took place in Shanghai and Guangzhou.
In retail audits around the country starting in March, Norris has observed far more willingness for consumers to come out and shop in cities along the eastern sea-board, between Shanghai and Guangzhou, while those in the north of the country, including Beijing, remain far more hesitant to leave home at this point.
Though retail sales data unveiled by China’s National Bureau of Statistics this month showed a slight improvement for March — a drop of 15.8 percent year-on-year, compared to the 20.5 percent drop recorded in January and February — some sectors are still struggling more than others, with apparel down 34.8 percent on the year in March. Similarly, variation is felt across different parts of China, where Norris says the rebound is happening in different ways, at varying paces and frequencies.
“We like this idea of approaching [different parts of China] on a geography basis and liaising with store managers [to work out an initial strategy],” explains Norris, who is research and strategy manager at the firm. Rather than forcing all city markets to follow the same approach at the same time, brands must accept the need for a two-pronged attack by location within China: getting people shopping in-stores in markets where they are more ready for it, and relying more on e-commerce and digital communication in markets where they are not.
2. Find ways to better serve the affluent because they are the most resilient and enthusiastic consumer segment in China right now.
Somewhat insulated from quarterly economic upheaval and unemployment woes, wealthy consumers in China may be in the habit of rationalising more of their purchases now than they were a year ago, but they are still spending.
“The affluent and the high net worth consumers [in mainland China] have been the most resilient consumers,” explained Amrita Banta, Managing Director at Agility Research & Strategy. “We found the same thing in Hong Kong in the midst of the protests, the high net worth consumers still wanted to spend.”
In a post-results call to investors, LVMH Chief Financial Officer Jean-Jacques Guiony, added evidence to this hypothesis by announcing a significant March and April rebound in China sales for the group.
Re-shoring Chinese luxury spend is the best option luxury brands have to recoup some of the losses they experience elsewhere.
“We’ve seen very substantial growth rates, sometimes in excess of 50 percent, so it really shows the appetite of Chinese people after two months of lockdown to come back to stores and come back to their previous patterns of consumption,” Guiony said.
One possibility is that China’s richest consumers may now focus more on buying luxury goods since their expensive overseas holidays are on indefinite hold. Though any domestic uptick is unlikely to make up for the two-thirds of luxury spending that Chinese typically make overseas, focusing on a re-shoring Chinese luxury spend is the best option luxury brands have to recoup some of the losses they experience elsewhere.
3. Brands that invested big in CRM to create deep and long-lasting relationships with Chinese consumers are enjoying a “loyalty dividend” now.
Those luxury shoppers who have resumed spending in the wake of the coronavirus in China are gravitating toward the brands they already know and love. In the case of LVMH, it was the group’s biggest luxury brands, Louis Vuitton and Dior, that Guiony highlighted as the driving force in the group’s China rebound.
A similar theme was apparent in comments Kering Chief Financial Officer, Jean-Marc Duplaix made during a post-earnings call last week. Though he explained that Gucci sales in the first quarter were off-point in the context of previous years’ breakneck growth because of the brand’s reliance on Asia (like-for-like sales were down 23.2 percent in the period), it is Gucci that is “leading the pack in mainland China” among Kering’s portfolio in terms of the group’s return to sales growth.
Likewise, Hermès seems to have weathered the coronavirus crisis relatively well in China. Its first quarter sales were down 7.7 percent globally, compared to the 15 percent (and more) experienced by some rivals. According to Chief Executive Axel Dumas, this is largely due to a strong China performance in the lead-up to Chinese New Year in January, and “double-digit” growth in sales from the time its China stores re-opened in March.
“Loyal customers are the first to return to brands. It’s critical to invest in CRM [for] clients and create those relationships during this crisis,” Banta says. “The brand shared interesting soft touches with them, going past transactional relationships, showing love and care, being very active online.”
An additional pivot to e-commerce also seems to have largely worked in favour of establishment luxury brands, even though they have traditionally shied away from the channel because of the disadvantages it has in terms of touch and feel. Duplaix said Gucci’s online China sales were up over 100 percent in the first quarter.
4. Beauty players can thrive if they are bold and act fast to embrace China’s latest digital innovations.
Chairman and Chief Executive of L’Oréal Group, Jean-Paul Agon, announced as part of his group’s quarterly earnings that sales in China have actually grown in the first quarter. For the three months to the end of March, he said, sales in China were up more than 6 percent year-on-year, a feat he described as “remarkable” given the retail disruption.
The ability of some beauty brands to maintain growth in China, even as the country was largely shutdown for the better part of eight weeks, is due to their ability to seamlessly migrate a larger percentage of their revenue-earning business online, by leaning on the current craze for livestreaming to boost sales.
China’s post-coronavirus beauty boom is coming from 'facemask-friendly' product categories.
On International Women’s Day, traditionally a major sales moment in China, beauty brands performed beyond expectations on major platforms. JD.com reported an increase of 97 percent year-on-year in sales of cosmetics and skin care items on March 8, with SK-II, Lancôme, L'Oréal SA, Olay and Pechoin the five best-performing brands.
Rather than the “lipstick effect” which is traditionally counted upon in times of economic uncertainty, China’s post-coronavirus beauty boom is coming from “facemask-friendly” product categories.
Sales of eyeliners and eye shadow products made by foreign brands rose by 40 percent on a yearly basis on Tmall, the online shopping platform of Alibaba Group, during the first three months of this year, according to company officials. According to L'Oréal, during the past two months, sales of eye makeup products, including eyeliners, eye shadows, mascara, and eyebrow pencils grew faster than their other product categories in the China market.
5. Global brands need to up their game to compete against increasingly popular local giants who are enjoying a patriotic consumption boom.
China’s second-largest sportswear manufacturer, Li-Ning, have announced they saw a 10 to 20 percent decrease in overall sales for the first quarter. Physical retail and wholesale channels were down 30 to 40 percent and 10 to 20 percent, respectively, while online sales grew “in the low teens.”
The brand shuttered stores in the wake of the coronavirus-induced shutdowns and now has 224 fewer points of sales than it did in the same period last year (as of the end of March, Li Ning had a total of 6,225 stores). This hefty store count explains the depth of the impact the brand saw from store closures across the country from the end of January and throughout February, though broader trends are working in their favour for a return to the explosive growth the brand saw in 2019 over the next few months.
One is the renewed interest in health and wellness cited by Chinese consumers in a number of surveys conducted since the widespread outbreak of Covid-19 hit the country in late January. Reports from China Luxury Advisors, Bain & Co., and Fung Business Intelligence Group, all predict positive outcomes for fitness and wellness-related brands in the wake of the virus.
This may be even more pronounced for domestic brands that are seen as leaders in their categories, including Li Ning, if they are able to ride the current wave of national pride tied to China’s seemingly successful efforts to contain the virus, even as other countries continue to struggle with their own outbreaks.
“[This] will make them [prouder] of their choices, [prouder] of Chinese brands,” says Jason Yu, managing director of Greater China at Kantar Worldpanel. And this, in turn, means that international brands competing in their respective categories — in Li Ning’s case brands like Nike and Adidas — will have to work that much harder to grow or even maintain market share.
Disclosure: LVMH is part of a group of investors who, together, hold a minority interest in The Business of Fashion. All investors have signed shareholder’s documentation guaranteeing BoF’s complete editorial independence.