The Fashion Industry’s Over-Reliance on China
From volatile sales and revenue to broader strategic and operational challenges, the dependency on China is proving to be a double-edged sword.
While all eyes are on the ongoing Summer Olympic Games, the luxury fashion industry is incurring something of a stalemate here in Asia. In recent years, the luxury fashion sector has increasingly centered its strategies around the Chinese market, capitalising on its vast consumer base and the burgeoning wealth of the population. China was responsible for almost 16 percent of global luxury spending last year which saw luxury goods consumption double from 2008 to 2014 making the country a crucial revenue driver for luxury brands, with Chinese consumers playing a pivotal role in global sales. However, this overreliance has introduced significant risks, making luxury fashion brands vulnerable to fluctuations in the Chinese market. LUXUO delves into the consequences of this reliance and explores strategies for luxury brands to mitigate these risks and achieve a more balanced, sustainable business model.
China As Fashion’s “Silver Bullet”
The rise of new shops and larger flagship stores over recent years is evidence of luxury fashion brands investing in growing their presence in China. This stems from the fashion industry’s long-standing efforts to leverage the world’s third-largest luxury market. China is arguably Asia’s largest economy and market penetration works differently here compared to other growing markets like India, Brazil, and Indonesia. A rising middle class and the growth of dynamic cities outside the capital allow for various opportunities to explore new markets within China. Simply put, luxury fashion conglomerates can strategise the growth of their brands by measuring it against the growth of cities outside of Beijing like Shanghai, Guangzhou, and Shenzhen. The rate of growth is slower in regional nations like Thailand, Vietnam and Malaysia where brands are more likely to invest primarily in the capital city. The growth recorded in new versus existing markets highlights that economic realities differ significantly. While market saturation may not be as pronounced in markets like the United States; a new store, new location, and new distribution in China makes its growth effectively see a 100 percent year-on-year increase.
Read More: For China, Good News is Bad News
“Luxury Shame”
China’s middle class — once a robust driver of luxury consumption in China — is now facing financial strain alongside a shift in government policy towards showcasing restraint and modesty from the ruling Chinese Communist Party (CCP). As reported by BusinessStandard.com, the term “luxury shame” first gained traction in the United States following the Lehman Brothers crisis of 2008 to 2009. It has now taken root in China as the country’s GDP growth falls short of expectations, and the unemployment crisis is so severe that President Xi Jinping made it the “top priority” in May this year. The result sees China’s wealthy refrain from indulging in ostentatious purchases, affecting consumer behaviors as Chinese consumers are also not traveling and spending in places like Europe like they used to. This inevitably has a knock-on effect on the luxury sector as a whole with the spending pattern (or rather lack of spending pattern) affecting sales within China’s domestic market and by Chinese tourists, which some argue can be tied back to the values implemented by the Chinese community party.
The Sales Slump
What happens when the China “gravy train” turns sour? Kering shares took a hit last week when the luxury conglomerate reported that operating income in the second half of the year would be down by 30 percent after a 42 percent drop in the first half of 2024. According to Forbes, July saw Burberry shares plunge by more than 16 percent, while Hugo Boss shares dropped by nearly 7.5 percent after the companies issued renewed profit warnings for 2024 following second-quarter preliminary earnings showing around 40 percent plunges in operating profits year-over-year. Forbes also reports that preliminary earnings of Richemont saw a 27 percent drop in China sales this year, and the Swatch Group reported an 11 percent decline in sales overall this year and significant declines in sales in China. Even fashion giant LVMH took a dip after missing its sales estimates. However, in reality, a dip in sales is hardly the kiss of death.
Read More: Asia Set to Take a Greater Role in LVMH’s Growth Moving Forward
Strategic Diversification
The rise and fall of revenues, profit margins, and quarterly projections of large fashion conglomerates like LVMH and Kering, seem to highlight their dependence on China, the growth of the Chinese Market and the spending power of Chinese consumers. This was mirrored in the marketing strategies which saw the rise of Asian brand ambassadors fronting luxury fashion’s seasonal campaigns.
China’s growing economy sees a rising middle class who view the consumption of branded goods as a reflection of one’s status. Purchasing a luxury brand is something of a physical declaration of the advancement of one’s social status. In the Asian context, the concept of “mian zi” or “face” plays a paramount role in the fabric of society and owning the latest Chanel or Louis Vuitton speaks volumes about a person’s “face”. By focusing on China’s growing middle class, luxury brands may have ignored other markets, such as the Middle East, Southeast Asia, and America, highlighting a need for luxury brands to explore commercial strategies on a global level. With the shuttering of physical stores and a refocusing of marketing efforts towards an online presence, a reshuffle in the distribution and retail landscape could be what the luxury industry needs.
Read More: China’s Economy: The Weakened Dragon
New Markets
While the Chinese market has been a lucrative source of revenue, luxury brands should actively pursue diversification. The luxury fashion industry’s overreliance on China could be detrimental to long-term goals leading to volatile sales and revenue. To offset this, the luxury fashion industry needs to consider the benefits of diversifying its market focus to include other high-growth regions such as North America, Europe, and Southeast Asia to reduce its sole dependence on China. This involves not only expanding into under-served markets like the Middle East and Southeast Asia but also enhancing their presence in mature markets like Europe and North America. For example, brands might explore emerging luxury hubs in cities like Dubai, Bangkok, or New Delhi. Thailand’s capital city of Bangkok already appears to be eyed by luxury powerhouses. Louis Vuitton recently unveiled the Maison’s first restaurant in South Asia, helmed by celebrated Indian chef Gaggan Anand. An effect that has no doubt had a part to play in the dominance of Thai celebrity brand ambassadors from Thai rapper and singer BamBam appointed as the latest House Ambassador for Louis Vuitton to Bright Vachirawit for Burberry and Tay Tawan Vihokratanaha for Loewe.
The expansion of world-class malls in Thailand (Siam Paragon and Iconsiam) and Malaysia (TRX, Pavilion and Suria KLCC) has become a significant factor in the region’s global luxury market. It goes without saying that luxury clients enjoy an elevated shopping experience. According to Angelito Perez Tan, Jr., co-founder and CEO of RTG Group Asia, Thailand’s growing economy is not to be dismissed particularly when compared to Singapore. Adapting marketing strategies to cater to local tastes and cultural preferences can help luxury brands better connect with diverse consumer bases. In the Middle East, for instance, emphasising luxury’s association with heritage and exclusivity might resonate more than in markets focused on contemporary trends.
Read More: Luxury Brands Leverage on Southeast Asia to Defy Slowdown
What Lies Beyond The Silk Road?
The shift towards online shopping presents an opportunity to reach global consumers without the geographical constraints of physical stores. Investing in robust e-commerce platforms and an integrated omnichannel approach can help brands capture sales from various markets and reduce dependency on any single region. Perhaps investment towards direct-to-consumer channels and online platforms would evade the aforementioned “luxury shame” of purchasing from physical stores.
Read More: These Brands Are Creating Luxury Lifestyle Experiences
The luxury fashion industry’s over-reliance on the Chinese market has underscored the risks associated with focusing heavily on one region. Despite China’s significant contribution to global luxury spending, recent shifts in consumer behavior and government policies have highlighted the vulnerabilities of this dependency. To address these challenges, luxury brands should consider diversifying their market presence by exploring emerging and mature markets beyond China alongside emphasising local adaptation and strengthening their e-commerce capabilities. In the meantime, it could simply be a “waiting game” situation to see if consumers will make a return to stores or perhaps rely on riding the “lipstick effect” wave as the beauty industry has the potential for growth amid the continuing economic downturn.
Read More: Sales-Focused Fashion Industry Turns to Beauty
For more on the latest in business and fashion reads, click here.
