The luxury retail market is on the brink of crisis due to the coronavirus impacting the all-important Chinese buyers both at home and abroad. Watch and jewelry sectors in Hong Kong, for example, are bracing themselves for a 40-60% decrease in sales and there are announcements of temporary closures of several upmarket stores.
Whilst cases of the virus were reported during the Christmas period in Wuhan, it wasn’t until January 20th that people in major cities like Beijing, Shanghai and Shenzhen began to stay indoors as they realized the virus could be transmitted by human-to-human interaction. The Chinese government was forced to cancel events for the Chinese New Year celebrations starting on January 25th, and by early February, several countries and regions in the Asia-Pacific region banned the entry of recent travelers from mainland China.
The phenomenon of viral epidemics in China is not a new one, with severe acute respiratory syndrome (SARS) having an acute, though brief, impact on the luxury goods market in 2003. This time round, observers will be taking a close look at how the Chinese luxury industry will sustain the latest downturn.
Number One?
While Hong Kong regularly holds the title of the number one market in the world for luxury watches, this position came under threat as early as the autumn of last year. Not only did the US-China Trade War result in a slow-down of the Chinese economy and property markets, the escalation in violence of the Hong Kong political protests from October 1st led to many potential buyers staying indoors. The impact of both the political unrest and the outbreak of the coronavirus was made worse because they coincided with the most lucrative sales periods of Christmas and Chinese New Year. The situation was exemplified by the early January announcement that Louis Vuitton, the world’s biggest luxury goods brand by sales, would be shutting its Times Square shop in Hong Kong due to high rental cost and protests dampening demand.
Initially, the major brands based in Hong Kong attempted to offset these negative occurrences by focusing on increased domestic sales in mainland China, and other countries such as Japan, Singapore, and even Europe and the US. But now with travel bans in place for Chinese traveling abroad, luxury markets all over the globe are affected.
Grey market solutions
One possible savior for this scenario could potentially be the luxury e-commerce, or grey, market. Although the luxury market, especially luxury watches and jewelry, has been slow to e-commerce as compared to other segments such as cosmetics, brands are slowly beginning to wake up to the potential of new customers that on-line shopping brings. What we are seeing today is a play by the large luxury groups striking deals with big international internet players such as Luxury Pavilion and Farfetch to develop separate online stores. This is important because it can ensure that brands stay in control of their online image. The luxury groups realize that they can capitalize on the traffic that only the large internet platforms can provide. They then stand to benefit from a growth in sales and the ability to reach new customers, as well as access to those customers not located within proximity to brick-and-mortar stores.
Facing the future
Due to the precarious situation in Hong Kong, it is feared that several retail shops will start to close down on a permanent basis. Business in China was already difficult due to the economic situation as a result of the trade war and whilst the trade agreement has helped, the continuing spread of the coronavirus has only served to deteriorate the situation further. Though brands attempted to shift sales to other territories in an attempt to compensate, this approach has its limitations due to the newly enforced travel ban. It is thought that luxury groups will turn to the grey market in the short-term to increase their sales, however, if the crisis lasts for, over a much longer-term of two to three years, they then run the very real risk of devaluing their brand image. Internet sales may provide the opportunity to boost, though not save, the situation caused by the epidemic. In the long-term, however, e-commerce provides a good opportunity to regenerate growth that will be needed as China transforms into a more maturing market.
This call was hosted on January 31, 2020, under the title: “(CFR) China Luxury Update: CoronaVirus Impact, Sales Trends, CNY Outlook.”
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