After positioning Education company Intervene again with the tech tycoons, will the next China come to grab the Birkin bag?

Since President Xi Jinping, this issue has been worrying investors in the world’s largest luxury goods group. Signal this month China will “regulate excessively high incomes and encourage high-income groups and enterprises to give back to society more.”

A committee led by Xi Jinping stated that although the Chinese Communist Party has long allowed some people to “get rich first,” it will now prioritize “common prosperity for all”, suggesting that measures may be taken to regulate income and redistribute wealth.

Since the announcement on August 17, these few words have been enough to reduce the total market value of LVMH, Hermès, Kering, Richemont and Burberry by 61.7 billion euros, or nearly 10%.

China has always been the main growth engine of luxury goods, and the Covid-19 pandemic will only increase its importance.Spending on high-end jewelry and clothing has been Repatriation to China Because travel restrictions mean that Chinese people can no longer fly to Milan or Paris for shopping.

According to data from Jefferies, under the leadership of the growing middle class of Gen Z and Millennials, Chinese consumers are expected to purchase 45% of all global luxury goods this year, up from 37% in 2019.

A small group of super-rich people — Jefferies estimates that their number is about 110,000, and each spends more than 100,000 euros on fashion and jewelry each year — accounting for almost a quarter of Chinese consumer luxury goods sales. If they feel that showing off their wealth has suddenly become taboo in Xi Jinping’s China, the industry may soon feel chill.

Executives of European luxury houses are still trying to figure out what might happen and whether they need to react.

Wang Yishu, a London-based consultant, has been answering phone calls from worried clients.

“I have been telling them that things may not change drastically immediately, but for some time, some very wealthy people, senior CEOs and senior government officials will definitely be more careful about what they wear or display in public,” she said.

“For luxury brands, it may be prudent to keep a low profile. They may consider downplaying the marketing activities planned for this fall and winter so as not to emphasize exclusivity or elitism.”

Wang added that Xi Jinping’s statement could also lead to a more sober clothing design, away from the bling and loud logo that is often popular in China.

Staff sorted items in a Gucci store in Beijing
Staff sorting items in a Gucci store in Beijing © Nicolas Asfouri/AFP via Getty

The recent sell-off in luxury stocks has shortened the gains that have pushed valuations to historical highs. The trading price of this sector is 90% premium to the MSCI Europe Index, compared to the historical average of 50%, according to UBS.

Facts have proved that as wealthy American and Chinese consumers continue to consume, the pandemic is far less dragged down than people feared.In the past 18 months, big brands such as Louis Vuitton, Hermès and Chanel under LVMH have taken up market share, placing them in Hope to recover As early as this year, even the smaller houses continued to struggle.

The chart shows that Chinese customers will account for half of global luxury goods sales

But some investors have begun to short the industry.

According to data from IHS Markit, Hermès’ short equity on Thursday rose from 0.7% in mid-August to 0.9% of free float, while Richemont rose from 1.1% to 1.4% over the same period. However, there is little change in short-term interest in LVMH or Kering.

Although there is uncertainty about any regulatory crackdown and its potential impact, others are not so worried.

“China’s opportunities clearly still outweigh the risks, and if that’s not the case, you don’t want to be extravagant at all,” said Jefferies analyst Flavio Cereda (Flavio Cereda). “All you have now is a lot of new uncertainty, which makes investors nervous.”

In August 2020, shoppers lined up in Hong Kong to enter the Hermès store
Shoppers line up to enter the Hermès store in Hong Kong in August 2020 © Miguel Candela/EPA-EFE

At a press conference in Beijing on Thursday, senior economic official Han Wenxiu tried to assure the public that promoting “common prosperity” does not mean that China will “rob the rich and help the poor.”

Analysts say that China may raise taxes on expensive products, crack down on influencers who show off on social media, impose advertising restrictions, or strengthen border controls. daigou, Professional shoppers who purchase outbound travel on behalf of Chinese people. All of these may weaken the demand for luxury goods.

Another concern is that the government may rely on companies to close the long-standing price gap. Brands charge for goods in China usually 25% to 50% higher than in Europe, which is why Chinese shoppers often spend so much on travel before the pandemic.

A 29-year-old professional in Chengdu who occasionally buys luxury goods said that the government’s change of tone has “no effect” on the wealthiest consumers she knows. But policies such as new inheritance taxes or higher taxes on investment or property income will affect the wealthy.

Louis Vuitton advertising in Shanghai
A Louis Vuitton advertisement in Shanghai © Qilai Shen/Bloomberg

Oliver Wyman’s Hong Kong consultant Katie Sham said that the wealth of the top 5% to 10% of consumers in China “may be affected” and “this is definitely not good news for luxury goods companies. “.

Chinese policies have hit luxury goods before. From 2012 to 2014, at the beginning of Xi Jinping’s anti-corruption campaign, Beijing severely cracked down on giving gifts to civil servants in exchange for favors. Analysts said that during this period, sales of luxury goods and spirits grew at a slower rate than before and after.

Jefferies’s Cereda predicted: “If Xi Jinping again says not to do this in the next few months, then you will see a rebound in the stock price, but the depreciation will continue.”

“If he continues to talk about it or announce specific policies, then the market may be in a very turbulent period.”

Additional reporting by Shanghai Wang Xueqiao, Seoul Ed White and London Adam Samson


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