For Swiss watchmakers preoccupied with growth, China is the relationship they cannot afford to ignore. As travel restrictions and duty-free limits limited outbound tourism, Chinese shoppers turned to domestic luxury shopping and boosted in-store sales.
Brands that prioritize digital adaptation and offer a seamless online shopping experience have an edge in this new landscape. But navigating China’s complex digital environment is not without challenges.
China’s Economic Resilience
After a sluggish start in 2021, luxury watch sales rebounded this year, according to data from market research firm Bain. The personal luxury goods sector, which encompasses fine jewelry and watches, recorded double-digit growth for the first three quarters of 2022, and is expected to reach a new record in sales this year. This is partly due to pent-up demand from Chinese consumers, who account for about a fifth of global luxury spend.
Luxury goods companies have adapted to economic uncertainty and volatility over the past few years, including investing in new production facilities closer to consumers to reduce logistics costs. In addition, the industry has a larger consumer base with a concentration of top customers who are less sensitive to recessions. It has also honed customer-centricity and a multi-touchpoint ecosystem.
The rebound in luxury spending by Chinese consumers is helping to drive global luxury markets, but the world’s largest economy has its own domestic challenges. In the wake of President Xi Jinping’s crackdown on “excessive” spending by high-profile individuals, Jefferies analysts Daniel Cereda and David Parker warn that Beijing risks destabilizing markets. But they point out that luxury purchases by China’s middle class are likely to remain resilient, especially if the severing of wealth-related connections between the government and business is limited.
China’s state campaign against luxury gift giving curbed growth in the country’s luxury market, which sank 0.9% in 2014, after averaging a 21.5% annual rate for the three years preceding it. Even prestigious luxury brands like Hermes, which sells the popular Birkin handbag that can cost up to $500,000, saw its China numbers decline that year.
But the slowdown was short-lived and luxury market recovery accelerated in 2016 as the country’s middle class gained financial confidence and became more comfortable with purchasing luxury goods. In addition, millennials and Gen Z — who are more likely to make purchases through digital channels than their older counterparts — continue to fuel luxury market growth. These trends are likely to persist. Nevertheless, the industry’s profitability remains below pre-Covid levels due to price increases and continued investment in digital and omnichannel platforms.
China’s Digital Transformation
For many luxury brands, China is more than a single market. It is the biggest and most important market in the world, one with a growing middle class, a sophisticated aptitude for digital engagement and a powerful role in shaping global trends. This makes it a formidable and challenging market for those who can get it right, but also one that offers greater rewards than anywhere else in the world to those who do.
Despite the recent slowdown, our observers all agree that the long-term outlook is very promising for China. Unlike other emerging markets, it has a much larger population of high- and middle-income consumers. Those consumers will be spending more in the future, not less, as their incomes rise. And they are increasingly willing to spend on high-end luxury products that can be seen and felt in-store as well as online.
While some analysts are cautioning against overstating the size of the Chinese luxury market, it’s worth remembering that it’s huge and still growing rapidly. In 2021, China’s market was estimated to be more than 520 billion RMB (about US$878 million). That’s roughly the same as Italy’s total luxury goods market and nearly half that of Switzerland.
In the short term, however, the economic woes of China have put a dent in demand for luxury watches. This is reflected in trade data from the Federation of Swiss Watch Industry (FHS) and results from publicly listed watchmaking conglomerates such as Richemont.
As China’s economy recovers, demand for luxury goods is expected to return. But the question remains how quickly that will happen, and what effect it will have on the global luxury watch industry.
The Covid-19 lockdown has pushed luxury brands to push their digital boundaries in order to be more engaging with Chinese consumers. This will help them mitigate the impact of potential future lockdowns, and also to weather any slowdowns in China’s economy.
At CEIBS, we are seeing more requests from the China or Asia Pacific HQs of luxury brands to set up training sessions that will showcase their digitalization experiences to their main HQs in North America and Europe. This shows that these HQs are listening and interested in the challenges that their Chinese colleagues are facing. They want to understand the digitalization journey in China and how it can support their overall strategy for growth.
China’s Social Media Culture
Despite China’s comparatively low average income, its consumers hold strong aspirations for luxury products. A key factor contributing to this is the country’s powerful “common prosperity” campaign, a cultural concept rooted in Mao and socialism. According to scholars such as Chris McNally, the “common prosperity” theme has evolved into a political strategy that discourages ostentatious displays of wealth and encourages consumer loyalty.
However, the Chinese luxury market is a complex environment for both domestic and foreign brands. It is critical that marketers understand the country’s culture and nuances when creating marketing campaigns. A misstep could lead to severe consequences for the brand’s reputation and sales.
As a result, it is essential that marketers focus on localizing their marketing campaigns and embracing the social media culture of the country. In doing so, they will be able to leverage the power of Chinese celebrities to increase brand awareness. In addition, they will be able to capitalize on the Chinese consumer’s growing preference for casual fashionable watches that reflect their own style and personality.
Furthermore, Chinese consumers are highly sensitive to brand reputation and storytelling. Hence, it is important for luxury brands to establish engaging official accounts on Weibo and WeChat to communicate their stories to the target audience.
For many international luxury brands, China has become a crucial market for their future growth. Moreover, the country’s recent loosening of strict pandemic control measures has opened up new possibilities for marketing and promotion in the luxury industry.
However, the country’s complexities and rapid change pose significant challenges for luxury brands entering the Chinese market. For example, city- or province-wide lockdowns can disrupt supply chains and slow factory production. Additionally, the government’s ongoing attempts to tame celebrity culture can undermine the credibility of certain marketing campaigns.
In order to succeed in China, luxury watchmakers must be aware of these complexities and keep up with the changing consumer behavior of the country. In doing so, they can ensure their future success in the lucrative Chinese market. Otherwise, they risk being left behind by their competitors in the country’s fast-growing luxury segment.
China’s Luxury Market Revival
While China has been a pillar of support for the luxury industry, it is no longer providing the same level of growth as before. A recent slowdown in China has caused many major luxury goods manufacturers to rethink their strategy and reassess their business plans. The luxury watch sector has also been affected by the weakening Chinese economy and escalating tensions between China and the United States.
However, there are several factors that have contributed to the recent revival in the luxury sector. Economic resilience has been a key driver, especially as high-net-worth individuals found that there were fewer opportunities to shop abroad. This is in addition to the fact that Chinese consumers tend to prioritize local products when making purchase decisions, which is a significant advantage for domestic luxury brands. Meanwhile, digital transformation has played a crucial role, particularly for high-end shoppers that have invested in WeChat and Alibaba platforms as a way to facilitate online purchases.
The recovery in the luxury sector has been fueled by strong growth in fashion, jewelry, leather goods and beauty. Additionally, luxury consumers are repurchasing and replenishing luxury items, while shopping for discounted prices through resale platforms and NFTs. These trends present new opportunities for luxury manufacturers to capture the attention of young consumers who are embracing a more modern lifestyle.
This generation of wealthy Chinese consumers are redefining their notions of luxury, shifting from traditional fine watches to more fashionable styles that fit with their individualized aesthetic and exemplify their social status. Moreover, discerning luxury consumers demand products that align with their ethos and values while meeting their emotional and functional needs. This has given rise to the rise of “soft luxury” and “momentary luxuries” for high-end brands in China.
Amid the resurgence in luxury sales, best-in-class luxury-goods companies have been able to increase product prices and manage cost inflation. They have also been able to reduce expenses through creative pricing strategies and collaborations, which has helped protect gross, operating and net margins. Consequently, they are poised to outperform their Western counterparts in 2023.
