Luxury brands say China’s latest Covid wave has hit consumer demand

BEIJING — Luxury brands have lowered expectations for their business in China this year after the country’s latest Covid lockdowns, according to an Oliver Wyman survey shared exclusively with CNBC.

Expected growth for luxury and high-end consumer brands was reduced by 15 percentage points, and nearly 25 percentage points for luxury brands alone, according to survey results released Wednesday.

High-end and luxury goods companies now expect annual growth of just 3% in their business in mainland China this year, down sharply from the 18% rise they forecast a few years ago. months, according to the report. This is based on a weighted average of survey results.

Oliver Wyman said his survey of executives in May covered more than 30 clients of the consulting firm in high-end consumer and luxury goods, representing more than $50 billion in retail sales.

Uncertain future

Shanghai, the city with China’s largest gross domestic product and a hub for foreign affairs, has faced the brunt of China’s Covid outbreak this spring – the country’s worst since the pandemic’s initial shock in early 2020. The city ordered people to stay home and most businesses to close for two months, before attempting to reopen on June 1.

“There is still a great deal of uncertainty about what the future Covid will be like. [measures] in China,” Kenneth Chow, director of Oliver Wyman, said in a phone interview this week.

Retail sales in China fell 11.1% in April from a year ago as Covid controls kept many people at home and shopping malls closed. Pictured is a luxury store in Shanghai on June 4, 2022, just days after the city’s official reopening began.

hugo hu | Getty Images News | Getty Images

“There is enormous doubt as to whether consumer confidence [can] recover quickly, like in 2020 and 2021,” he said, citing the company’s interviews with executives.

Retail sales in China fell 11.1% in April from a year ago, after rising 3.3% in the first three months of the year. Consumer spending in China has never fully recovered from the initial phase of the pandemic, and as Covid enters its third year, people are increasingly worried about future income.

The unemployment rate in China’s 31 largest cities surpassed 2020 highs to hit 6.7% in April – the highest since records began in 2018.

“It seems that this time around, affluent Gen Z [age 25 or younger] may react differently, especially since a lack of job security may be something they have to deal with for the very first time,” the report says. – the hollow will last.”

Even in unlocked areas, customer stories indicate that in-store traffic dropped by more than 50% and the percentage of those visitors making a purchase was up to 30% lower, according to Oliver Wyman’s report.

China has maintained a strict “dynamic zero-Covid” policy that uses travel restrictions and rapid lockdowns to try to control the virus. While the strategy has helped the country quickly return to growth in 2020, the higher transmissibility of this year’s omicron variant has made the virus more difficult to control.

Looking ahead to next year, survey respondents were more cautious about future growth, with just 12% – down from 40% previously – expecting their business in China to grow by more than 20%.

Brands now on average expect 11% growth next year in their business in mainland China, of which only 6% do not expect growth, according to the report.

bright spots

Many luxury and high-end consumer brands surveyed were optimistic about growth opportunities in domestic travel and e-commerce, Chow said. He said once domestic travel is allowed to resume, Hainan tends to benefit.

The tropical Chinese island has become a luxury shopping hub since most Chinese travelers cannot go overseas.

He added that many luxury brands were using e-commerce to reach smaller Chinese cities, while brands at a lower end of the market were exploring new store openings. But “when we speak with some of our customers, the Covid lockdown in Shanghai and some other cities has been their main concern, rather than store expansion,” Chow said.

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Over the longer term, high levels of Chinese consumer savings have always been a good predictor of future spending, according to the report.

In the first quarter, the propensity of Chinese households to save reached its highest level since 2002, according to a survey by the People’s Bank of China.

“Once consumer confidence picks up and the Covid lockdown measures are lifted, there will be a much better level of spending to unlock,” Chow said. But “the question remains as to when the Covid measures will be lifted”.

Oliver Wyman’s survey found that optimists expect China to fully recover as early as July, while pessimists don’t expect a return to normal until next year. “The neutral view puts an end to the restrictive policies that will occur around October of this year,” the report said.

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