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China's luxury shoppers emerging from quarantine

Industry's recovery could accelerate thanks to 'revenge spending' sprees

While store traffic is inching back up after falling 80 per cent at the peak of the outbreak, it is unlikely that the spending undertaken by those newly out of lockdown will make up for the lost sales.

Hong Kong

CHINESE shoppers are slowly returning to the glitzy malls and boutiques where they have been driving growth of the global luxury industry, as the novel coronavirus quarantine measures relax.

Store traffic in China is creeping back up after falling by as much as 80 per cent at the virus outbreak peaked there earlier this winter, hammering sales of brands ranging from Burberry to Gucci.

The recovery could accelerate in the coming weeks, fuelled by so-called "revenge spending" sprees.

Amrita Banta, managing director at Agility Research, used the term - previously coined to describe pent-up Chinese consumer demand unleashed in the 1980s after the chaos and poverty of the Cultural Revolution - to describe buying by luxury clients whose pockets are flush with cash after weeks of cancelled plans.

"China seems to have turned the corner and bigger cities are showing cautious optimism," she said. "We see a slow but definite bounce-back."

Chinese shoppers made up more than a third of the luxury industry's sales and about two-thirds of its growth in recent years.

When Beijing imposed lockdowns in late January to stem the spread of Covid-19, sales ground to a halt just as the key Chinese New Year vacation period was getting started.

What had previously seemed like a disastrous first quarter for the industry is poised to turn into a poor first half, as luxury hubs like Italy ramp up their own quarantine measures and the virus spreads in major markets like the US.

Even as the virus spreads globally, there are signs that China's own outbreak is coming under control.

The country reported only two dozen new cases of the disease on Wednesday, down from hundreds or thousands per day a few weeks ago.

Luxury brands such as Hermes International are reopening shops.

"We see a slow improvement in the business in China," said Salvatore Ferragamo chief executive officer Micaela Le Divelec Lemmi.

"On top of the traffic, the mood of the Chinese customers will also be relevant," he added. "After a month and a half of closures and restrictions, there is a will to come back and have a real life."

Andy Li, who works in financial technology, agrees. The 29-year-old has already gone to the Maoye mall in the northern Shanxi province three times since quarantine measures eased two weeks ago.

The mall, which houses brands including Gucci and Bottega Veneta, checks shoppers' temperatures before allowing them to enter. Guests must also wear masks.

"I was trapped in my home for an entire month," he said. "Our residential compound was chained up, and we were not allowed to go anywhere. Now I feel somewhat free again."

He tried shopping more online during the quarantine, but said the products he ordered got stuck in customs amid logistics delays.

Hermes says it has reopened all but two of its stores in mainland China, after closing 11 locations when quarantine measures were at their peak.

Chow Tai Fook Jewellery Group, the world's biggest jeweller by sales, said about 85 per cent of its more than 3,600 Chinese stores resumed operations this week.

Flight cancellations and restrictions on sales of package tours have made it harder for Chinese tourists to travel internationally, which could accelerate a shift to buying more at home rather than on shopping trips abroad. That trend has already taken hold as lower import duties and taxes make local shopping more attractive.

It is unlikely that revenge spending will make up for all of the lost sales.

The outbreak is likely to reduce industry sales by as much as 40 billion euros (S$63.3 billion) in 2020, according to the survey of 28 top executives undertaken by Boston Consulting Group and Sanford C Bernstein.

But not everyone will be racing back to the mall as quarantine measures relax.

"It all comes down to the confidence of the consumers," said Jason Yu, managing director at Kantar Worldpanel Greater China.

Many people who work in the service sector or run smaller companies saw their incomes damaged by the epidemic, he said, and might be more likely to weed out non-essential spending from budgets.

While the number of officially confirmed new cases in China has slowed sharply, there is a risk that infections could rise again, now that more people are resuming activities.

Travellers could spark new outbreaks by bringing the virus back to China from abroad.

Despite the grim first quarter, with revenue falling between 25 per cent and 33 per cent worldwide, Ferragamo still expects sales growth in China this year, but only if the virus' impact continues to fade.BLOOMBERG