Covid-19 has trapped US$111 billion of luxury spending in China

THANKS to Covid-19 that's halted travel and disrupted networks of parallel importers, Chinese high-end shoppers - who collectively spend US$111 billion a year on luxury goods, powering over a third of the global industry - are finding it hard to spend their cash.

That's forcing global luxury houses from Balenciaga to Montblanc to rethink how to reach mainland consumers, despite long-standing concerns ranging from counterfeiters to powerful e-commerce platforms that set the rules. The halt to travel is also fuelling the rise of a second-hand luxury market in China as consumers seek certain styles or models they can't find in local stores.

Prior to the pandemic, two-thirds of Chinese luxury purchases were made overseas, said consultancy Bain & Co. The spending took place either on shopping spree vacations or through resellers called daigou. Meaning to "buy on behalf", these were platforms or individuals who used Chinese people living, studying or travelling abroad to buy sought-after goods from boutiques in Europe or the US and bring them back home.

Travel is now impossible, and daigou sellers are either back on the mainland or stranded in Europe. Cognisant of the potential of Chinese consumers who don't travel overseas, luxury houses had already been rolling out plans to expand on the mainland. The pandemic has now hastened that shift and imbued it with urgency.

With other factors like perceived anti-Chinese racism in Western countries exacerbated by Covid-19, and the Chinese government's desire to bring spending home to boost its ailing economy, it's likely that Chinese luxury buyers won't revert to previous patterns even after the crisis passes. More than half of Chinese purchases for luxury goods will happen domestically by 2025, Bain & Co estimated in May, compared to a third in 2019.

Said Amrita Banta, managing director at luxury consultancy Agility Research: "Brands should increase importing from foreign countries into China and offer a wider and well-priced range. They can now expand their reach to more cities - even smaller towns which have a propensity to spend."

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With China having largely contained its epidemic, including a new outbreak in Beijing last month, shoppers are spending again. This is set to boost the luxury market on the mainland as much as 10 per cent this year, compared to a 45 per cent plunge in the global industry, Boston Consulting Group estimated.

"Things are normal again internally, and we are seeing the results throughout our stores," Richemont chairman Johann Rupert said of China, where it has around 460 boutiques. "But they're not travelling. Nobody is travelling. And until people feel sufficiently safe, I doubt that we will return to a pre-Covid stage." The loss of Chinese travel spending has been cited as a blow to earnings by companies from LVMH to Moncler SpA in recent months. While luxury companies mostly do not break out mainland China numbers, sales to Chinese tourists is likely to far outstrip revenue from local boutiques, analysts say.

The trend of more spending within China "will push us to reconsider our store network", said Jean-Marc Duplaix, chief financial officer of Gucci-owner Kering during an April 21 earnings call. "It will lead to a clear re-shuffling of the distribution." A wave of luxury brands like Prada, Miu Miu, Balenciaga, Piaget and Montblanc have opened virtual storefronts on Alibaba Group Holding's Tmall luxury platform this year.

Brands like Louis Vuitton, Givenchy and Chloe have started using live-streaming to push products in China, a popular style of social commerce. In the past, luxury houses were worried about diluting brand prestige and losing control of customer data by working with Chinese Internet giants like Alibaba, but the urgency of reaching Chinese shoppers has now eclipsed those concerns.

"Most luxury brands were too reliant on their offline experience and they lacked presence outside major cities where there is no decent shopping mall," said Jason Yu, managing director at Kantar Worldpanel Greater China. "Counterfeits and resellers were also prevalent on e-commerce platforms in the past. But that is fast changing now."

Demand for some items has surged past supply in China. In May, Swiss watch exports to China fell 55 per cent from a year ago, according to industry data, largely due to supply bottlenecks.

"Due to the travel curbs during the pandemic, all the consumption power is locked inside China, so our sales there are growing," said Alain Lam, the finance director of Oriental Watch Holdings. The high-end watch seller has 46 stores in mainland China. "But the supply is very tight, as Swiss factories are not yet fully returned to work." Prior to the pandemic, luxury brands largely avoided stockpiling in China and kept local manufacturing to a minimum. Brands will now need to rethink how to avoid delayed stock and lost sales, said Agility's Ms Banta.

Chinese shoppers desperate for certain items are turning to second-hand luxury platforms to procure them, fuelling a surge of investment in such startups. Boosted by the pandemic, Ponhu (Beijing) Technology Co's gross sales will triple this year compared to last year, said founder Ma Cheng.

JD.com Inc's used-goods platform Paipai saw sales in second-hand luxury goods jump 138 per cent during the 18 days of its annual summer sale period in June compared to a year ago, including a record 300 Rolex timepieces changing hands. The demand for luxury watches in particular is due to the delay of new stock supply to Chinese retail stores, said Paipai's luxury business manager Tony Yao.

Facing its worst economic contraction since at least 1992, when official data was first released, China wants to keep spending within its borders. BLOOMBERG