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1、Ongoing Covid-19 restrictions and economic uncertainty caused the first personal luxury market decline in five years.Setting a New Pace for Personal Luxury Growth in ChinaCopyright 2023 Bain&Company,Inc.All rights reserved.This work is based on secondary market research,analysis of financial informa

2、tion available or provided to Bain&Company and a range of interviews with industry participants.Bain&Company has not independently verified any such information provided or available to Bain and makes no representation or warranty,express or implied,that such information is accurate or complete.Proj

3、ected market and financial information,analyses and conclusions contained herein are based on the information described above and on Bain&Companys judgment,and should not be construed as definitive forecasts or guarantees of future performance or results.The information and analysis herein does not

4、constitute advice of any kind,is not intended to be used for investment purposes,and neither Bain&Company nor any of its subsidiaries or their respective officers,directors,shareholders,employees or agents accept any responsibility or liability with respect to the use of or reliance on any informati

5、on or analysis contained in this document.This work is copyright Bain&Company and may not be published,transmitted,broadcast,copied,reproduced or reprinted in whole or in part without the explicit written permission of Bain&Company.Authors and acknowledgmentsBruno Lannes is a senior partner with Bai

6、n&Companys Consumer Products and Retail practices and is based in Shanghai.You can contact him at .Weiwei Xing is a partner with Bain&Companys Consumer Products and Retail practices in Greater China and is based in Hong Kong.You can contact her at .The authors are grateful for all those who contribu

7、ted to this report,especially Zoe Zou,a senior manager with Bain&Companys Consumer Products and Retail practices in Greater China,and Zhewen Wei,an associate consultant in Bains Shanghai office.1Setting a New Pace for Personal Luxury Growth in China1At a Glance In 2022,the Chinese luxury market decl

8、ined 10%year over year,ending a five-year run of exponential growth.Covid-19-related business disruptions caused the downturn.Despite the setback,the fundamentals for luxury consumption remain strong and growth is expected to resume in 2023.The China luxury market had been on a bull run over the pas

9、t five years,with the market doubling between 2019 and 2021.That growth streak ended in 2022,brought to a halt by zero-Covid policies.Strict lockdowns remained in place through December,slowing economic and social activities and causing a significant number of stores to sit idle.As a result,the pers

10、onal luxury market contracted 10%YOY(see Figure 1).In 2022,nearly every luxury category and most brands experienced their first major decline in five years.Since borders were still closed at the start of 2022,Chinese customers made most of their luxury purchases within the mainland.Despite a strong

11、start to the year,Covid-related lockdowns started in the second quarter and created barriers to purchasing.Major cities were shut down,sometimes suddenly,which prevented in-person shopping.Figure 1:In 2022,the Chinese luxury market declined 10%,ending a five-year growth spurtSources:Bain-Altagamma 2

12、021 Worldwide Luxury Market Monitor;Bain analysisMainland China personal luxury sales(billion RMB)Stringent and extensiveCovid-19 lockdownsoccurred across all city tiers,restricting travel andconsumption;shopping malltraffic declined by 30%35%Decreased consumerconfidence and willingnessto consume en

13、sued,due toreal estate marketslowdown and negativeeconomic outlookWeakened consumptionpower was present,dueto higher unemploymentand uncertainty ondisposable income50001002003004001213141517181920212022E16CAGR2012161%20161926%20192142%202122(10)%Setting a New Pace for Personal Luxury Growth in China

14、Figure 2:All luxury categories declined in 2022,but watches suffered the most Sources:Expert and industry participant interviews;Bain analysisMainland China personal luxury market year-over-year growth by categoryOffline traffic decreasedsignificantly across cities,heavily impacting mostcategories;b

15、eauty offlinesales were somewhat offsetby strong online penetrationBigger brands and iconicitems were more resilientcompared to smaller brandsand trendy items,with a fewexceptions Digital consumerengagement has been themost important lever in lightof severe offline impactWatchesFashion andlifestyleJ

16、ewelryLeather goodsBeauty(10%)(15)%45%50%(10%)(15)%20%25%(6)%(15%)(20)%50%60%40%45%30%35%(20%)(25)%20212022(estimated)202020212 2A decline in the real estate market,higher unemployment,and anxiety about Covid also weakened consumer sentiment.Many consumers opted to stay home,even after movement rest

17、rictions relaxed.Luxury brand leaders told us shopping mall traffic was down 30%35%.Luxury sales did not decline as steeply as foot traffic because conversion rates increased significantly.Consumers completed very targeted and short shopping trips instead of casually browsing stores as they had in t

18、he past.All luxury categories were affected by the decline,although not to the same degree(see Figure 2).Categories with strong online penetration were less affected by lockdowns and fared better.For example,with 50%online penetration,luxury beauty only contracted 6%.Online penetration was lower in

19、other segments(10%15%),so they were more exposed during lockdowns.The watch market suffered the most,declining 20%25%from 2021.Fashion and lifestyle categories experienced a 15%20%decline.Jewelry and leather goods performed slightly better,with a 10%15%decline.The impact across nonbeauty categories

20、was consistent with historical trends.Typically,jewelry and leather post the strongest performances,fashion falls in the middle,and watches are the weakest.Setting a New Pace for Personal Luxury Growth in China3 3While most brands saw declines in 2022,a few stayed flat or grew despite these challeng

21、ing conditions.Three factors contributed to their success:On average,bigger brands out-performed smaller players.Brands with iconic portfolios did better than those with trendy or seasonal merchandise.Brands with a higher concentration of Very Important Clients(VICs)also fared better.This year,our r

22、esearch explores three major trends and how they could influence the luxury markets comeback.They are the expansion of VICs,duty-free shopping,and global pricing strategies.Trend 1:The expansion of VICsGlobally,the top 2%of customers account for about 40%of luxury sales,according to Bains most-recen

23、t luxury goods market study.Chinas luxury market typically attracts a high concentration of VICsand that trend expanded in 2022(see Figure 3).The economic slowdown affected entry-level luxury consumers more than high-net-worth individuals(HNWIs).The decline in mall traffic also translated into fewer

24、 new customers entering luxury stores.As a result,sales skewed toward VICs in 2022.Some Chinese luxury brands achieved higher concentrations of VIC sales than the global average.Figure 3:The concentration of very important clients(VICs)in China grew in 2022Sources:Bain-Altagamma 2021 Worldwide Luxur

25、y Market Monitor;Bain analysis Global top customer incidence on total market(20212022 estimated)TRENDIncidence ontotal market(number ofcustomers)AveragespendingBrands that depend less on offline trafficand more on VICs fared better in 2022Macro economy slowdownimpacts the entry-levelluxury consumers

26、Reduction in shopping malltraffic translated into lossesof new customer acquisitionFurther increase in concentrationof VICs observed across brandsSimilar concentration of VICs fortop brandsBEFORE 2022IN 2022vs.2019vs.20211.5%2%China-specific nuances35%of market valuein 202140%of market valuein 2022(

27、estimated)Setting a New Pace for Personal Luxury Growth in ChinaFigure 4:Duty-free sales in Hainan dropped approximately 30%in 2022Sources:WIND;literature research;Bain analysisMainland China personal luxury sales(billion RMB)CAGR202122(estimated)20182118192021170230350470(7)%(10)%(30)%38%40%70%6%6%

28、8%11%22E4258%Hainan duty-freesales as shareof total marketIn Q1Q3 2022,the numberof duty-free shoppers inHainan dropped by 35%vs.Q1Q3 2021The lockdown in Hainan in earlyAugust caused approximately10 Hainan duty-free shops toclose for more than one monthHaikou issued approximately1.6 million RMB duty

29、-freecoupons during Mid-AutumnFestivalTo accelerate duty-free marketrecovery,Hainan officialsorganized all duty-free shopsto carry out promotionsOthersHainan duty-free sales4VICs played an important role in online luxury sales,too.Shoppers who buy more than three times a year account for over 50%of

30、sales and are the fastest-growing segment,according to leaders at Tmall Luxury Pavilion.Trend 2:The duty-free ecosystemIn recent years,duty-free shopping in Hainan contributed to Chinas luxury market boom.However,Hainan province was also affected by Covid policies,travel restrictions,and lockdowns i

31、n 2022.Duty-free sales could be down 30%,landing around RMB 35B in 2022(see Figure 4).That was far below the Hainan Development and Reform Commissions target of RMB 100B.The decline was slightly offset by an 8%increase in spending per shopper.The decline in sales is directly linked to a reduction in

32、 traffic.Hainan had about 35%fewer duty-free shoppers in 2022.Strong promotions and an International Consumption Expo were held in the third quarter to reinvigorate travel and purchasing.However,they were followed by more lockdowns.Despite the lackluster results,the central government is committed t

33、o strongly promote Hainan and the repatriation agenda.Brands,retailers,and developers continue to follow through on their committed investments in the province.Setting a New Pace for Personal Luxury Growth in China5Meanwhile,China Duty Free Group(CDFG)and its affiliates have been aggressively pushin

34、g for domestic e-commerce options to offset declines caused by limited airline travel.Duty-paid items accounted for roughly 40%of CDFGs revenue during the first half of 2022(see Figure 5).Growth in discounted duty-paid business makes it harder for luxury brands to harmonize pricing across channels.I

35、n mid-December 2022,the price gap between domestic and duty-paid beauty prices was 60%70%for some leading brands.In the short to mid term,this trend could devalue luxury beauty brands.South Koreas duty-free market continues to play an important role in the broader luxury beauty ecosystem.Travel has

36、been lower over the past two years,yet duty-free sales are high.In 2022,visits to South Korea were over 90%lower than in 2019,but sales remained at 70%of 2019 levels(see Figure 6).This suggests an abundance of cross-border exporting activities,such as daigou shopping.Figure 5:Domestic,duty-paid e-co

37、mmerce offered by travel retailers became a key shopping channel during Covid-19Note:Figures include all travel retail categoriesSources:CDF prospectus;literature research;Bain analysisCDF revenue segment by product type(B RMB)80CAGR201921328%60402002019202020212022H148536828357%19%-4%2%38%36%40%112

38、2022Domestic percentagein totalNumber of membersonline(M)Starting from 2020,due toCovid-19s impact on offlinetourism and retail,CDF startedto expand domestic businesswith own e-commerce platforms“Sunrise”and“CDF Members”are the two major brands underCDF domestic(duty-paid)business,with each accounti

39、ngfor approximately 50%2022 was also a challengingyear for CDF,as duty-freerevenue drops by 34%in H1;domestic e-commerce stillenjoyed 5%growth(vs.first half of 2021)Duty-free businessDomestic business(duty-paid)Setting a New Pace for Personal Luxury Growth in ChinaFigure 6:Travel to South Korea cont

40、racted 90%,yet duty-free sales remained stableNote:About 90%of international travelers who purchase duty-free products in South Korea are daigou operators and mainly for mainland China;figures include all travel retail categoriesSources:Korea Duty Free Shops Association;analyst report;lit research;B

41、ain analysisNumber of international travelers visiting SouthKorea duty-free(20192022 estimated)2019(-82%)(-37%)202020212022E2019202020212022EJanOct18M(-80%)(+17%)3M0.7M1.2M120799292Est.forNovDecSouth Korea duty-free sales to internationaltravelers(20192022 estimated,billion RMB)South Korea duty-free

42、 sales tointernational travelers from January toOctober 2022 were the same as in 2021Trend 3:Global pricing strategiesChinese borders have been closed since 2020,so most brands have not needed to harmonize pricing between China and the rest of the world.Similar to pre-pandemic times,some luxury pric

43、es are now observed to have significant price gaps between China and Europe.Only a few brands maintained global pricing strategies over the past two years.A sample check of leading SKUs in the leather segment found a price gap of 25%45%between China and Europebefore accounting for value-added tax(10

44、%12%).The price gap was larger for entry-level products than for more expensive merchandise.The price gap for shoes was significant(25%35%),while jewelry and watches were less affected (see Figure 7).Many brands in those categories adopted global pricing strategies years ago and maintained their str

45、ategies despite borders being closed.A look aheadWe believe 2022 was a reset,not a harbinger of more distress.Growth will resume in 2023 after China recovers from the most-recent Covid-19 impacts.We expect positive conditions to return before the end of the first quarter.6 6Setting a New Pace for Pe

46、rsonal Luxury Growth in China7 7Figure 7:Pricing gaps make purchasing abroad attractive to Chinese consumers,once international travel resumesNotes:Top three SKUs were selected for three to five leading brands in each category;France official website prices were applied for bag,shoe,and jewelry;Swit

47、zerland official website prices were applied for watches;the EU/RMB exchange rate is 7.30,and the CHF/RMB exchange rate is 7.5Sources:China official website;France official website;Switzerland official website Price gap between Chinese and European label price as of December 21,2022Percentage differ

48、ence of listedprice between China and EU(before value-added tax back)+25%30%+35%45%+25%35%+0%10%+0%5%Luxury bag(10K RMB)Entry luxury bag(10K RMB)ShoeJewelryWatchListed price in mainland ChinaListed price in EuropeThe fundamentals of consumption in China are still intact.Compared to other emerging ma

49、rkets,China is a behemoth for luxury growth.It has a larger number of middle-and high-income consumers,and those populations are projected to double by 2030(see Figure 8).In the mid to long term,“the next China”is China.Luxury consumption will recover once Covid-19 subsides,mall traffic improves,and

50、 consumer sentiment rebounds.We expect to see 2021 sales levels sometime between the first and second half of 2023.Hainan will rebound and become a key travel destination again,especially for the majority of Chinese travelers who are without passports.Demand for international travel will bounce back

51、 too,starting with Asia-Pacific destinations like Hong Kong,Macau,and Southeast Asia.Chinese luxury consumers have distinct shopping behaviors and preferences.Differences between the Chinese and global luxury market will widen,especially around digitalization,the retail environment,cultural referenc

52、es,and relationships with brands.Brands that understand the nuances of the China luxury market will succeed over time.While optimism abounds,there are also risks.Setting a New Pace for Personal Luxury Growth in ChinaFigure 8:Despite setbacks in 2022,China is still the most promising market for luxur

53、y goodsSources:Bain-Altagamma 2021 Worldwide Luxury Market Monitor;Bain analysis China will still be the growthbehemothMid-and high-income consumersChina is expected to double its mid-to high-income population by 2030China201420222030F20222030F20222030F20222030FIndiaSoutheast AsiaEmergingAfrican Cou

54、ntriesGrowth in other regions fragmented across many emerging markets+180M+250M+36M+27M+9M8Most important,brands need to resolve pricing gaps between China and Europe before international travel resumes.At the moment,airlines have not fully resumed operations,but demand and traffic will pick up soon

55、.Similar to pre-pandemic times,exchange rate fluctuations will influence where consumers travel.In addition,some HNWIs are leaving China for Singapore,Hong Kong,and other destinations.Luxury brands may see a rebalancing between mainland China and the rest of the world.Brands have invested heavily in

56、 customer experience and customer service in China over the past three years.Now,Chinese luxury customers have high expectations,regardless of where they live.Brands need to ensure their CRM tools work effectively across borders.To continue growing,luxury brands must deliver excellent experiences ev

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