Chinese consumption changing, not slowing argues Dominion Funds’ Arjen Los

Arjen Los, chief investment officer at Dominion Funds, argues that while some talk of a slowdown in China, this ignores changes in the way consumers view and buy products, which still leaves plenty of upside for the companies that adapt.

Whether it is watch manufacturers like Hublot, or other luxury companies, the way their products are viewed and consequently bought, in China is changing.

Many commentators have talked of a slowdown. We disagree and [here] discuss how the maturing tastes of Chinese consumers are changing the market landscape, meaning the companies that win will be those that adapt.

Luxury is a necessity in China according to professor Xiao Lu (Fudan University, Shanghai), who identified six different factors to explain the demand for luxury goods in China.

He concludes that the consumption of luxury products and services in China is driven by a combination of classical, social and personal-oriented needs, as well as Chinese cultural and political uniqueness. Socio-economic and psychological
studies identified that, when wealth increases, conspicuous consumption tends to follow. An increase in wealth fuels people’s drive for distinction. For the “new rich”, luxury consumption represents the most efficient way to distinguish
themselves from the rest of society.

The complexity of Chinese history magnifies this factor. The Cultural Revolution (1966 to 1976), led by Mao Zedong, removed cultural craftsmanship and traditional products with the aim to enforce egalitarian communism. Today the appetite for fine art is boosting luxury consumption. Sotheby’s has eight dedicated auctions in London, New York, Hong Kong and Paris for Chinese ceramics and works of art. In the recent sales about 271 lots were purchased at a price of over $1 million with prices exceeding estimates. For example a 13.5cm diameter brush washer of the Northern Song Dynasty was sold for $26 million, almost 3 times higher than Sotheby’s estimate. Another factor is the political structure of China. Entrepreneurs and new HNWIs from the private sector have neither power nor representation in the political system: this circumstance stimulates the demand for luxury goods as a means to establish a social profile.

Two categories of luxury consumption behaviour can be identified: appearance conspicuousness and conservative conspicuousness.

The former is represented by the classical definition of the luxury consumer displaying wealth; this is common within the western world. Conservative conspicuousness is unique to the Chinese socialist market environment. With a formal rejection of individual wealth creation by the centralized power structure, the consumer adopts a more subtle and intelligent approach.

The successful entrepreneur doesn’t express status openly, but focuses purchases on designed, higher quality products often without display of the “logo”. This effect might be reinforced by the recent change of power at the Communist Party. Xi Jinping, the new Chinese president, has emphatically made clear that the government won’t tolerate corruption in the public sector. The domestic antibribery enforcement that has risen since his assignment can also be
seen as a threat to luxury products with high visibility.

When LVMH reported relatively slow 10 month sales growth for its iconic Louis Vuitton brand in China, the initial market reaction could be summarized as “the end of luxury growth in China”, but after two days the sentiment was reversed.

The same week Burberry reported its sales trend: double-digit growth for its Chinese business! These trends and other recent sector evidence suggests that the attitude towards luxury products is moving up a “learning curve” as the Chinese clientele acquires their own personal taste and individual preferences.

The enforcement of anti-bribery measures only increases the number of  consumers that behave according to the conservative conspicuousness profile. The more experienced consumer also increasingly focuses on quality, which is not dissimilar to the experience in consumer behaviour in western countries since the 1960s.

The profound difference between the Chinese consumer and the European, American or Japanese one is the time it took to reach maturity. Thanks to the internet and social media, knowledge has spread more rapidly across “new markets”.

Appetite for information is high in the region, which reflects the role that shopping has in Chinese culture.

For example, the Chinese spend on average more than nine hours per week shopping; Americans spend less than four hours. The digital revolution is one factor that can explain the significant difference between recent sales reports of Louis Vuitton and Burberry. Entering a Louis Vuitton store one sees the equivalent of a 3-foot wide red carpet. When one enters a Burberry store one sees 27-inches screens and iPads. Digital media has become a key marketing medium in a country with 564 million internet users.

Travel also represents a way to increase product knowledge and extend the shopping experience. Bain/Altagamma estimates that the Chinese represent 25% of the global luxury market. However, only 13% is consumed in Greater China (China, Hong Kong, Macao and Taiwan). The remaining 12% is purchased in Europe (representing at least half of average tourist spending), North America and the Middle East. The main driver of nondomestic consumption remains the price difference: Import tax and luxury tax inflate Chinese prices by about 30%.


Luxury consumption in China is changing, not slowing: the Chinese consumer has become more selective in choosing luxury goods. This is partly driven by temporary effects (anti-bribery enforcement as mentioned earlier), but more
importantly, reflects the structural trend of an increasingly educated consumer. Companies are facing changing purchase decision drivers and diverging revenue trends even within product categories. This is changing the landscape for highend
luxury (Louis Vuitton vs. Burberry), sportswear (adidas vs. Nike), or jewellery (Cartier vs. Tiffany) alike. As a consequence, investing into the luxury sector has to be selective (“Being in China” is no longer a recipe for success). Diverging sales prospects have become visible and management quality (size and shape of distribution channels, inventory management, product adaptation to local tastes, sourcing, etc…) has become crucial in selecting winners and losers in this growing sector.

It is for these reasons that we are not invested in LVMH, who in our view will need to adapt to the changing tastes of consumers if they are to continue to grow. The Dominion Global Trends – Consumer Fund holds positions in companies
such as Estee Lauder, Diageo & Burberry who have positioned themselves to do well as tastes continue to evolve.


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