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China's luxury consumption sapped amid global crisis

(Xinhua)
Updated: 2008-12-13 20:57

BEIJING  -- Zhang Yu, owner of a consignment store for luxury goods, hopes business stays as strong as it has been despite the global economic downturn.

It's been a busy time for Zhang, who started "Milan Stop" in Hangzhou City, 300 km south of Shanghai, seven months ago. A surge of visitors who want to resell luxury products have been coming in to the store since October.

"Business has actually gotten better since the financial crisis," he said. At least it has in terms of the amount of items for sale.

"Before that, people usually came with only one or two items, but now they bring five or six, or even up to 10 items, for commission sale."

Their eagerness to sell means Zhang has more inventory to offer and more opportunities to profit from price differences. Resellers also benefit as they get ten percent of the item's sale price.

"Usually we don't ask any questions, but sometimes customers tell us anyway. Some women said they get less money from their husbands due to a business downturn, so they're selling their luxury collections for pocket money," he said.

The black shelves in the 30-square-meter "Milan Stop", the city' first second-hand luxury store, are packed with Louis Vuitton, Gucci, Chanel, Prada and Christian Dior purses. They look almost brand new as each is wrapped with a protective covering. Top-end watches and jewelry are displayed in the middle of the room.

A classic, limited-edition LV trunk is the store's rarest treasure. "The owner, from Hong Kong, lost money in copper and the construction materials business. Pinched for cash, he began to resell some shelved luxury items. He also left his Bentley and Rolls Royce cars with a pawnshop," Zhang said.

The rich around the world are being squeezed by the economic crisis. Consulting firm Bain & Co., predicts the luxury goods industry will likely enter a recession in 2009.

A study, released by Bain in October, said the industry, which has not yet experienced the full affects of the global meltdown, will see a relatively modest growth rate of 3 percent in 2008, compared with 9 percent growth in 2006 and 6.5 percent growth in 2007.

However, it also said increased spending by high net worth consumers in new emerging markets including China, Russia, India and Brazil over the next five years, ranging from 20 percent to 35 percent, help build an optimistic picture in the long run.

Many luxury goods and service providers hope China's market will save them amid the crisis which is why they are stepping up marketing.

Men's luxury goods retailer Alfred Dunhill and Swiss watch maker Vacheron Constantin opened new stores in Shanghai in mid-October, while French jeweler Cartier hosted a polo match in Zhejiang Province, neighboring Shanghai, entertaining its guests with a champagne lunch.

But Sun Yimin, a marketing expert at Shanghai's Fudan University, believes the world slowdown will affect luxury sales in China.

China is more connected to the world than in the past and it's feeling the global chill, with double-digit economic growth falling to 9 percent in the third quarter. A growing number of factory closures and increasing unemployment are further curbing growth momentum.

The super-wealthy, whom Sun depicts as the pillar consumers of luxury goods in China, have seen their fortunes shrink due to losses in stocks and other investments. "They won't splurge like before," Sun said.

According to the US publication, Forbes, the number of billionaires in China this year was just 24 compared with 66 in 2007. "The combined net worth of the 400 richest [people in China] dropped to 173 billion US dollars from 288 billion US dollars, " said the magazine in late October.

Young office workers are another growing but vulnerable group of luxury goods consumers in China. Sun calls them "margin consumers," who might scrimp for months to buy an LV handbag but immediately stop buying when times are tight. Rising living costs, lower incomes and even the risk of job losses will cut their consumption, Sun said.

Daisy, 29, from Chengdu, capital of southwest China's Sichuan Province, had to curb her enthusiasm for Chanel after the foreign-funded company she works for cut her salary by 25 percent in October.

"I know the company's R&D progress, marketing and sales have all been affected by the financial crisis, but to cut salaries is really annoying. I can no longer buy whatever I like since I have to consider the mortgage, meals, transport and phone bills first," she said.

Daisy is thinking of reselling some of her 10 luxury handbags to pay for visits to hairdressers and a trip to her hometown. She isn't sure her job will be there after the involuntary vacation.

Likewise, prospects are unclear for Zhang Yu and his "Milan Stop."

"Though more have come to sell us their luxury collections, not as many are willing to buy," said Chen Jiapin, sales assistant.

"Two sales assistants from a Hermes store near the West Lake once came. They developed a craving for luxury after serving well-heeled customers," Chen said. "They looked at the bags but didn't buy. They said their own store's sales were down drastically, so they had to be more careful."

Chen said most visitors these days were window-shoppers.

Some analysts suggested consumption taxes on luxury products be cut to spur sales. The government has announced measures, including a 4-trillion-yuan stimulus package, to boost domestic demand and maintain economic growth.

Previous predictions by the Ministry of Commerce said China would surpass Japan and the United States to take the lead in luxury spending by 2014, comprising an estimated 23 percent of the world market. The country is now the third-biggest luxury goods consumer, with the market put at 8 billion US dollars last year.

"It's hard to say what 2009 will be like," said Huang Bingjun, who takes online orders for imported luxury products. So far, his business hasn't been hit -- actually, it saw orders jump 20-30 percent since October, as the rising yuan made European luxury brands cheaper.

Huang, who opened xiaobuyer.com about two years ago, planned a two-week trip to Europe during the post-Christmas sales season. "I will look for classic items and base my purchases on customer orders. Small businessmen like me have no experience of financial turmoil and we must remain cautious."