(Bloomberg Opinion) -- Boom or bust, we Chinese love our Gucci loafers.
There seems to be a disconnect in China’s consumption story. As the country prepares to celebrate the Year of the Pig, few are feeling joyous. Last year was so bruising: The stock market staged one of the world’s worst routs, Beijing’s deleveraging campaign crippled private enterprises and investment bankers are expecting lousy bonuses. Even in the red-hot technology sector, there’s talk of massive layoffs.
So it’s no surprise that the retail sector has been soft. Car sales fell for the first time in 20 years, while Apple Inc. lost ground as consumers shift to cheaper smartphones. Pinduoduo Inc., a young Groupon-like e-commerce site — boasting 200-yuan ($30) “authentic Guqi” sling bags — is edging closer to the market capitalization of JD.com Inc., whose value proposition is quality and authenticity. Bargains are in, it seems.
And yet luxury retail remains strong. Ahead of the Lunar New Year, a half-liter bottle of baijiu made by Kweichow Moutai Co. cost more than 2,000 yuan, or a month’s salary for a minimum-wage worker in Beijing. LVMH Moet Hennessy Louis Vuitton SE continues to see strong demand in China, posting 17 percent sales growth in fashion and leather goods in the fourth quarter. This bodes well for Kering SA, whose Gucci brand also has a strong following there.
One explanation is that luxury retail is recession-proof. After the collapse of Lehman Brothers Holdings Inc., for instance, U.S. retail sales excluding food tumbled by double-digits in 2009, but LVMH’s North America sales fell only 7.2 percent.
In China, there are already more than 60 million premium consumers, who make at least 20,000 yuan a month, according to Bernstein Research. More than 80 percent of them own more than one property — and 80 percent of those properties are mortgage-free. Family wealth, rather than fluctuation of annual income, is going to be the deciding factor in menu-planning this New Year’s banquet.
But the story is more nuanced. As times get tough, Chinese do slow down on luxury spending — it’s just a matter of which luxuries. In times like these, we start to embrace the classics.
Think about it: What would you buy if you could only afford one pair of designer shoes? Gucci loafers are versatile, while Manolo Blahniks — those pencil-thin heels of “Sex and the City” fame — are only for ladies who do high tea. Even in the luxury segment, Chinese are practical.
History is also a guide. Back in 2014, demand for premium baijiu collapsed amid China’s anti-corruption campaign. The retail price of a bottle made by Moutai’s less-prestigious rival Wuliangye Yibin Co. tumbled 48 percent from a peak of 1,100 yuan in 2012. That’s below the liquor maker’s ex-factory wholesale price. (The retail price for Moutai never fell below its wholesale tag.)
As a result, sales at Moutai continued to grow even in difficult years, while Wuliangye struggled. Revenue at Luzhou Laojiao Co., at the lowest end of the luxury segment, collapsed.
To the credit of these big luxury houses, they’re eager to please the Chinese. Reductions in the country’s import duties prompted LVMH to drop prices for its Louis Vuitton products by 3 percent to 5 percent last July, while Gucci cut its prices by about 5 percent. To celebrate the Year of the Pig, the French company is selling a playful swine-themed bag charm, while Gucci launched wallets with three little porkers.
That's particularly the case now that the government is cracking down on consumer credit.
To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.
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