Of Chinese Sneezes and Growth Prospects

As equity markets continue to adjust to the Chinese economic correction, many observers of the luxury goods industry are predicting havoc. Indeed continuing 3% corrections from China to the US are beginning to give investors in the luxury goods industry jitters. Add to the mix the triple economic whammy in Russia (sanctions; drop in oil prices; fall of the ruble)  and the ongoing Brazilian recession to begin to worry. Certainly,  volatile environments are not conducive to mayor industry M&As or to growth rates surpassing 5% , but the industry is far from taking a dive.

On the contrary, in many segments a substitution effect is beginning to operate. Luxury watches for instance have experienced enhanced demand. Small boats cruises with educational lectures on board are on the rise. Vintage apparel is going faster than replacement capacity by shop owners. And young designers and artists are beginning to displace the great masters. Because far more important than current market corrections is the subtle but continuing change in tastes and life styles by affluent consumers.

“Our last index found affluent consumer confidence down and today it is only a few points above its historic low from Q4 2008,” said Pam Danziger,president of Unity Marketing, Stephens, PA. “We continue to see a very cautious point of view from the affluent consumer segment.”. This caution has more ties to culture and taste than to purchasing power. To be sure, affluent consumers were the least likely people in the world to be taken by surprise by the Chinese market correction. Consequently they probably engaged in product substitution before it happened and there lies the explanation for their low confidence index.

Consumers representing households with access to over US 300,000 per year are over 80M worldwide. Chinese consumers with equivalent purchasing power represent 116M.  But contrary to their Japanese; German and American counterparts Chinese luxury consumers engage in shopping while touring the world spending 33 days abroad on the average. Also in sharp contrast to their peers from all over the world they are not great holders of stocks preferring land and gold as reserves of value. The ongoing market correction has failed to affect their net worth as significantly as many experts predicted. But what seems to be change process in motion is that of tastes.

Affluent Chinese households seem to be veering towards patina. They are the greatest buyers of  second hand luxury watches; old furniture and vintage apparel. They have also developed a traveling pattern that has the US as the family and friends get together destination;  Japan to shop and enjoy gourmet food; France for shopping and Australia for leisure. All destinations include a shopping component that increasingly is preferring vintage products including watches; furniture; clothes and household decoration items.

This emerging but strong trend has been triggered by two events. First , comes time. Affluent Chinese households have had that status for over a decade. Accordingly, they do not need to flaunt their status anymore. Second, politics, as usual,  President’s Xi Jinping’s campaign against corruption is creating pressures towards discretion. Ferraris are thus giving way to less apparent Volvos and Mercedes Benz ; young artists displacing  the impressionists and vintage dresses Birkin bags. Satisfying this demand could be extraordinarily rewarding.