The luxury goods market in mainland China saw a significant boost in consumer spending in 2020. Our report examines the four factors that powered this increased growth rate and that will continue to offer opportunities for China’s luxury brands.
Mainland China’s luxury goods market will likely achieve 48% growth in 2020, reaching nearly RMB 346 billion. A decrease in global travel in the wake of the early Covid-19 lockdowns prompted Chinese consumers to turn to national sources for their luxury purchases, sending the domestic market climbing. This increase helped to double China’s overall share of the global luxury market in 2020, to 20%, but the growth in mainland China could not compensate for the consumption of Chinese products lost overseas. We anticipate this year’s growth to continue, putting the country on track to claim the biggest share of the market by 2025.
Following historical trends, growth in China’s luxury goods market varied significantly across several factors.
- Brands experienced a range of growth, from 10% to more than 70%, depending on the brand.
- Regional performance varied, with the north and northeast regions underperforming the stronger south, east and southwest regions.
- Categories also saw differing growth rates, with leather goods and jewelry leading the way, followed by ready-to-wear clothing and shoes, beauty, and watches.
To determine the factors behind these impressive growth rates, our research (in collaboration with data from report contributor Tmall Luxury Division) examines four engines that powered China’s luxury goods market in 2020:
- Repatriation. Since 2015, reductions in import duties, stricter gray market controls, brand price harmonization and now pandemic-related travel restrictions have helped mainland China’s portion of Chinese global luxury purchases to increase steadily. Brands that aim to continue this growth should work on strengthening supply chain effectiveness as well as their ability to serve mainland consumers.
- Millennial and Gen Z shoppers. Gen Z consumers continue their emergence both as a source of market growth and as a driver of increased digitalization, while millennials form the core of Tmall’s luxury fashion and lifestyle and luxury beauty consumers. Savvy brands would be wise to mark these shoppers’ interests and preferences, including cross-brand collaboration and customized products.
- Digitalization. Given the growing influence of younger consumers, China’s luxury brands are increasing online penetration. Omnichannel expansion increased across brands’ physical and virtual footprints and through cross-channel efforts such as luxury livestreaming from pop-up stores. Online and offline marketing activation at the current scale is extremely costly, however, and is a primary driver of the performance gap between larger and smaller brands.
- Hainan duty-free shopping. Hainan offshore duty-free shopping sales surged thanks to attractive policy changes and restrictions on international travel. By the end of October 2020, sales were growing at a rate of 98% year-to-date. Hainan duty-free shopping is the first step in the development of a domestic duty-free channel, with new licenses being granted. This will contribute even further to the repatriation trend discussed above. Some brands have concerns about issues such as brand-image risk and daigou agents, however, as well as whether the development of new premium shopping malls will improve Hainan’s transactional shopping environment.
With global conditions unlikely to return to normal before 2022 or 2023, we think most luxury brands will continue to see positive domestic growth next year, to about a 30% level, at least until the second half of the year. Mainland brands will have until then to convince Chinese luxury consumers that domestic shopping is a better choice. Online and omnichannel penetration will be important means for reaching consumers. Regardless of the potential for short-term changes, the momentum of China’s luxury goods market is poised to continue.