Can mainland China’s love affair with luxury goods withstand a downturn in the global economy? Yes, say retailers – naturally.
For Graff, the diamond retailer, and Chow Tai Fook, the Hong Kong gold and jewellery store, both planning IPOs in Hong Kong, the belief is rock-solid. Graff’s chief executive Laurence Graff projected to the South China Morning Post last month that if 10 per cent of China’s population bought diamonds, the world would run out of diamonds. True, but unlikely.
We have heard that sort of breathless extrapolation before with regard to China. Familiar, too, is the argument that Asia’s love affair with luxury brands is so devoted that it will continue to grow by leaps and bounds.
Both notions seem wildly optimistic at the moment, however. As retailers like Chow Tai Fook, who have been in the business for more than eight decades, demonstrate, the Chinese prefer buying gold to diamonds. That is changing – in part thanks to CTF’s making more diamonds available to its wealthier customers, but the world is a long way away from running out of diamonds.
Similarly, the idea that the Chinese would not rein in their spending on luxury brands even as property prices start to decline across China’s major cities as is happening now seems implausible.
No one is predicting a property crash like that Hong Kong experienced in 1997 for the mainland, but the city’s retail spending collapsed in short order after the bubble burst. The negative wealth effect applies to consumers everywhere in a downturn – in fact to just about anyone who can count. One major luxury retailer reports that sales in Wenzhou, where small and midsized businesses have had cashflow problems, have fallen in the past few months.
Still, Asia is different in many ways – the identification of one’s self-worth with luxury brands is much more intense. McKinsey’s study of consumer attitudes showed that young office workers will sometimes salt away a month’s salary for an expensive handbag.
In the past several years, according to HSBC, the growth of jewellery and silver sales has been growing at 24 per cent compared to income growth of 14 per cent.
2011 was the year many analysts predicted China would overtake Japan as the largest luxury retail market in the world. Chow Tai Fook would seem well placed to do reasonably well in a downturn since its products qualify as so-called mass luxury. Also, as HSBC points out, unlike watches, which must go through distributors who may have cashflow problems in a slowdown, jewellery retailers typically have a direct retail model, which leads to less volatility.
If the next 12 months also prove that wealthy China consumers will just keep shopping even if the property market hits a downward spiral, they will not only keep luxury goods manufacturers busy. They will have a new generation of economists struggling to answer why.