Western Brands Aiming at Xi Jinping’s China Sky
When Chinese President Xi Jinping call in August To redistribute wealth and “common prosperity for all,” markets reacted quickly. The quick sale wiped out more than 60 billion euros of the market capitalization of Europe’s four largest luxury groups in two days.
Already alarmed by Beijing’s crackdowns on video games, for-profit education and tech billionaires, investors fear a repeat of the 2012 anti-corruption campaign, which hit the mark. into sales of sports cars, luxury watches and expensive alcohol.
So far, these concerns seem overblown. Instead of slowing growth, China’s “olive” asset distribution dynamics appear to be an opportunity for Western brands, although it is a complex opportunity that requires them to revolve around political and social minefields.
If Beijing succeeds in transferring most of its wealth to the middle class, it will significantly expand the potential customer pool for multinationals. That’s why so many companies produce alcohol, luxury goods, and consumer goods pour money into the country, and financial services group knocking on the door to join them.
Bain estimates that luxury sales in China will grow from 11% of the market in 2019 to 25% in 2025, even as global sales grow from 281 billion euros to more than 360 billion euros. One of them is that Chinese tourists’ shopping abroad is currently mostly limited to their domestic market, but much of the growth is expected to come from newly empowered consumers.
The biggest opportunities, the companies say, lie in the wealth of the masses, not in the super-rich, who are more likely to find themselves at the turning points of Mr. Xi’s crackdown.
“Anything designed to increase middle-class income is positive for us,” Pernod Ricard chief executive Alexandre Ricard said at a recent Bernstein conference.
Similarly, top luxury brands like Gucci and Hermès are looking to capitalize on investments in less expensive lines, such as cosmetics, that can reach a wider audience of buyers. They must envy L’Oréal, which saw third-quarter sales in China increase 43% compared to 2019.
Burberry CFO Julie Brown described the commonwealth dynamics last week as “a good thing, it will help the industry.” She said the British luxury group, which already draws two-fifths of its revenue from Chinese consumers, was poised to benefit as its customer base “tends to be upper-middle-class”. “.
Nestlé has recently elevated the importance of the Greater China region, including Taiwan and Hong Kong, in its strategy. The Swiss food group hopes brands like Nespresso and Starbucks, which are licensed, will prosper alongside younger and middle-class consumers.
For all the appeal of the Chinese market, there are significant challenges for companies aiming for profit.
Influencing Chinese consumer behavior has become much more complex lately. The e-commerce platform’s wealthy founders were the original target of the crackdown on the super-rich. Maybe that’s why Alibaba, JD.com and the like have cut back on their promotions for events like Singles’ Day last week. The two corporations still post record sales, but the numbers cover a longer period than before.
Given the general mood, brands are wary of relying on bling and oversized logos that used to attract new consumers. State media have also recently contempt piled up about entertainers and influencers deemed too “incompetent”. Both shifts have companies scrambling to find acceptable ways to promote their products and satisfy demand.
Western companies also face conflicting pressures when it comes to environmental, social and governance concerns. Human rights activists are call for big sponsors of the Beijing Olympics next year, including Visa, Coca-Cola, Airbnb and Omega, use their leverage to address security crackdowns in Hong Kong and Xinjiang.
But compliance groups risk infuriating Beijing and angering China’s nationalist consumers. Last week, Adidas admitted that its sales had taken a big hit from a customer boycott after the company, along with other brands, raised concerns about forced labor and Xinjiang cotton. Sales in China, Hong Kong and Taiwan fell about 15% for two consecutive quarters, which is bad news for an area that Adidas considers a strategic growth market.
Chinese consumers have also been shifting from foreign brands to domestic brands for more than a decade. Political tensions will only exacerbate that trend, despite efforts to reduce temperatures this week virtual summit between Xi Jinping and US President Joe Biden. There are also questions about China’s broader economy: growth falters 4.9% in the third quarter, the lowest level in a year.
For now, multinationals are ahead, attracted by the growing size and wealth of the Chinese market. This month, Diageo broke ground on its first single malt whiskey distillery in China, while making a commitment to “middle-class consumers”.
“For luxury companies, we are still in a golden age. Ernan Cui, consumer analyst at Gavekal, a consulting firm.