You're listening to Asia Centric from Bloomberg Intelligence, the podcast that pulls back the curtain non global business so you can invest better across the Pacific rim. I'm Tom Corbett in Hong Kong.
And I'm John Lee. China's economy resembles a high stakes tug of war with fear and greed finding for the hearts and minds of Chinese consumers.
Its property crisis, its stock market swings and following prices have dealt a body blow to the confidence of its once freewheeling consumers, and shock waves from the spending pullback are shaking up some of the world's biggest luxury brands, Apple, Gucci.
And Tesla At some of the names feeling the pinch. But is the new Chinese frugality here to stay or will that big spending ways returned With avengeance.
Let's go deep on China's new consumer austerity with Catherine Limb's senior cons humor analyst with Bloomberg Intelligence in Singapore.
And Debrah Aitken, senior Luxury Brands analyst with Lundberg Intelligence in London.
Catherine and Deborah welcome both Asia Centric.
Hello, nice to be.
Here, Thanks for having us, Tom John Catherine.
How is China's economic words impacting confidence and their ability to spend?
Well, we've actually seen the negative wealth effect weighing in on spending for the first two months of twenty twenty four, and notably this should have actually been two strong months because of the lunar New Year's celebrations. Unfortunately, we continue to see retail sales missing market estimates and we are now expecting that there will be further downwards revisions to market expectations for retail sales in China this year.
And on a previous podcast, we had how long Economists that Grow Investments discuss how Chinese consumers are downgrading their habits the foregoing overseas trips in favorite domestic travel. Are we seeing these in terms of the numbers, Well, in.
Terms of the travel numbers itself, we are definitely seeing more of them traveling domestically within mainland China, going for shorter trips and specifically traveling within the region in Asia. Now, there could have actually been flight constraints, capacity constraints, and perhaps some of these safety concerns lingering post COVID, but that said itself, we do see that even the travelers are tightening their spending budgets as they go planning for their travels.
Deborah Aiken in London. We've seen some amazing sales figures for some of the luxury brands. Widely reported Gucci sales down nearly twenty percent for the first quarter, Asia Pacific leading the way. That's a report from Bloomberg News. We watch exports to China down twenty five percent in February. What's your take on all this? How long could it last? These numbers are a far cry from the free wheeling spending patterns of the past.
Hi, Tom, I think, well, several things here. So if we look at what happened, particularly with Gucci, they're due to have results come through and they guide for around a twenty percent negative iss. You say on Gucci predominantly linked to Asia and particularly China, but I feel you know that that's quite standalone, or that there are a couple of other brands Gucci, Berbery and Salvatore for Agamo.
They're all going through strategy overhaul, luxury brand elevation and amidst new creative director change, so they're working with old product versus new and maybe they're not really sponsoring enough maybe they're not as active right now because there's not much product around from the new design, and consumers, particularly wholesalers, wholesale accounts, the boutiques, the department stores aren't willing to take on board those types of products and take the
risk in the Chinese market in the downturn. But at the other end, this first half of twenty twenty four out of Asia faces particularly harsh comparables a year ago on the sales numbers. You know, there was big growth first half twenty twenty three after n twenty twenty two closures. So we get companies with deep heritage, very high level, high priced companies, brands like MS Brunello, Kushinelli and also prior to doing very well, and those kinds of demand
levels are holding up. So it really is a mix, you know, in terms of what we're seeing overall.
We recently spoke to Vincent Lamb, CEO of Gemini Private Concierge Singapore based Services, which caters to the indulgences of the rich. Many of Vincent's clients are from mainland China, and we asked him how Chinese spending patterns have changed post.
COVID, the market change or our euy has changed a little bit. We're not getting as many calls and queries from China and we're getting a lot more calls from Singapore.
I don't think that coincidence.
I think there is definitely a shift in the market on how Chinese people in China are spending and what they're doing with their money.
Basically, if I.
Kick you back pre COVID, that's sort of twenty nineteen and twenty eighteen times of period. The mainland Chinese is very active in their luxury spending. You see complete excesses in buying in jets and yachts, properties abroad, as well as luxury travel and luxury spending. And then come COVID two to zero. Obviously all those big ticket purchases dried up, especially with jets and yachts just nowhere to go, nowhere to part them. And then now we're in the post
COVID period, people are beginning to travel again. I'm seeing a substantial drop in these sort of luxury items being purchased abroad.
Now.
I think that's not a lifestyle issue. That could be a currency issue and the florid exchange issue, where Chinese people just couldn't get their money out or couldn't convert into US dollars or euros, you know, to buy these things because of the exchange control. So again I think the government also tried to encourage you know, if you have made a lot of money in China, you should spend that money in China itself.
Debra, we just heard from Vincent about the shift in Chinese spending patterns. In your view, which global brands could be the most exposed to a potential slowdown in Chinese spending.
In terms of brands, we have a list on our boards which shows some companies have up to forty percent plus of their sales across the Asia area and brands in particular on slowdown. So we saw Gucci. So it's brands which aren't at the forefront of the consumer first off, brands that are in transition. So the three that I named, for example, Ferragamo has a large footprint in Asia, big exposure to China. Birbury is building itself in China. Gucci had a big market in China. So they are all
exposed and they're all struggling. If I look to the lower end too, though in particular, perhaps the US brands and how we're watching those quarter by quarter. So we can think about names like Michael Kor's Steward Advisement Coach Kate Spade, where they're builting their way within the Tapstreak Capri combined deal which would take place this year, but where those two companies in particular, and some of the brands that they have at entry level are perhaps struggling
a little bit. And then also there are some other brands and some other categories actually wear an LVMH, for example, with its seventy five brands, one of the categories it's built over the last several years has been perfume and cosmetics within that area, and we think of that as entry level into their brand portfolios. Then Lorel, for example, with some of its high end brands biersed off with
La Prairie este l order. They've all ended up in China being overexposed, some of them with more inventory in Hainan and others, and that's only just starting to normalize. So there for now and through the rest of twenty four for me are the brands which will take time to come back, and that it's a second half recovery and we need to be watching them quarter by quarter.
Vincent also claimed that European luxury makers maybe getting worried not only from weak cyclical demand, but also a growing preference amongst Chinese consumers for local brands.
I think China trying to push that technology and craftsmanship. For example, the iPhone versus Samsung and then the Huawei. You know, you might think in the Western world iPhone and Samsung has the majority of market, but in China, China brands are very strong. You know, you sell me and your Huawei. They have really top end models that the pricing is not far from your iPhones and your Samsong,
and there's a very strong following. People generally opt for the China products because a lot of them are very good. The same as wine. You know, some of the China wine can be hundreds of thousands of dollars. It's the same level as your Opus one and your Cato Marco and so on. And you look at cars, yes, you have your Tesla, Mercedes and new cars, but China electric cars
are coming. I would expect in the next ten years China will try to develop a bigger domestic luxury market than the last ten years.
Catherine Vincent just mentioned that Chinese consumers are starting to look at local brands. Do you think geopolitical tensions are making Chinese consumers more nationalistic?
I think the drivers for Chinese consumers towards the national brands started a couple of years ago. If we take a step back, when the controversy over the usage of Shinjiang cotton first occurred, and that impacted the lights of Nike and Adidas, as well as fast retailings Unicloe. That prompted the shift towards some of the local sports brands
like Anta and Leaning. And then with the rise of the influence from social media itself, we've seen a shift not just towards national sportswear, but also a shift towards national brands in cosmetics as well. We've actually seen more of the Chinese companies being able to better leaverage on the rise of the social media influence, to be to
create and package their products. And I must say that again their ability to package the value for money proposition, along with some of the examples that I've seen that they come from the same factory as the international brands, etc. They are just as good, you know, with a fraction of the price itself. Chinese shoppers are.
Buying in Deborah Aiken in London and Catherine Limb in Singapore. Is it possible that this consumer retrenchment in China is overstated? Could it be that this is just a matter of the Chinese consumer having money but just not feeling rich enough to spend it.
I think the negative wealthy fect is weighing on the propensity to spend. As I've mentioned, there are categories out there that select consumers are still willing to actually spend more,
not just on consumer goods itself. Tom recall that you know we've actually seen some of the younger Chinese consumers spending on services such as concerts, domestic travels, etc. So I do think that once the overhang on the economy the job securities gets more stable, you will see the spending come through again, not in the same fashion as we have seen before COVID, but there will be a trajectory upwards in my view.
Debrah aken any thought on that.
Yeah, Actually, And if I bring it particularly to a luxury perspective and give you a couple of numbers, we so often hear China associated with the luxury market. The Chinese consumer back in twenty nineteen made of thirty three percent of personal luxury goods spending, and what we used to find at the time was just over a quart of that spend was on the mainland. The rest was elsewhere. It was Hong Kong, it was Japan, Macau, Hainan, outside of the main areas, and then also we would say
it was further afield. So the Europeans felt the consumer protection of tourism in store, and that's what's missing still, as did the US. But if we look at the numbers overall, we actually see from twenty nineteen where we say around a quarter of that spend was in China, we actually now see that the Chinese mainland is sixteen percent of spend of the market, So actually the Chinese consumer is not spending as much globally, but they're spending more in China.
There's been an interesting phenomenon in Hong Kong where we're seeing a lot less mainland tourists enter Hong Kong, but at the same time you're seeing a lot more Hong Kong residents travel to Shenzhen and neighboring cities, leading to some pundits calling Hong Kong the ghost town. During holidays and weekends, Tom Ran into one of these Hong Kong residents who's made we can travel to Shenzhend part of his personal routine. Thirty three year old Hugo Lee says,
it just makes sense. Let's have a listen.
You go to Shenjen how on like at least like two times in a month, and what's the draw? It wasn't always this way, right. I feel like because I've been living in Hong Kong for long enough and I tried a lot of things in Hong Kong ready, so then Sheenchin actually feels more refreshing to me. It's been a big trend in Hong Kong where a lot of hongkowners want to go to Chenchin over the weekend because the food is much cheaper with better quality, and then there are a lot of things that you can do
in Chenchen as well. There are a lot of big shopping malls with different themes, and some of the shopping malls even have like specific themes of like some games that you can play in it. So I feel like it's a good place to get relaxed. Is it more for like older people younger people? A little bit of bout? I think before the pandemic period. Maybe for the younger generations we do go to Hingin from time to time, but for now I think it's it's across all generations.
So consider the fact that let's say, for like one hundred KD, like if you spend in Hong Kong, what can you get in terms of food? Maybe the quality and the service will not be good, right, But then is engine you can enjoy much better quality of service and food, So why not hu you get more for your money in Ginin? Exactly? Is it all about money or does it go beyond that? I think it's what Money is definitely one of the factors that drive people to go to Ginin a lot. The other thing is
like it's more spacious. Obviously, what do you see in the future. Is this a permanent change? Is this a temporary thing? This Jin popularity. To be honest, I don't have a crystal ball. I can't tell how it's going to be in the long term, but at least for the short term medium term, I think that the trend's going to proceed back ten years to the way it used to be. People from Shenjin would come to Hong Kong for weekends, for shopping for entertainment. Now the tables
have turned. Does that surprise you? I don't see it as a surprise. I feel like back then, when a lot of mainland Chinese people would like to come to Hong Kong because they trust the quality, the products are real. In Hong Kong, they can buy a lot of famous brands with a cheaper price. But now they can actually get the same sort of my price with the same products in Jin.
Yeah.
I think the high speed.
Rail was a game changer.
Shinjen is more accessible now.
Yeah, yeah, definitely.
So that's a real life example of what motivates Hong Kong is to travel to Shenzhen. Catherine, what's driving this trend and what's the impact for Hong Kong retail?
Do you know what, John, Absolutely, the ties seems to have turned for Hong Kong being the de facto shopping paradise. It's going the other way now for the Hong Kong residents. And part of that is because two things. Firstly, of course, let's take into consideration of d Weeker yun. That has made it more affordable for Hong Kong residents to actually
spend on basic goods in China. The underlying driver for that is that in the last five years, if you look at the quality of the offerings the merchandise array that we have seen in China, particularly nearby Chinese cities like Shanjin, we are looking at malls which are like three or four times the size of that in Hong Kong.
The whole shopping experience has been elevated. I can totally see why Hong Kong residents would want to go shopping in Shinjin right now now, not with standing of course, with the underlying demand from one point four billion population, there is a lot more merchandise on the table to select, and Hong Kong residents are also now more open towards some of these Chinese merchandise, particularly when it comes to the basic goods, namely electronics, whether it's Sumi or even
Huawei or Pu, some of the Chinese brands and the local household care products. Hong Kong residents are willing to actually spend on these items now.
And some of the numbers coming out staggering. I read that during the Easter period, mainland tourists into Hong Kong was something like forty five percent below pre COVID levels on the other hand, I think Hong Kong residents going overseas and in particular to mainland China was up ten percent. Is Hong Kong retailer getting worried.
Well, I think we will start to actually see the numbers coming through. I would say that speaking to some of my contexts to things one, they definitely think that there is very limited room for landlords to actually increase shop rentals, which is a good news for them. Now. On the sales fronts, we actually look at some of the companies here in Hong Kong, most have diversified or set up operations in China, so the incremental impact to them from lower sales in Hong Kong will be marginally
less significant than what it was before. What they are focusing on right now is to actually adjust the merchandise mix so that in the case of jewelry, for instance, they will have the pricier items here dedicated exclusive to the Hong Kong market only that differentiates them from what is available for mainland China. So they are making adjustments, you know, what they are offering to the consumers with bearing in mind that they are probably facing consumers with shifting needs as we speak.
And Catherine, is your impression that this shift we have seen between Hong Kong and shen Zen as a retail destination, is this the future? Is this a structural shift or do you see it as something temporary and fleeting that perhaps currency shifts could up end.
I think structurally. We don't have the actual numbers, clearly, the authorities have not released these two publicly. But if you look at the mix of the population in Hong Kong, I would say that because of the multiple talent schemes whereby they have attracted mainland Chinese to be residents in the city, the composition of mainland Chinese within the Hong Kong population has actually increased tremendously versus pre COVID levels.
So there is hence a natural inclination for them to also shift back to China for their purchasers, whether it is for basic goods or maybe for something a little on the higher and or even for services, whether it's petticure, you know, medicure or hair washers. But that's what is driving the trend over the borders into Shenjin and the neighboring Chinese cities.
And Catherine, for the listeners who are not based in Hong Kong. Can you give some type of examples of how much cheaper it is to buy certain items over the border in Shenzhen versus buying it in Hong Kong.
I'll take Bubble Tea and clearly you know there is a Bubble Tea craze in Asia, and I'm sure maybe Debra will add to that that there is that crazy
in London too. So Bubble Tea, for instance, you are probably getting at least double the selection in chin Jen and suggestion gen alone right, double the selection at about thirty percent cheaper than what you get in Hong Kong if you are in a position to actually download discount vouchers on your apps in China, and clearly lots of the Bubble Tea shops now have apps they're offering instore discount coupons thanks to platforms like mit one as well
as Ali Baba's Alama, etc. With the right discounts and means three percent cheaper will be the basic items in China.
Our guests have been Catherine Limb's senior consumer analyst with Bloomberg Intelligence in Singapore, and Debra Aitken, Senior Luxury goods analyst with Bloomberg Intelligence in London. It's been a fascinating and insightful discussion about shine Up, consumer spending, luxury goods, Hong Kong's new retail competition, and the road ahead. It's been our pleasure having you both as our guests.
Thanks Top, Thanks John, thanks for having us.
I'm Tom Corbett in Hong Kong and I'm John Lee.
This podcast was produced by Clara Chan and you've been listening to the Asia Centric podcast