Cooling Off in China's Luxury Market in 2024

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Cooling Off in China's Luxury Market in 2024

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On January 21, 2025, Bain & Company released its annual report concerning the luxury market in China, projecting a significant downturn in the personal luxury goods segment for 2024. The report anticipates a decline of between 18% to 20% in sales within China's mainland market.

Looking back over the last five years, the Mainland Chinese luxury goods market has faced notable fluctuationsAccording to Bain’s findings, 2020 witnessed a remarkable contradiction; while global luxury markets shrank by 23%, China’s luxury sector surged by an impressive 48%. This positive momentum continued through 2021, with a staggering 36% growth rateNevertheless, the market hit a stumbling block in 2022, suffering a 10% dropThe following year showed signs of recovery with a 12% increase, yet this upward trajectory seems to have stalled as the new year unfolds.

The downturn has been primarily attributed to a lack of consumer confidence and increased cautiousness in spendingEven the more resilient high-value consumers (VICs) have adopted a conservative stance towards luxury purchasesIn the face of economic uncertainties, they now lean toward “dispersing risks,” diverting their expenditures toward a more diversified array of reputable investment assets.

Among various categories of luxury goods, watches appear to be the hardest hit, suffering a decline of as much as 28% to 33%. Bain's report highlights that this trend results from two main factors: an increasing rationality among Chinese consumers concerning watch purchases and a persistent price reduction in the secondary market for Swiss luxury timepieces, undermining the watch's perceived value retention.

Moreover, Bain's report emphasizes that the luxury goods market is also affected by the resurgence of outbound tourism and favorable exchange rates abroadRemarkably, overseas markets now constitute roughly 40% of the total luxury expenditure by Chinese consumers

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Spending on luxury items in Europe has rebounded to approximately 50% of pre-pandemic levels from 2019, while demand in the Asia-Pacific region has surged to around 120% of that benchmarkHowever, this growth in international markets has not been adequate to offset the decline in the mainland market, resulting in an overall predicted decrease of about 7% in the total luxury spending of Chinese consumers on a global scale for 2024.

Xing Weiwei, a global partner at Bain, reveals through extensive research and industry insights that Chinese consumers are undergoing a profound transformation in their perception of luxury goods, gradually moving towards a more mature and rational standpointPreviously, luxury items, basking in their brand luminescence and high-end positioning, had consumers almost willingly accepting the exorbitant prices associated with high markupsHowever, as information becomes more transparent and consumer perspectives evolve, the once-loyal patrons are starting to reconsider the value offered by luxury brandsConsumers are no longer blindly investing in a brand's reputation alone; instead, they're demanding better value propositions while practically eroding the previously accepted notion of excessive luxury pricing.

This shift in consumer mindset has led many to seek out other avenues of expenditure, with experiential travel and outdoor activities emerging as popular alternativesTraveling allows consumers to tangibly engage with diverse cultures and create lasting memories, while outdoor pursuits cater to a growing interest in health-oriented lifestyles, helping individuals alleviate stress and enjoy mental rejuvenation.

Interestingly, events from 2020 and 2021 stand in stark contrast to the present scenario

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Amid the global economic turmoil following the pandemic, luxury consumption in China soared, significantly buoyed by robust sales in Hainan's duty-free market, which played a critical role during that periodRestrictions on overseas travel thrust Hainan's favorable duty-free policies into the spotlight, where increased quota limits and an expanding range of goods sparked an impressive shopping frenzy among consumers.

However, recent developments have transformed the landscapeThe past two years have seen a downturn in the Hainan duty-free market, with sales anticipated to drop by approximately 29% in 2024. This decline is rooted in several interconnected factorsAs international travel gradually resumes post-pandemic, consumers are exploring a broader array of duty-free shopping options abroadConcurrently, an increase in domestic duty-free outlets is siphoning off market share, while nearby regions are striving to capture the fragmented customer baseThe report notably anticipates that by the end of 2025, the entire island of Hainan will implement a closure policy, a strategic move that promises tremendous growth potential yet creates considerable operational challenges during this transitional phase for the island's duty-free market.

Xing Weiwei further emphasizes that luxury brands must abandon simplistic market expansion strategies in their future endeavorsInstead, they should focus on how to gain market share within an increasingly competitive landscapeStrategies must evolve, prioritizing enhancements in perceived brand value, endorsing innovation in product offerings, refining pricing strategies, and elevating customer experienceThese critical elements will become the linchpins enabling brands to thrive in this new era.

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