The Fashion Sector's Excessive Dependence on China

From volatile sales and revenue to broader strategic and operational challenges, the dependency on China is proving to be a double-edged sword.

As the Summer Olympic Games capture global attention, the luxury fashion sector in Asia is experiencing a notable stagnation. In recent years, the luxury fashion industry has increasingly focused its strategy on the Chinese market, leveraging its extensive consumer base and the rising affluence of the people. Last year, China accounted for about 16 percent of global luxury expenditure, with luxury goods consumption having doubled from 2008 to 2014, establishing the nation as a vital revenue source for luxury companies, and Chinese consumers significantly influencing worldwide sales. This overreliance has created substantial dangers, rendering luxury fashion firms susceptible to variations in the Chinese market. LUXUO examines the ramifications of this dependence and investigates methods for luxury firms to alleviate these dangers and attain a more equitable, sustainable business strategy.

China As Fashion’s “Silver Bullet”

The rise of new shops and larger flagship stores over recent years is evidence of luxury fashion brands investing in growing their presence in China. This stems from the fashion industry’s long-standing efforts to leverage the world’s third-largest luxury market. China is arguably Asia’s largest economy and market penetration works differently here compared to other growing markets like India, Brazil, and Indonesia. A rising middle class and the growth of dynamic cities outside the capital allow for various opportunities to explore new markets within China. Simply put, luxury fashion conglomerates can strategise the growth of their brands by measuring it against the growth of cities outside of Beijing like Shanghai, Guangzhou, and Shenzhen. The rate of growth is slower in regional nations like Thailand, Vietnam and Malaysia where brands are more likely to invest primarily in the capital city. The growth recorded in new versus existing markets highlights that economic realities differ significantly. While market saturation may not be as pronounced in markets like the United States; a new store, new location, and new distribution in China makes its growth effectively see a 100 percent year-on-year increase.

“Luxury Shame”

China’s middle class — once a robust driver of luxury consumption in China — is now facing financial strain alongside a shift in government policy towards showcasing restraint and modesty from the ruling Chinese Communist Party (CCP). As reported by BusinessStandard.com, the term “luxury shame” first gained traction in the United States following the Lehman Brothers crisis of 2008 to 2009. It has now taken root in China as the country’s GDP growth falls short of expectations, and the unemployment crisis is so severe that President Xi Jinping made it the “top priority” in May this year. The result sees China’s wealthy refrain from indulging in ostentatious purchases, affecting consumer behaviors as Chinese consumers are also not traveling and spending in places like Europe like they used to. This inevitably has a knock-on effect on the luxury sector as a whole with the spending pattern (or rather lack of spending pattern) affecting sales within China’s domestic market and by Chinese tourists, which some argue can be tied back to the values implemented by the Chinese community party.

The Sales Slump

Luxury brands face significant drops in earnings as the downturn of China’s luxury market impacts profits.

 What occurs when the China "gravy train" deteriorates? Kering shares took a hit last week when the luxury conglomerate reported that operating income in the second half of the year would be down by 30 percent after a 42 percent drop in the first half of 2024. Forbes reports that in July, Burberry shares fell over 16 percent, while Hugo Boss shares decreased by nearly 7.5 percent after both companies issued updated profit warnings for 2024, following preliminary second-quarter earnings that revealed approximately 40 percent declines in operating profits year-over-year. Forbes also reports that preliminary earnings of Richemont saw a 27 percent drop in China sales this year, and the Swatch Group reported an 11 percent decline in sales overall this year and significant declines in sales in China. Even the fashion conglomerate LVMH experienced a decline after failing to meet its sales projections. Nonetheless, in actuality, a decline in sales is scarcely catastrophic.

Strategic Diversification

As CNN reports, LVMH CEO Bernard Arnault was photographed visiting the WF Central mall in Beijing. 

The fluctuations in revenues, profit margins, and quarterly forecasts of major fashion conglomerates such as LVMH and Kering underscore their reliance on China, the expansion of the Chinese market, and the purchasing power of Chinese consumers. This was reflected in the marketing methods that featured Asian brand ambassadors leading luxury fashion's seasonal ads.

 China's expanding economy is witnessing an increasing middle class that perceives the acquisition of branded items as an indicator of social standing. Acquiring a luxury brand serves as a tangible assertion of one's elevated social position. In the Asian culture, the notion of “mian zi” or “face” is crucial to societal dynamics, and possessing the latest Chanel or Louis Vuitton significantly reflects an individual's “face.” Luxury companies, by concentrating on China's expanding middle class, may have overlooked other regions, including the Middle East, Southeast Asia, and America, underscoring the necessity for these firms to investigate global commercial strategy. The closure of physical locations and a shift in marketing strategies towards an online presence may necessitate a transformation in the distribution and retail environment of the luxury business.

New Markets

While the Chinese market has been a lucrative source of revenue, luxury brands should actively pursue diversification. The luxury fashion industry's excessive dependence on China may jeopardize long-term objectives, resulting in unstable sales and revenue. To mitigate this, the luxury fashion sector must contemplate the advantages of expanding its market emphasis to encompass other high-growth regions, like North America, Europe, and Southeast Asia, thereby diminishing its exclusive reliance on China. This entails not just penetrating under-served countries such as the Middle East and Southeast Asia but also augmenting their presence in established markets like Europe and North America. Brands may investigate burgeoning luxury centers in locations such as Dubai, Bangkok, or New Delhi. The capital city of Thailand, Bangkok, seems to attract the attention of premium brands. Louis Vuitton has recently inaugurated its inaugural restaurant in South Asia, overseen by renowned Indian chef Gaggan Anand. An effect that has no doubt had a part to play in the dominance of Thai celebrity brand ambassadors from Thai rapper and singer BamBam appointed as the latest House Ambassador for Louis Vuitton to Bright Vachirawit for Burberry and Tay Tawan Vihokratanaha for Loewe.