Morgan Stanley
  • Research
  • March 22, 2023

Chinese Buyers to Boost Luxury Goods Sector

Luxury brands are poised to soar as high-spending Chinese consumers emerge from COVID restrictions.

Key Takeaways

  • China’s reopening is expected to lift luxury goods sales this year and account for 60% of spending growth by 2030.
  • Buying may be highest in Europe, where prices can be 30% lower than in China.
  • Demand from Chinese consumers may offset an expected decline in U.S. buying.

After three years of stringent COVID control measures, China has finally reopened. Morgan Stanley Research analysts expect the wallets of Chinese consumers will do so as well, especially for luxury goods.  

As restrictions ease and cross-border travel picks up, the re-emergence of Chinese consumers—the largest cohort for spending in the global luxury goods sector—is expected to boost demand for high-end clothing, accessories and other items by 20% in 2023. Longer term, Chinese nationals are likely to account for 60% of total spending growth on personal luxury goods through 2030, driven by wealth as well as demographic, social and technological factors. 

"China should become the industry’s growth engine from this year on, and we expect brands at the top of the luxury-goods pyramid to benefit the most," says equity analyst Edouard Aubin. 

Back From the Sidelines

Before the pandemic, two-thirds of Chinese consumers’ personal spending on luxury goods took place outside of China, and Chinese consumers accounted for about 60% of total industry growth between 2000 and 2019. Although these consumers remained the largest cohort for luxury spending in 2022, disruption from COVID sent their spending down between 10% and 15% last year, after a 20% year-over-year increase in 2021. 

Stocks of luxury goods companies proved surprisingly resilient last year, as strong demand from high-income consumers and favourable exchange rates helped offset high inflation and rising borrowing costs.  And while valuations are back to historical averages, Aubin sees China—the most important market for European luxury names—driving more opportunity in the sector in the coming year and longer.  

“Overall, we expect industry growth to remain solid this year at 7%, albeit slowing from around 15% in 2022, which should lift earnings per share for leading brands by at least 10%,” Aubin says.  

In the rest of the world, analysts expect luxury spending in the Middle East to rise 15% in 2023, while South Korea and Japan register single-digit growth. Meanwhile, spending is expected to fall by low single digits in the U.S and Europe. 

China should become the industry’s growth engine from this year on, and we expect brands at the top of the luxury-goods pyramid to benefit the most.
Edouard Aubin Equity Analyst

Pricing in Focus

With the ability to resume overseas travel for the first time in three years, Chinese consumers can once again take advantage of cheaper prices in Europe, which can be as much as 30% lower than in China, depending on the brand. 

The Chinese government has cut import duties and opened duty-free shopping centres in an attempt to repatriate luxury shoppers. However, the lure of lower prices on the Continent—which can be as much as 30% lower than in China—along with the "feel-good factor" of, for example, buying an expensive handbag on a weekend in Rome, may prove too strong. 

This isn’t ideal for luxury brands "If Chinese tourists spend the same amount but just transfer their sales away from home and to Europe, this could potentially be negative for brands, given prices and margins are higher in China."

Offsetting a U.S. Decline

Another key theme for the luxury sector in 2023 is whether the pickup in Chinese demand will be enough to offset slowing spending in the West. Analysts expect U.S. consumers to spend 1% less on luxury goods this year. It’s a small but important shift since sales among this group grew around 75% between 2019 and 2022, making the U.S. the fastest-growing major nationality in this spending category during that period. In Europe, analysts expect a 3% decline in spending. 

The so-called ultra-premiumisation of the luxury market may also skew regional shopping trends. Chinese and Korean shoppers are increasingly favouring brands with the highest price points, which they view as status symbols, while cutting spending on the less expensive, more fashion-oriented or "aspirational" brands favoured by Western shoppers. 

Possible Headwinds

While Morgan Stanley analysts are positive about the luxury sector for 2023, they remain on alert for potential surprises:

  • The strong Chinese demand may be short-lived, the result of "revenge spending" as shoppers make up for time lost to the pandemic.
  • Contraction of the Chinese housing market may have a negative effect on wealth.
  • While Western buyers in higher income brackets have buoyed spending, a negative wealth effect and wage pressure on white-collar jobs could undermine that.
  • Spending abroad by Chinese nationals could resume more slowly than expected over the next 18 months.
  • If luxury goods are more expensive than consumers expect, they could buy fewer items overall.
  • In the event of a global recession this year, luxury goods sales could decline further. During the 2008-2009 recession, luxury sales saw the biggest drops in the West and the U.S. Pressure on the U.S. housing market in 2023 could result in weakness to the sector.

Nonetheless, says Aubin, “we believe luxury demand in China should pick up faster than feared and will be material enough to offset the reversal of recent years of record growth in the U.S.”

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