Consumption Pattern Changes Are Here To Stay
The COVID-19 induced closing of China’s borders has forced many premium retail brands to alter their business model. Before the pandemic, Chinese shoppers accounted for one-third of the global luxury consumption, with luxury goods predominantly consumed overseas. While the global luxury market shrank, domestic consumption rose by over 48 percent in 2020, according to Bain. The global travel restrictions have not hampered the lust for luxury. Now that vaccinations have begun and ease of travel restriction might occur from the summer of this year, brands must realize that the consumption pattern changes are here to stay, and consumers will not flock back to their old habits.
According to Bain, driven by migration to e-commerce during the lockdown period and forced digitalization of business models, the domestic Chinese luxury market reached RMB 346 billion in 2020. The changes in consumer habits resulting from retail store shutdowns and fear of infection led brands to develop a local China omnichannel strategy and experiment with digital tools and platforms. Livestreaming and online boosted the total market volume of social commerce in China to more than USD 268 billion, according to eMarketer. The pandemic further pushed global luxury brands to engage stronger on e-commerce and social commerce in China, with many brands entering mainstream e-commerce platforms TMALL and JD.com – Something unthinkable before the pandemic. Examples include Prada, MiuMiu, or Delvaux. The travel restrictions worked as a disrupter and accelerator to the Chinese business model of luxury retail brands.
Like overall trends in retail and e-commerce that existed before the pandemic, domestic consumption of luxury goods was on the trajectory to increase in China. Stricter governmental control of gray market imports and overseas shoppers (known in China as ‘Daigou,’ 代购), as well as more restrictive currency controls, were accompanied by a global price harmonization trend. Brands that had relied on the Chinese tourists but did not enter the domestic Chinese market were left in the rain when the border shut down and are rushing to find partners to enter China. We have experienced a tremendous increase in consultations and strategic discussions in our business. The physical arrival of more luxury brands will further increase the local offering to Chinese consumers.
Similar to the term ‘revenge spending,’ which had described the excessive consumer spending after the end of the lockdowns in Spring 2020, the term ‘revenge travel’ is circulating. It is a manifestation of the belief that a re-opening of the borders will lead to excessive traveling and return to overseas shopping and spending behaviors. However, it is fair to argue that this will not be the case as it is unlikely that the world’s borders will open fully. Moreover, while Chinese outbound travel is always a numbers game, tourists might be prohibited or afraid to travel to certain areas for an uncertain time to come. With Hainan being announced a Free Trade Port, which included in the first wave the raising of the annual offshore duty-free allowances for shoppers in Hainan to RMB 100,000, an alternative option was introduced to the market last year. Hainan is now luring luxury brands for the opening of additional retail spaces. A development that threatens the old special status of Hong Kong in the region as the categories of duty-free goods available at Hainan is continuously expanding.
The changes in consumption patterns of Chinese consumers are here to stay, and the earlier brands recognize that there will not be a way back to the ‘old normal,’ the better. Once the world has entered the post-COVID-19-phase, Chinese shoppers will travel again and increase their spending overseas. But, the domestic luxury retail in China has entered a ‘new normal’ and is the future growth driver. It is more imperative than ever for brands to fully commit to the Chinese market and increase the local footprint if they do not want to be left behind.
About the contributor
Mike Hofmann has an MBA from the Robert H. Smith School of Business of the University of Maryland. He is a Doctorate Candidate at the Robert W. Plaster Graduate School of Business of the University of the Cumberlands in Williamsburg, Kentucky. Mike is the Managing Director of Melchers in Beijing, a retail partner and service provider focusing on premium brands in China. He can be reached at firstname.lastname@example.org.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the view of Melchers.
This opinion piece was published in the business journal of the German Chamber of Commerce in China GC Ticker Spring 2021 edition.