What has stopped working for luxury in China?

In some ways, the origins of the crisis currently affecting the luxury sector were embedded in the same factors that ensured its prosperity for ten years. The affliction that has struck the fashion industry can be interpreted as a multifactorial issue from a financial and historical standpoint, but its ramifications also extend to aesthetic and artistic, as well as socio-cultural, dimensions. One of the key factors in this crisis, or if we want to call it the epicenter of its primary symptoms, has been the Chinese market. Last year, China's luxury market shrank by about one-fifth compared to the previous year, according to estimates by Bain—financially speaking, it was a bloodbath. In 2024 alone, the stock price of Kering plummeted by 39.4%, Burberry by 30%, LVMH lost 13%, and Moncler 7.8%. Kering's revenues fell by 11% in the first quarter of 2024, while its flagship brand, Gucci, recorded a 24% drop in sales in China. Even LVMH, usually unshakable, saw an 11% decline in Asia, excluding Japan, in the fourth quarter of 2024—perhaps its worst result since the 2008 financial crisis.
 

«China has sustained the economy of many global luxury brands for quite some time», designer Ian Hylton told us. Hylton, formerly the creative director of Ports 1961, is now the head of his own eponymous brand and president of the popular Xiamen-based brand Ms Min. «Mainland Chinese consumers, both domestically and abroad, have been a driving force for luxury fashion». In recent years, China's luxury market has been the primary growth engine for European fashion, but in the post-pandemic years, that momentum has slowed. To gain a deeper understanding of the situation, in addition to speaking with Hylton, we also interviewed a senior executive from Hong Kong who spent a decade as a high-ranking manager for one of Italy's most renowned luxury brands in China. According to her, the slowdown in Chinese consumer spending over the past two years is due to a combination of «high unemployment rates among recent graduates, the decline of real estate magnates, financial constraints for local governments, political tensions with other countries, a drop in foreign direct investment, and lockdown policies». 
 

Stratigraphy of a Crisis: Geography and the Middle Class

One key element to consider is geography, meaning how the decline in spending is regionally distributed. «Most of the negative factors influencing consumer behavior are external or primarily affect lower-tier cities. This is why first-tier markets like Beijing, Shanghai, Guangzhou, and Chengdu might be less impacted by these tensions», explained the executive. However, she made an important distinction: «What has declined in China is the spending of the middle class», she told us. This segment «faces greater financial pressures, such as mortgages and children's education, compared to high-net-worth individuals», who «can afford most luxury goods even during economic crises. Even if they spend less due to asset depreciation, they still have the means to buy». This also explains why a group of brands classified as ultra-luxury, such as Hermès or Brunello Cucinelli, have continued to grow: «Brands with a higher share of affluent consumers making high-value purchases are likely to weather difficult times more effectively than those overly reliant on the middle class». 
 

However, European brands had bet on middle-class spending for years, only to see the ground vanish beneath them in a matter of months. According to the Hurun Wealth Report 2024, cited by JingDaily, the number of Chinese households with assets exceeding 6 million RMB ($830,000) dropped by 0.3% to 5.128 million, with even steeper declines among the wealthiest groups: those with more than 10 million RMB ($1.4 million) fell by 0.8%, while ultra-rich households (over $30 million) declined by 2.3%. Moreover, the number of billionaires in China plummeted from 1,185 in 2021 to just 753 in 2024—a one-third drop, according to the report, significantly altering the country's economic landscape and its direct impact on the luxury market. «For the middle class, economic security is essential before resuming spending», the executive explained. «Real estate value is a cornerstone for many Chinese families, and while this may not yet apply to younger generations, it will become relevant when they inherit property. The government is taking measures to stabilize the real estate market […]. Job security is another crucial factor. Although the middle class is not losing jobs, the current economic climate does not encourage companies to invest in new talent, leading to an oversupply of graduates compared to available opportunities».

Indeed, while luxury sales in the United States and Europe remained relatively stable in 2024 (still low by the growth standards brands had become accustomed to), China’s share of the global personal luxury goods market dropped from 20% in 2020 to 12% in 2024, according to WSJ. Meanwhile, the urban youth unemployment rate reached 15.7% last November for those aged 15 to 24; 6.6% for those aged 25 to 29, and 3.9% for workers between 30 and 59 years old—for a national average of around 5.1% in December, according to Reuters. The role of the middle class is crucial. According to a study by Fortune published last month, between 2017 and 2021, China's luxury market tripled precisely due to the rising demand for luxury goods from the emerging middle class as well as the ultra-rich. This combination of spending groups made China a crucial ecosystem for brands like Louis Vuitton, Gucci, and Burberry, which saw their fortunes multiply. Then, as we know, the pandemic hit, and lockdowns in China halted travel, forcing brands accustomed to selling to tourists in cities like Paris and New York to focus on the domestic Chinese market. 

The Shift in Customer Behavior

«I believe that post-pandemic, along with the economic slowdown and a stronger sense of national pride, Chinese consumers have become more attentive to local products and design», confirms Hylton, who founded his namesake brand in the first year of the lockdown. Brands are trying to adapt as best they can: Gucci and OTB are closing stores in China’s second-tier cities, while LVMH is attempting to regain consumer interest through high-profile marketing campaigns, such as its participation in the China International Import Expo 2024 last November. The recovery of brands in the country’s market, in fact, depends «largely on understanding, communication, and engagement with customers, truly grasping the needs and desires of the market and catering to them», says Ian Hylton. Recently, speaking with WSJ, Tiffany’s CEO Anthony Ledru explained the importance of China, stating that the average purchase value there is higher than in the United States, Japan, or Korea. However, relying solely on wealthy consumers may not be enough to offset the overall market contraction.

Another phenomenon that has significantly impacted luxury consumption is the rise of the "dupe" culture. Initially, as explained by WSJ, it started during the lockdown and with the first price hikes, which coincided with a period of economic weakness, pushing many consumers to look for replicas of luxury designs. Over time, however, the trend shifted from counterfeits to seeking out local brands that could offer similar designs with a decent price-to-quality ratio. This phenomenon led to a sales boom for brands like Songmont, Oleada, and Cafuné, which are the Chinese equivalents of emerging European handbag brands like Polène, Euterpe, or Demellier, to name a few. The anonymous executive confirms this trend: «With the rise of consumer patriotism in China, there is a growing preference for supporting high-quality local brands, as well as a particular appreciation for Western brands that embrace Chinese culture, for example, through East-West collaborations».

For Western brands, the issue is «not about value-for-money», says the Hong Kong-based executive, but rather about strategy and clientele. «Brunello Cucinelli has established a strong presence in China over time and has recently thrived thanks to the growing trend of “quiet luxury,” while Hermès, particularly in the handbag segment, focuses heavily on high-net-worth individuals, and its bags do not depreciate in value», she explains, noting that «resale value is particularly significant in the handbag category, as the second-hand market greatly increases a brand’s popularity. These high-net-worth individuals may not intend to resell their luxury items, but they still appreciate the appreciation of their value over time. Gucci, for instance, has seen a sales decline due to the depreciation of its resale value». Essentially, the two brands, Hermès and Brunello Cucinelli, «have adopted a slower retail expansion strategy compared to the rapid growth pursued by LVMH and Kering, which expanded aggressively, leading to an oversupply of retail stores in first-tier and sometimes even second-tier cities».

Signs of Cautious Optimism

The data suggests that the crisis primarily affects the domestic luxury goods market, as demonstrated by a report from McKinsey published last September. The report states that «China continues to record GDP growth figures around 5%. [...] Domestic consumption, although modest, is on the rise. Some sectors, such as services and tourism, are experiencing robust growth, indicating that the economy is not uniformly declining but rather showing varying performances across different sectors and regions. Additionally, while overall product consumption may appear flat, certain sectors such as sportswear, urban outdoor apparel, and consumer health products have recorded double-digit growth, reflecting the continued strength of these markets». Furthermore, the same report highlights a recovery in Chinese consumer spending abroad. In the first half of 2024, Chinese consumer spending on luxury goods overseas already surpassed 2019 levels, not only much earlier than expected but also despite the fact that international travel has not yet fully returned to pre-pandemic levels. 

In May 2024, luxury spending abroad was 32% higher than in 2019, followed by a 22% increase in June. «Chinese consumers are often bargain hunters», explains the Hong Kong-based executive. «If the yen remains low, spending in Japan is likely to continue. Additionally, many high-net-worth individuals travel abroad for shopping due to price differences. Currently, Chinese consumers tend to prefer Europe over the United States for long vacations, although the U.S. might regain interest once political tensions ease. Currency exchange rates will also play a key role in determining where Chinese consumers choose to spend». The situation is different for the middle class, but our interviewee remains optimistic: «The government is implementing measures to stabilize the real estate market, and positive signals in this sector could increase the middle class’s sense of security», while regarding youth unemployment, «if the government succeeds in implementing policies to improve this situation, confidence in the economy will rise». According to McKinsey, confidence remains high: «Chinese consumers are among the most optimistic in the world», the study states. «In the latest August survey, 59% of Chinese consumers stated that the economy would recover within the next 2-3 months, compared to 41% of American consumers, 30% of British consumers, and 13% of Japanese consumers».

The increase in luxury purchases abroad suggests that Chinese consumers’ desire for luxury goods remains strong but is influenced by factors such as the economic advantage of tax-free shopping, the experience of shopping abroad, and the exclusivity of items that may not be available in China. According to McKinsey, this is why many brands are downsizing their retail networks in the country while increasing their budgets for marketing. The report states that the number of new store openings dropped to 111 in the first half of 2024 compared to 150 in the same period in 2023, while marketing activities such as offline events and art installations increased from 36 in 2023 to 53 in the first half of 2024. In general, many companies in other sectors continue to invest heavily in China, such as major players in the German automotive industry. However, the report is less clear when it comes to the fashion sector. 

While referring to «premium and luxury segments» when discussing growing brands, the focus is on sportswear brands that are far more accessible than major European luxury brands. The report suggests that talking about a “consumer crisis” in China is misleading, but the crisis for luxury brands is real, as domestic sales in the country have declined. It is clear that even affluent consumers have realized that shopping abroad, in places like Japan or Europe, while taking advantage of favorable exchange rates, is appealing. However, as the executive tells us, «the Chinese government is not particularly pleased with Chinese citizens spending their wealth abroad. This is why it facilitates the Hainan free-trade zone. There have also been cases where Shenzhen customs heavily taxed luxury items brought into China. If one day the Chinese government were to implement strict customs duties, it could hinder overseas luxury purchases and redirect spending back into China».

The Complex Issue of Tariffs

Trump announced on February 27 the introduction of an additional 10% tariff on Chinese imports, which came into effect on March 4, adding to the 10% tariff already imposed on February 4. This new tariff has pushed numerous retail companies, as well as brands like JingDaily reports, including Steve Madden, to reassess their pricing strategies, supply chains, and distribution strategies to remain competitive. Steve Madden, mentioned by the magazine as one of the brands most exposed to tariffs due to its heavy reliance on Chinese manufacturing, has announced selective price increases to offset additional costs. CEO Edward Rosenfeld stated during the fourth-quarter earnings call that the company will raise prices where possible, starting in the fall. In an effort to reduce its dependence on China, Steve Madden has already lowered the percentage of goods imported from China from 71% last November to 58%, with a goal of reaching 40% by the end of the year. Notably, however, the brand still expects revenue growth of between 17% and 19% year-over-year, provided that the acquisition of Kurt Geiger is completed by May. The issue is complex: if the fabric is produced and cut in China but assembled in Italy, tariff rules change; they also change if the opposite happens or if, for example, a product is made in a third country but assembled in China. According to NPR, approximately 32% of all brands manufacture in China, while only 3% of all global apparel is produced in the U.S.

The first casualties of the trade war, however, currently appear to be Shein and Temu, which have so far benefited from the de minimis exemption (a rule allowing imports of goods valued under $800 into the United States without paying tariffs) but may now see their business model threatened. Although Trump initially signed an executive order to eliminate this exemption in February—only to later retract it—the U.S. government plans to abolish it permanently as soon as it can process and collect tariffs more efficiently. To counter this situation, Temu has started directing U.S. consumers toward products already available in American warehouses, while Shein has opened distribution centers in the United States and an office in Seattle in recent years, which will prove particularly useful if these tariffs are prolonged. However, China is not standing by idly—it has imposed tariffs on U.S. goods, including crude oil, liquefied natural gas, and agricultural machinery. It has also promised further countermeasures in response to the additional 10% tariff on Chinese imports. A spokesperson for China’s Ministry of Commerce stated that if the U.S. continues in this direction, China will take all necessary countermeasures to defend its legitimate interests. And retaliations have already begun: PVH, the parent company of Calvin Klein and Tommy Hilfiger, for example, has been placed on China’s "unreliable entities list"—the first time a company dealing in consumer brands has ended up on the list, exposing it to fines and sanctions.

The situation remains unclear for everyone: tariffs have been implemented, postponed, and then revised. «For Chinese companies, it will be a survival game, as their profits will be impacted», Edwin Tan, general manager of the global logistics company Asian Tigers China, told CNBC. Even if a Chinese company decides to relocate production to another country to circumvent tariffs (a strategy known as "China+1"), the new country could still be subject to new tariffs without notice. Many American clients have already asked Chinese suppliers to cut costs or risk having their orders canceled—while the implications for China’s manufacturing sector and local businesses could be vast, the overall economy might not be significantly affected. As the anticipated meeting between Trump and Xi Jinping is rumored to take place next month, the prospect of a trade war could drive up raw material and fashion product costs, with effects that will be felt not only in the U.S. but also in other global markets that rely on Chinese exports. China is the leading apparel supplier for both the U.S. and international markets, and the increase in tariffs will inevitably lead to higher prices for consumers in many parts of the world. According to the United States Fashion Industry Association (USFIA), tariffs could increase retail prices by up to 32%, affecting demand and consumption patterns worldwide. Industry analyses estimate that the total value of U.S. apparel imports from China amounted to about $30 billion in 2024, a figure that could face a 15-20% decline due to the new tariffs. To mitigate losses, some brands are already diversifying their production sources, shifting to Southeast Asian countries such as Vietnam, Bangladesh, and India. However, these nations have yet to develop the same manufacturing capacity as China, which could lead to delays and higher production costs, impacting global supply chains, including those in Europe. At present, China accounts for 38% of the world’s textile exports—relocating production will significantly affect both quality and production costs.

Chinese Foreign Ministry spokesperson Lin Jiang stated that Beijing is ready to fight on all fronts, whether economic or commercial, if the U.S. continues on this path. However, compared to 2018, when Trump initiated his first trade war, the global economic landscape has changed. As Al Jazeera explains, the U.S. and China have gradually reduced their interdependence, mitigating the direct impact of tariffs imposed by both sides. According to Christopher Beddor, deputy director of China research at Gavekal Dragonomics, the new tariffs indeed pose a challenge to China’s economy, but they are far lower than the 60% rate threatened by Trump during his campaign. China’s share of total U.S. trade, measured as the sum of exports and imports, has dropped from 15.7% in 2018 to 10.9% in 2024, while the U.S. share of total Chinese trade has decreased from 13.7% to 11.2% in the same period. Carsten Holz, an expert on China’s economy at the Hong Kong University of Science and Technology, made things very clear to Al Jazeera: «Even the effect of a total Trump ban on Chinese imports—which is hardly realistic in an era where, for example, most iPhones are made in China—might not impact China’s GDP by more than a fraction of a percentage point». 

According to Holz, Beijing might also be willing to negotiate, but without showing signs of weakness. Other analysts believe that China is trying to avoid escalating the trade conflict, as evidenced by its decision to limit tariffs to a select number of strategic sectors. According to Even Rogers Pay, an analyst at Trivium China, this strategy aims to put pressure on U.S. states that are major agricultural exporters, particularly those politically aligned with Trump, with the goal of forcing him to the negotiating table. Essentially, the Chinese government appears to be adopting a wait-and-see strategy, maintaining political pressure while stabilizing its economy through fiscal stimulus and trade diversification measures.