By Gregory Kuczynski, CFA
China's middle class is boosting sales of luxury brands, consumer goods analyst Greg Kuczynski says in the second part of a series on Chinese tourism.
After suffering a downturn following President Xi Jinping's crackdown on corruption, sales of high-end watches, jewelry, Cognac and other luxury goods have bounced back and are forecast to continue to grow as Chinese overseas travelers, attracted by the cachet of luxury European marques, surge in numbers.
- Chinese tourists are driving sales of luxury brands in markets such as Europe.
- For consumer goods companies, the booming Chinese international travel cohort represents an important sales opportunity.
- There is potential for further incremental spending as Chinese savings rates move more toward Western levels.
Kuczynski: So for the Chinese, as they have gained so much wealth and just the pace of income growth has been so rapid, that has manifested in two different ways. So first, you have just got sort of the conspicuous consumption that goes along with that. You have got the Chinese population wanting to sort of badge themselves with these consumer brands that are understood and known globally to demonstrate their wealth and success. And then another part of this coming of age of the Chinese consumer is just that they want to travel more. So if the first luxury indulgence was just shopping more at home, well, now they want to shop more globally and they want to visit these prestigious European capitals. And what is interesting about the luxury goods space in particular is that luxury goods are often purchased when traveling.
The Chinese growth and spending haven't been a straight line, though there have been disruptions. A few years ago, we had a multi-year disruption just with the political corruption, prosecutions and scandals that were taking place in China. So it put a chill on the sort of high-end consumption in China for a number of years. There was just the first order of impact of there is less banqueting, for example, going on, less government-sponsored gifting. But then in addition to that, perhaps more importantly, you just had all of the consumers sort of reticent to spend big on high-ticket items just for fear of making it look like they were doing something inappropriate. But to the extent that the anti-corruption effort has stabilized or perhaps decreased in intensity, we have sort of seen the underlying demand just continue to grow. And so since late 2016, we have just had this release of all this pent-up demand and so the Chinese consumers just come roaring back the last couple of years.
One of the interesting things, too, about thinking about the future trajectory of the Chinese consumer is that not only do you have a very strong GDP tailwind, but you also just have sort of the latent purchasing power of the consumer, where the economy, the savings rate is something near 50%, whereas in a Western modern economy, it might be 15% to 20% national savings rate. So just to the extent that the Chinese start to reduce the intensity of their savings as they build more social infrastructure in terms of a social safety net, you could just have a radical shift in, radical growth in consumption just based on a shift from savings to consumption on top of the underlying growth of the economy, which is by far the strongest in the world for a large economy. And there is another interesting dynamic too that plays into luxury goods consumption in China. So in most parts of the world, your luxury goods consumer is an older affluent, someone that has been working for 20 or 30 years, they are in their 40s, they are in their 50s. China, you have got actually a very young consumer, so not only do they have, tend to have good jobs, if you are in Shanghai, and you are an educated college graduate, there will be lots of demands for your skills. So you just have a tremendous amount of discretionary spending power for this very young 20- or 30-something luxury consumer in China.
When you see luxury purchases growing in Europe, it is not the local European consumer that is driving that growth, it is a Chinese tourist in large measure. And then so you have a company like Richemont (OTCPK:CFRUY), for example, where maybe up to 40% of the consumption in their business is driven by the Chinese consumer, either in mainland or globally. But then on the margin, it is even more important where the Chinese consumer is probably driving three-quarters of the growth of that company overall.
And then another example of how important the Chinese consumer has become to some of these Western brands, another example is Estée Lauder, where they compete against other staples companies, let's say. And the staples industries, in general, have had a very difficult time generating growth - zero to 1% sales growth has been sort of a very typical figure we have seen from that sector recently. For Estée Lauder, despite the fact that the Chinese are maybe 10% of the customer base, they have been putting up in recent quarters nearly 10% sales growth or better, and a big chunk of that, perhaps half of that growth, maybe a little bit more, has probably been driven by the Chinese consumer, again, either in mainland China or when they are in travel retail corridors or shopping in Europe. So it is just another example of the Chinese consumer being a major swing factor for these brands.
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