Luxury Goods and Status Symbols in Trouble in China

A friend recently mailed us an article from the Hong Kong Standard which describes how extremely high retail shop rents in Hong Kong can no longer be paid even by retailers of luxury brands.

Gucci store in Hong Kong, Central

Photo via flickr

Not only is this testament to the fact that Hong Kong's real estate bubble has gotten out of hand quite a bit, but the waning demand for luxury goods is also highly interesting from a sociological and economic perspective. As the Standard reports:

Business is getting tougher for Hong Kong's retailers with the value of total retail sales dipping 1.6 percent in the first half of 2015 from a year back, according to the Census and Statistics Department's latest data. Valuable gifts, including jewelry, watches and luxury goods, were hardest hit, with sales falling for 10 consecutive months. Sales value slumped 10.4 percent in June compared with a year earlier, despite efforts by several luxury brands – including Italian fashion house Prada – to boost sales by cutting prices. Squeezed by slimmer pickings in Hong Kong and the mainland market, top global luxury brands are looking to renegotiate store rents to cut costs. The latest to plead for landlords' mercy was French luxury goods conglomerate LVMH. Revenue from its signature brand Louis Vuitton slumped 10 percent year- on-year in Hong Kong, Macau and China for the first half while Europe and the United States saw stronger sales of fashion and leather goods. It is also planning to close a directly operated shop of its biggest watch brand, Tag Heuer, in Causeway Bay. […] British high-end fashion house Burberry, which has 16 shops in the SAR, said it may trim its local store network and negotiate for lower rents after the Hong Kong market, which accounts for about one-tenth of the brand's total sales, saw a double-digit percentage fall in sales over the period. Meanwhile, Gucci owner Kering said it will consider closing its Hong Kong and Macau outlets if rents stay high. […] Waning sales and whopping rents have sent Italian fashion label Baldinini packing. It shut its first and only flagship boutique in Hong Kong after just four months in operation, ending its three- year contract. In June, visitor arrivals from the mainland were down 1.8 percent year- on-year. Adding to the woes of luxury goods vendors are the changing spending patterns of mainland visitors, who are now looking for more mid-priced products.

(emphasis added)

We don't believe this is happening because prospective clients can no longer afford these goods. While Chinese consumers of ostentatious luxury items have probably taken a hit from China's economic weakness and its wobbling real estate and stock market bubbles, they can surely still afford to buy Gucci bags and Tag Heuer watches. We believe that they rather no longer want to be seen adorned with such items.

The Dow Jones Luxury Index has actually peaked in May 2014 already – click to enlarge.

Typically a decline in the desire to own products conferring and announcing one's high social status happens close to, or hand in hand with fairly severe economic downturns. People no longer want to stand out as rich when times are getting tough. This effect can be observed in numerous areas, even in the colors and shapes people choose when buying cars. The colors tend to change from loud ones such as red, to inconspicuous/conservative ones such as gray and brown. Car shapes tend to go from sportive and sleek to boxy and inconspicuous.

Of course there is an additional reason for this development in China as our friend reminded us:

"Your point they no longer want to be seen with them is especially acute today with mainland Chinese, who are (were) the big buyers of luxury goods, property and services here. […] The mainland's corruption clampdown is deterring a lot of PRC citizens from exhibiting any wealth these days, a continuing crackdown that has lasted far longer than any Hong Kong businesses suspected and which has changed the dynamics of mainlander's inward and outward spending."

To this we would point out that China's relentless crackdown on corruption is informed by the same "social mood" that is driving the reluctance to buy luxury items, and is driving capital outflows from China as well as the increasing unwillingness of businesses to invest. These developments are simply manifestations of an environment that has soured: They signal that China's entire society is increasingly infested with a bearish outlook.

Recently China's government has managed to halt the decline in the Shanghai stock market at what has reportedly been a huge cost. Zerohedge has published an article on a Goldman Sachs estimate of the amounts of money thrown at the market through government intervention. Apparently nearly 900 billion yuan have been spent merely to keep the market from cratering further.

The Shanghai Composite Index – a triangle has now formed in the index in the wake of unprecedented government intervention. Unfortunately