President Xi Jinping’s Promise to Redistribute Wealth Brings Bad Memories to Luxury Brands in China

Many analysts believe that the campaign could actually be good for business. While Xi’s plans are still taking shape, his government has made it clear that it ultimately wants to increase the incomes of more households and expand the middle class. That, in turn, could help increase purchasing power and consumption.

But experts have not ruled out the possibility that the government cracks down on signs of perceived extravagance or raises taxes on the wealthy, which could darken the prospects for high-end handbag, shoe and jewelry makers.

“Initially, when it was announced, people panicked,” said Zuzanna Pusz, an analyst at UBS, of the promise of “common prosperity.” “And the market panicked. Because everyone returned with their memory to the campaign against corruption, and how the demand for luxury was affected back then.”

Shoppers pass a Gucci store in Hong Kong.

Some players have already taken a hit. LVMH shares fell 7.9% from August to September, while Kering, the owner of Gucci, fell 19.4% during the same period.

“In the last three months, the [luxury] The sector has underperformed the European market … due to renewed concerns from China, “including the wealth redistribution drive, an outbreak in coronavirus cases and regulation, Citi analysts wrote in a October report.

The call for ‘common prosperity’

Beijing has been tightening the screws of private enterprise for the past year.

But the stakes were raised in August, when Xi told the top leaders of the ruling Chinese Communist Party that the government should establish a system to redistribute wealth for the sake of “social justice.”

According to the state news agency Xinhua, Xi said it was “necessary” to “reasonably regulate excessively high incomes and encourage high-income individuals and businesses to return more to society.” State media have suggested that the government might consider imposing taxes or other ways to redistribute income and wealth.

Alibaba promises $ 15.5 billion to help China achieve the & # 39;  common prosperity & # 39;
Some companies have gotten the hint from Beijing. In recent months, several of China’s largest tech firms have pledged to donate billions of dollars for the cause, including Alibaba (SLIME) and Tencent (TCEHY). A company, Pinduoduo (PDD), even promised deliver your total profit for the second quarter.

There have been signs of apprehension in the world of luxury. The sector has recently lost favor with some investors, “suggesting that the short-term uncertainty related to China has been discounted,” UBS analysts wrote in a September report.

“The impact of China’s common prosperity initiatives on luxury consumption … remains the main concern of investors,” they added.

But analysts at the Swiss bank also point out that “common prosperity” is not a new concept in China.

The use of the phrase dates back to the time of Chairman Mao Zedong, who invoked “common prosperity” when he advocated for dramatic economic reforms to take power away from wealthy landowners and farmers, the rural elite.

Shoppers at a luxury shopping plaza in Beijing in August.  Many analysts believe that the & quot;  common prosperity & quot;  The campaign could be good for business, increasing household incomes and expanding the middle class.

In 2012, “common prosperity” was “considered the” fundamental principle “of Chinese socialism” at a major Communist Party meeting, UBS economist Tao Wang said in a report to clients.

The bank’s analysts also say they expect “modest and gradual” adjustments in personal income tax and consumption tax in the coming years, suggesting that “the negative impact may be limited and not imminent.”

Chinese buyers are giving luxury brands hope

Some top executives have addressed the issue directly.

Earlier this month, LVMH CFO Jean Jacques Guiony said he was “not particularly concerned or concerned about the recent announcement.”

“We see no reason to believe that this could be detrimental to the upper middle class, the wealthy class that is the bulk of our customer base,” he told analysts. “Therefore, this does not seem negative to us, if not positive.”

Last week Nicolas Hieronimus, CEO of L’Oreal, which owns brands like Giorgio Armani Beauty and Lancôme, also weighed in.

“We continue to have a lot of trust in China,” he said on a corporate sales call, adding that the promise of “common prosperity” would likely help make the country’s middle class “richer and bigger.” [which] it’s very positive for us. “

A sensitive subject

However, industry watchers have good reason to be concerned.

Less than a decade ago, the luxury industry was hit hard by a huge anti-corruption unit in China. The government eliminated any sign of generous spending among officials, even on luxury goods.
the Bell, launched by Xi in 2012, had a dramatic impact on the industry. In 2013, the mainland Chinese luxury market grew by just 2%, compared with 7% a year earlier, according to Bain.
Some fashion brands were avoided because shoppers were looking for less flashy logos or designs. People “no longer want to just walk around with big LVs,” Patricia Pao, CEO of Pao Principle, a luxury brand consultancy in China, told CNN at the time.
Shoppers queuing to enter a Louis Vuitton store in Nanjing, east China's Jiangsu Province, in August.
Premium spirits brands, such as baijiu maker Kweichow Moutai, also saw sales drop significantly. The company later said the campaign put “unprecedented pressure” on the alcohol industry.

The sector still faces regulatory concerns and was recently hit by a stock sell-off.

It is 53% alcoholic and tastes like fire.  Here's how this liquor brand took over China
During the 2012 anti-corruption crusade, luxury hotels also suffered, as officials called off banquets and conferences. Some five-star hotels at the time even asked to drop one star, hoping the lower ratings would allow them to appear less affluent and retain business, Chinese state media. reported.
It doesn’t help that companies ranging from the booming tech sector to Private education in China lately they have been the target of another Bell, which has been extended to entertainment and live shopping Industries

Pusz, the UBS analyst, said that may have contributed to some concern.

“Because obviously there has been quite a flow of news in the market about various other industries that have been affected by various measures by the Chinese government, I think there was a bit of anticipation on the part of the people, [like]: ‘Okay, what if luxury comes later?’ “, Said.

The time has changed

However, some analysts believe that this crackdown could be different.

According to the latest Bain estimates, buyers from China represent 35% of all luxury sales worldwide. By 2025, the firm suggests it could skyrocket to nearly 50%.

Bruno Lannes, Bain’s partner for consumer products and retail practices based in Shanghai, said his company will not change its forecasts due to the commitment to “common prosperity.”

“It’s too early to tell, but there is no real indication that this has a major impact, I think, on brands,” he told CNN Business.

Lannes hopes that the latest policy may have a “neutral” or “positive” effect on luxury consumption, particularly if revenues rise across the country as a result.

“I think it’s very different from what happened [with] the anti-corruption campaign back then, “he added.

Previously, many luxury brands in China were driven by the tradition of executives or officials giving or receiving gifts, which was a big goal of the campaign, Lannes noted. Now, consumption is largely “by people who consume for themselves or for their families,” he said.

China Sentences Former President Of Alcoholic Beverage Giant Moutai For Life Of Corruption

However, some consumers may already be beginning to contain their spending.

According to LookLook, a consumer research firm that works with luxury brands, 1 in 10 respondents in a recent survey of 100 luxury buyers in China cited the government’s crackdown on excessive displays of wealth as a reason not to they were spending so much these days.

One participant in the study, which was published in September, cited a desire not to “attract unwanted attention,” according to LookLook CEO Malinda Sanna.

“We had never heard that before,” he said. “I think the demand is definitely still there, but they are being cautious.”

– Laura contributed to this report.

Reference-rss.cnn.com

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