Flavio Cereda, Investment Manager, Luxury Equities at GAM Investments,
shares his latest insights on the luxury sector, following a 10-day visit to two
major cities in China.

“It was the best of times, it was the worst of times.” By opening his novel with an array of paradoxes, Charles Dickens lays the foundation for a story that seeks to reveal the wild complexities of history and modernity. Themes of hope and despair are prevalent, as Dickens begins to develop the central theme of duality. Similarly, the luxury sector mirrors this duality, as denoted in a previous article, ‘The luxury sector in the post Covid era – Polarisation’. The luxury market has shifted dramatically, featuring the rise of Asia and the decline of Europe. Luxury brands are experiencing a polarisation effect, where stronger and weaker brands are moving in opposite directions.

In September I spent 10 days in China meeting luxury companies and industry contacts; China is an important market featuring fast growth that the luxury industry relies heavily on, and Chinese luxury consumption is expected to reach 35 to 40% of the world’s total by 2030. During the trip, I visited two major cities, Hong Kong and Shanghai.

Hong Kong

Hong Kong accounted for 9% of global luxury spending in 2016 to 2017. Today I estimate it to be around 2%, which translates to a drop from EUR 23 billion to EUR 8 billion. In contrast, my best guess for Milan, as a benchmark, is an increase from 2% to over 4% share over the same time frame.

The stores on Canton Road used to have the highest sales densities in the world, but this is most certainly no longer the case. There is now an oversupply of retail space in the city in my opinion, leading to some closures, with more expected to follow. Currently, Hong Kong’s luxury market primarily caters to local wealthy clientele – but they are mobile by nature. Aspirational customers travel abroad for vacations. Comparing August 2024 with August 2023, decreases in value of sales were observed in the majority of the retail outlets, with a significant decrease for jewellery, watches and clocks, and valuable gifts (-24.0%). The city has to reinvent itself, and it is doing so. It can no longer survive solely as a shopping destination; it needs to evolve into a cultural, gastronomic and entertainment centre.

The long-established behemoth malls are still there, but the traffic has decreased by 20% to 40%, depending on the location, as mainland visitors are no longer keen to visit. There are fewer visitors, with arrivals in 2023 recovering to just 60% of the levels in 2018. A new concept is needed, in my view, which for me is best exemplified by the relatively new K11 MUSEA mall in Kowloon, which features edgy brands, restaurants, bars, art and a beautiful waterfront location. Other malls are incorporating art exhibitions, auction houses, Michelin star restaurants and music events to attract visitors.

Some brands have established enormous stores in Hong Kong, which is and will remain a challenge for them. Looking forward into 2026? I believe Hong Kong can hold on to its 2% share of global luxury shopping, but no more.

Shanghai

Shanghai has changed significantly since my last visit, The metropolis is sadly far less international now and much more Chinese, with limited English proficiency among those I met outside of management. I was in Shanghai in the week when a number of measures to aid consumption were announced (the ‘stimulus’ measures), and I was able to talk to local experts to have a sense of whether the stock market excitement was really justified (spoiler: only to a point so far).

In terms of estimated market share, the city has grown from around 2% in 2016-2017 to 5% today, similar to Milan and now more than double that of Hong Kong.

Chart 1: Luxury spend in China versus luxury spend by Chinese

(percentage of global total spend)

Source: GAM Investments, October 2024. For illustrative purposes only. Forecast is based on estimated figures which refer to future performance and such forecast is therefore not a reliable indicator of future performance. There is no guarantee that forecasts will be realised.

Luxury spending in China differs significantly from the spend of the ‘Chinese Cluster’. I estimate the former at 23% of global total this year, versus 33% to 34% for the latter. This is because around one-third of spending now takes place abroad, mostly in Asia (with Japan being the top destination due to recent foreign exchange market moves). This is a far cry from 2019 when two-thirds of spending took place abroad, but it is slowly ramping up again in the post-Covid era. On a year-over-year (YoY) basis, the common estimate is that luxury spending in China is down by 15% to 20%. Some brands are down -50%, while others are up in the mid-teens, with Miu Miu (a subsidiary of Prada) being the outlier at over +50%. This decline is due to soft traffic, and although conversion rates are described as okay the impact is meaningful and clear. It was hoped that Q3 would show a reversal in trend, but this is not the case. I think Q4 will show better metrics but still negative.

Reasons for the decline in luxury spending

Why is China’s luxury spending down YoY, and why do we think it will be flat next year? A meaningful number of wealthy Chinese nationals have left the country. More wealthy Chinese are able to travel and opt to shop abroad where prices are lower. Many brands have been too greedy on pricing, with increases of over 50% in the past two to three years being too much for the market to absorb. The local consumers, including high-net-worth individuals (HNWIs), suffer from a clear lack of confidence in the immediate future. This is due to poor returns from stock market and real estate investments, high youth unemployment and general uncertainty about the future, which was not the norm before. This lack of confidence is absolutely key and means traffic metrics are down across the board. To be clear, consumers have plenty of money (excessive savings if anything) – it is the unwillingness to spend on ‘expensive things’ that is an issue at this time.

As seen elsewhere, consumers appear to be more willing to spend on travel, wellness and experiences. This is where malls need to spruce up, and fast. ‘Luxury shaming’ is a thing – visibility is not always preferred, and logos are not the best way to sell. However, in my view, that drives the choice of brands rather than overall consumption. Additionally, brands need to innovate: the way that selling worked five years ago no longer does.

The Chinese consumers have changed and not all brands have understood this. Management needs to be local, or if European, they need to understand the Chinese mindset well – two years in China does NOT make you an expert.

The one good thing for China-based malls is that there is growing awareness that service is far better than in Europe. Many customers value their VIC (very important customer) status locally, and this will drive their choice of location. You purchase abroad because it is a lot cheaper to do so, or for the added status element for some.

Hope and despair

We need to distinguish between China spend and Chinese spend – both matter as the former will impact profitability of brands disproportionally, given that China margins are usually the highest globally. I believe the confidence issue is not going away anytime soon. The measures announced so far will help food and beverage, possibly duty-free shopping in Hainan5 and lower ticket spend. However, the resumption of luxury spend on a more significant magnitude goes hand-in-hand with reassurance on the real estate front, of which we have seen little so far.

2025 will have very easy comparisons but will likely end up flat. I think 2026 is the year when growth is most likely to resume. That said, I expect certain brands (with HNWI-focus, strong momentum and lower visibility etc) continue to grow double-digit in China. The gap between outperformers and underperformers is now huge and will stay that way. The market is more difficult than before, but this just calls for greater research.

I am not assuming a meaningful recovery in Chinese luxury spend anytime soon, but rather a stabilisation. As a result, many of the core holdings in our strategy are underexposed to that cohort, as much as you can be in luxury.