Globalization is over: get ready for another 12 months of luxury local consumption
Key points to remember:
Travel has picked up somewhat, but more in the West than in Asia.
Chinese citizens are expected to continue shopping in their country for most of the next 12 months.
Continue to focus on the locals like the cake; tourists will be the icing on the cake.
I remember when COVID-19 cases started to pile up around the world in March 2020, observers thought it could initially compromise summer 2020 travel and then the holiday season. Now we have 18 months into the outbreak and it’s starting to be pretty clear that long-haul travel won’t be operational until late 2022 or early 2023. According to IATA statistics, July 2021 showed a significant improvement over June 2021, but international passenger demand was still down 74% from July 2019 and domestic travel down 16%. While this is progress for sure, it’s not exactly impressive and if luxury demand correlated with long-haul travel as much as some thought, the industry would clearly be in dire straits right now.
Also, looking by region, it appears that domestic travel has intensified in the United States, some intra-regional travel has taken place in Europe over the summer.
Two weeks ago, as the United States lagged all other G7 countries in terms of vaccination rates, the Biden administration announced a host of measures to increase the number of vaccines. Theoretically, this could have meant that the United States would remain very difficult to access for most non-American citizens for the foreseeable future. The good news here is that the country is finally opening up to vaccinated travelers – in Europe, the UK and China – from November. If you are based in New York like me and have never been to Ellis Island or the Empire State Building, this is your window! Overall, it looks like Western markets will recover quickly from a travel perspective.
In Asia, the story was somewhat different, with South Korea and Japan seeing a strong rebound in COVID-19 cases over the summer. Singapore and South Korea are the latest countries looking to ditch a virus elimination strategy and move to a strategy where you learn to live with it, but it can certainly lead to some volatility, and it’s not like if travel trends rebounded overnight. Finally, in mainland China, several regions were affected by the Delta variant this summer, the last one being in the southeastern province of Fujian and these epidemics are treated very quickly through effective containments. Altogether, this also means that luxury consumption, which has become local for 18 months, will remain predominantly local over the next year.
With the Chinese administration targeting “common prosperity,” many believed the authorities might end up taxing luxury goods. In my opinion, the opposite will happen. In recent years, the administration has facilitated local purchases with lower import taxes, lower VAT rates and the rapid development of Hainan as an alternative to shopping in Europe or Hong Kong. In the future, it is likely that more duty-free hubs will emerge in China, as the Shanghai government announced its support for such initiatives last week.
Luxury consumption tends to be local after a phase of discovery abroad. This was the case for Japanese and Korean luxury consumption, in particular with sales mainly abroad moving towards sales mainly national. The fact that the world is closed and the development of infrastructure to ensure that citizens buy from their homes every time the world reopens should ensure that Chinese consumers primarily spend at home, even when COVID-19 is, hopefully. , become a vague memory.
The world going local doesn’t necessarily hurt luxury sales as we saw in late 2020 and so far this year. It does mean, however, that sellers will need to continue to develop an intimate knowledge of what local customers like and see them as key target consumers. And when the tourists return, they will be the icing, not the cake.
Erwan Rambourg is a leading analyst covering the luxury goods and sporting goods sectors. After eight years as Marketing Manager in the luxury industry, notably for LVMH and Richemont, he is now Managing Director and Global Head of Consumer & Retail equity research. He is also the author of Future Luxe: What’s Ahead for the Business of Luxury (2020) and The Bling Dynasty: Why the Reign of Chinese Luxury Shoppers Has Only Just Begun (2014).