Luxury companies are betting that Chinese shoppers who are buying fewer gold bars and lavish gifts for their business dealings will loosen the purse strings after a once-a-decade government change in Beijing.
The leadership transition beginning Nov. 8 will clear uncertainty on political appointees and economic policy, encourage business gifting and boost luxury sales next year, said Kent Wong, managing director at the world’s largest jeweler, Chow Tai Fook Jewellery Group Ltd. (1929)
After a year of slower consumer spending, any increase would be a windfall for Greater China’s 27-billion euro ($35 billion) luxury market. It is the world’s second largest, according to Bain & Co., and benefits from purchases of ostentatious presents for business associates and bureaucrats. More-generous gifting would also aid next year’s sales at companies, including Chow Tai Fook, Cartier watch seller Hengdeli Holdings Ltd. (3389) and LVMH Moet Hennessy Louis Vuitton SA. (MC)
“We expect industry sales to grow more than 10 percent in the second half of next year, driven by pent-up demand for luxury,” said Wong. “When new government officials take office, they will lay out policies and strategies that would clear investment uncertainties.”
Next Year’s Demand
A rebound won’t be immediate. China’s economy expanded at its slowest pace in three years in the third quarter and consumers are still slow to spend. Chow Tai Fook and smaller jeweler Luk Fook Holdings International Ltd. (590) may report earnings declines from a year earlier in their six-month updates in November, according to Citigroup Global Markets Inc.
Sales may be better in the coming year as the political changes help unleash demand, said Luk Fook Executive Director Nancy Wong, who forecasts an increase in gifting in the first quarter of the calendar year.
Hengdeli gained 1.7 percent to HK$2.44 in Hong Kong trading, Chow Tai Fook lost 0.4 percent to HK$9.56 and Luk Fook lost 1.3 percent to HK$19.48.
Gifts are important in Chinese personal and professional life and center around the idea of reciprocity. CLSA Ltd. estimates that about 30 percent of sales in China’s luxury industry come from purchases of gifts bought for business reasons, weddings and other personal celebrations.
Gold bars carved with lucky characters and Swiss watches are popular with business shoppers at Chow Tai Fook and Luk Fook stores. Gifting, which will take until the second half of next year to pick up, will also aid companies such as Swatch Group AG (UHR)’s China partner Hengdeli as well as LVMH, said HSBC analyst Erwan Rambourg.
Optimism for next year is encouraging chains to keep their expansion plans. Chow Tai Fook expects to add about 200 stores in Greater China next year. Luk Fook will open 50 to 60 stores by the end of March, and introduce a line of gold bars engraved with characters symbolizing the coming lunar Year of the Snake.
The Communist Party begins the leadership transition with a congress that starts Nov. 8, with Vice President Xi Jinping probably becoming party head. At a March session of the legislature, Xi will probably succeed Hu Jintao as president. Vice Premier Li Keqiang is set to replace Premier Wen Jiabao.
While the succession plans for those top jobs have already been telegraphed, the transition also involves changes of officials and bureaucrats across the country at state-owned enterprises, government departments and local agencies.
Chow Tai Fook’s Wong expects corporate gift giving will pick up next year after China’s leadership change.
As incomes have risen, China’s shoppers have spent more on high-end brands at home and overseas. One in every four luxury shoppers globally is Chinese, consultancy Bain estimates. Greater China, which includes the mainland, Hong Kong and Macau, is the world’s second biggest luxury market after the U.S., Bain said.
Even as the middle class has grown more affluent, high- profile corruption cases among business and government leaders have exacerbated social tensions ahead of the leadership change. The most public scandal, the March ouster of Chongqing party chief Bo Xilai in an alleged graft and murder scandal, put the spotlight on influence and corruption in public life.
To bolster its image, the government earlier this year restricted its agencies from spending public money on luxury goods and lavish receptions.
According to Bain, China saw the first signs of slowing luxury spending in 2012 amid reduced gift-giving ahead of the government transition and curbs on civil servants spending government funds.
That, coupled with a broad consumer pullback in a weakening economy, curbed demand for pricey brands. Chow Tai Fook said it saw a decline in spending per customer. The U.K.’s largest luxury-goods maker, Burberry Group Plc (BRBY), in September said a slowdown ahead of the leadership transition and a drop in gifting hurt its China business.
Luk Fook, which gets about a fifth of its annual sales from purchases of gifts, has seen that side of the business hurt, said Nancy Wong. That will ease after the transition because “customers will know whom they should be sending their gifts to when things are settled,” she said. Also, the new government may take measures to stimulate economic growth and boost domestic demand, she said.
“Maybe the government-related gifting can start again in the second half of next year, when the officials will have been in their new jobs for a bit longer,” said HSBC’s Rambourg.
The latter part of 2013 will be better for the luxury industry because, as the economy improves “you may have confidence building back,” he said.
China’s economy is already showing some signs of a pickup. Industrial production, retail sales and fixed-asset investment accelerated in September. Economic growth in Asia largest economy will rise to 8.2 percent in 2013 from 7.8 percent this year, the International Monetary Fund estimates.
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