The Crackdown Conundrum
What China's check on excessive wealth means for luxury companies.
On August 17th, Chinese President Xi Jinping announced an impending crackdown on “excessive wealth” within mainland China, sending stocks across all sectors tumbling. Hardest hit were luxury stocks, whose profits have historically relied heavily on the power of Chinese luxury consumers. According to Bloomberg, luxury stocks fell 12.85% over the course of a week following Xi’s shocking declaration, with LVMH and Kering losing €30 billion and €10 billion in market capitalization, respectively.
Mega-conglomerates like LVMH, Kering, Capri, and Tapestry have long found their largest and most profitable consumer bases in China. Even amid the COVID-19 pandemic, Chinese consumers rebounded faster than nearly every other consumer demographic. While Europeans and Americans remained in lockdown, struggling to regain their confidence and match their previous purchasing power, the Chinese returned to luxury shopping with force.
In its Q2 2021 Letter to Shareholders, published before Xi’s unnerving announcement, LVMH posted record-breaking numbers, not only beating their pandemic-ridden 1H 2020 results, but smashing their incredibly impressive pre-pandemic 1H 2019 numbers, too. Of its amazing €28.7 billion in revenue for 1H 2021—up 53% compared with the same period a year prior—Asia, excluding Japan, accounted for the largest percentage of the Group’s revenue, at a whopping 38%.
Luxury stock performance since Xi's announcement. From top to bottom: Capri, Kering, LVMH. Credit: Yahoo Finance.
Kering posted similarly strong numbers. Of its more than €8 billion in revenue in 1H 2021, 42% was attributed to the Asia-Pacific region—again, excluding Japan—amounting to a 68% increase from a year prior. This monumental uptick demonstrated the first signs of a massive post-pandemic rebound, about which luxury conglomerates were undoubtedly optimistic. However, in the wake of Xi’s announcement, investors fear this rebound is unlikely to continue as China’s top luxury buyers—those who buy in excess of $100,000 in personal luxury goods each year—face being slapped with exorbitant taxes designed to promote “common prosperity.”
For the time being, luxury’s main players have no choice but to sit and wait. Without taxes being officially imposed and with no concrete evidence of Chinese consumer slowdown as of yet, major luxury brands have no way of determining just how severely Xi’s plans will affect their businesses. However, Xi’s announcement should serve as a much-needed wake-up call to luxury companies who have, for too long, allowed their business models to rest on the strength of Chinese consumers. LVMH, Capri, and the like should use this announcement as an opportunity to explore both new and underserved markets, pursuing untapped purchasing power that could help mitigate the Chinese fallout.
Ultimately, though we don’t yet know the scale of Xi’s plans, China's suddenly anti-capitalist messaging is cause for concern across all industries. This plan to redistribute wealth affects not just the luxury market, but the wider economy, too. Unfortunately, there is no way for luxury companies to gauge the damage to their business model at this stage. However, in the meantime, luxury’s major players should treat Xi's announcement as a warning, shifting their business models to accommodate for the uncertainties that lay ahead, while making inroads with emerging markets that could help solve the China problem and provide luxury powerhouses additional revenues well into the future.