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Luxury Goods And Status Symbols In Trouble In China

Tyler Durden's picture




 

Submitted by Pater Tenebrarum via Acting-Man blog,

A friend recently mailed us an article from the Hong Kong Standard which describes how extremely high retail shop rents in Hong Kong can no longer be paid even by retailers of luxury brands.

Not only is this testament to the fact that Hong Kong’s real estate bubble has gotten out of hand quite a bit, but the waning demand for luxury goods is also highly interesting from a sociological and economic perspective. As the Standard reports:

Business is getting tougher for Hong Kong’s retailers with the value of total retail sales dipping 1.6 percent in the first half of 2015 from a year back, according to the Census and Statistics Department’s latest data.

 

Valuable gifts, including jewelry, watches and luxury goods, were hardest hit, with sales falling for 10 consecutive months. Sales value slumped 10.4 percent in June compared with a year earlier, despite efforts by several luxury brands – including Italian fashion house Prada – to boost sales by cutting prices. Squeezed by slimmer pickings in Hong Kong and the mainland market, top global luxury brands are looking to renegotiate store rents to cut costs.

 

The latest to plead for landlords’ mercy was French luxury goods conglomerate LVMH. Revenue from its signature brand Louis Vuitton slumped 10 percent year- on-year in Hong Kong, Macau and China for the first half while Europe and the United States saw stronger sales of fashion and leather goods. It is also planning to close a directly operated shop of its biggest watch brand, Tag Heuer, in Causeway Bay.

 

[…]

 

British high-end fashion house Burberry, which has 16 shops in the SAR, said it may trim its local store network and negotiate for lower rents after the Hong Kong market, which accounts for about one-tenth of the brand’s total sales, saw a double-digit percentage fall in sales over the period.

 

Meanwhile, Gucci owner Kering said it will consider closing its Hong Kong and Macau outlets if rents stay high.

 

[…]

 

Waning sales and whopping rents have sent Italian fashion label Baldinini packing. It shut its first and only flagship boutique in Hong Kong after just four months in operation, ending its three- year contract.

 

In June, visitor arrivals from the mainland were down 1.8 percent year- on-year. Adding to the woes of luxury goods vendors are the changing spending patterns of mainland visitors, who are now looking for more mid-priced products.

We don’t believe this is happening because prospective clients can no longer afford these goods. While Chinese consumers of ostentatious luxury items have probably taken a hit from China’s economic weakness and its wobbling real estate and stock market bubbles, they can surely still afford to buy Gucci bags and Tag Heuer watches. We believe that they rather no longer want to be seen adorned with such items.

Typically a decline in the desire to own products conferring and announcing one’s high social status happens close to, or hand in hand with fairly severe economic downturns. People no longer want to stand out as rich when times are getting tough. This effect can be observed in numerous areas, even in the colors and shapes people choose when buying cars. The colors tend to change from loud ones such as red, to inconspicuous/conservative ones such as gray and brown. Car shapes tend to go from sportive and sleek to boxy and inconspicuous.

Of course there is an additional reason for this development in China as our friend reminded us:

"Your point they no longer want to be seen with them is especially acute today with mainland Chinese, who are (were) the big buyers of luxury goods, property and services here.

 

[…]

 

The mainland’s corruption clampdown is deterring a lot of PRC citizens from exhibiting any wealth these days, a continuing crackdown that has lasted far longer than any Hong Kong businesses suspected and which has changed the dynamics of mainlander’s inward and outward spending."

To this we would point out that China’s relentless crackdown on corruption is informed by the same "social mood" that is driving the reluctance to buy luxury items, and is driving capital outflows from China as well as the increasing unwillingness of businesses to invest. These developments are simply manifestations of an environment that has soured: They signal that China’s entire society is increasingly infested with a bearish outlook.

Recently China’s government has managed to halt the decline in the Shanghai stock market at what has reportedly been a huge cost. Zerohedge has published an article on a Goldman Sachs estimate of the amounts of money thrown at the market through government intervention. Apparently nearly 900 billion yuan have been spent merely to keep the market from cratering further.

The Shanghai Composite Index – a triangle has now formed in the index in the wake of unprecedented government intervention. Unfortunately, triangles are usually trend continuation formations – click to enlarge.

Our hunch is actually that this market will soon resume its decline in spite of the government’s frenetic antics. If China’s social mood has indeed turned bearish, nothing will keep the market from falling further.

The Social Mood is Changing Everywhere

In the US and Europe, sales of luxury goods appear to be in trouble as well. As a recent report in the Washington Post noted:

"[…] experts say the penchant for more discreet luxury goods is also partly being fueled by the simmering political debate about income inequality, which is leaving some big spenders worried that it is tacky to carry a purse that practically announces its four-figure price tag.

 

“We clearly can see that this is something where people are not wanting to show their wealth quite so conspicuously,” said Sarah Quinlan, who studies consumer spending patterns as the head of market insights for MasterCard Advisors.

 

This new attitude has helped create a rough patch for some of the titans of the luxury retail industry. Louis Vuitton, Gucci and Prada ascended as icons of global wealth as their $5,500 handbags and $695 silk scarves became status symbols from New York to Shanghai.

 

But today’s luxury shopper has soured on such obvious signs of affluence, in particular the logo-emblazoned goods that these brands became known for as they aggressively opened stores in emerging markets and in smaller cities in the United States and Europe.

 

“This is really what keeps me up at night," Johann Rupert, the chief executive of Richemont, which owns Cartier and other big luxury brands, said at a business conference last week. “Because people with money will not wish to show it. If your child’s best friend’s parents go unemployed, you don’t want to buy a car or anything showy."

We certainly wouldn’t want to be in the shoes of a manager of a luxury brand company right now. However, what is important here from our perspective is what this change in attitudes is saying about society as a whole and what its likely impact on financial markets and the economy is going to be. Luxury goods are typically doing best during bull markets, when people are suffused with optimism and are actually eager to show of their riches and success.

When this mood changes, it is a sign that the bullish trend in “risk assets” is likely to reverse. In fact, it signals a decline in people’s willingness to take risk more generally, which obviously has negative implications for the economy as well.

Conclusion

This is a trend one should definitely keep an eye on. It represents yet another subtle warning sign for the economy, stocks and other risk assets.

 

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Sun, 08/09/2015 - 16:52 | 6407618 GMadScientist
GMadScientist's picture

What's that? Demand is cratering for US politicians, spots in American private schools, and US real estate? I think not.

Sun, 08/09/2015 - 17:23 | 6407713 Stuck on Zero
Stuck on Zero's picture

I like your insinuation.  Politicians are luxury goods and to display your "owned" politician is a sign of wealth and prestige.

Sun, 08/09/2015 - 17:42 | 6407771 Publicus
Publicus's picture

It's due to the curruption purge, if you actually keep up with Chinese news you'd know it instead of fantasizing this article.

Sun, 08/09/2015 - 20:13 | 6408185 Fahque Imuhnutjahb
Fahque Imuhnutjahb's picture

Hai Ding Doh

Sun, 08/09/2015 - 21:17 | 6408385 Laowei Gweilo
Laowei Gweilo's picture

Why are you trying to speak Vietnamese?

Sun, 08/09/2015 - 16:53 | 6407619 KnuckleDragger-X
KnuckleDragger-X's picture

Tsk, how will people know your 'special' without a Rolex and a Ferrari? This kind of thing has happened before and for the same reason that conspicuous consumption tends to be...conspicuous......

Sun, 08/09/2015 - 17:13 | 6407675 Winston Churchill
Winston Churchill's picture

iWatches and Tesla's.

Oh wait....

Sun, 08/09/2015 - 17:16 | 6407684 Ralph Spoilsport
Ralph Spoilsport's picture

There are a lot fewer of those painfully loud Fountain and Donzi cigarette type boats screaming around on the upper Chesapeake Bay. The marinas selling them Hi-Test fuel can back that up. Can't get more conspicuous than being seen in one of these contraptions since everybody on shore for miles around has to stop talking until the damn things get far enough downrange. A lot of these boats are from New Jersey and are owned by bankers, other financial types, and of course, lawyers. 

Sun, 08/09/2015 - 17:21 | 6407706 KnuckleDragger-X
KnuckleDragger-X's picture

There's always a battlecruiser sized yacht..... http://www.usatoday.com/story/money/business/2013/04/13/lurssen-yacht-az...

Sun, 08/09/2015 - 17:27 | 6407720 Handful of Dust
Handful of Dust's picture

At least the Chinese don't need a pink plastic watch Bit strapped to their skinny arm to tell them when to get up and move their ass or what their heart rate is.

China's obesity rate is like <1%.

 

Maybe aapl forces them to wear an 'efficiency arm wrist band' to monitor how many widgets they assemble for The Man in Merika.

 

 

Sun, 08/09/2015 - 22:49 | 6408609 Totentänzerlied
Totentänzerlied's picture

Guess again.

China has one of (if not the) highest growth rates of diabetes and obesity in the entire world. It is only a matter of time.

Sun, 08/09/2015 - 23:06 | 6408646 sun tzu
sun tzu's picture

Chinese obesity rate of 3% going to 4% is a 33% increase. US obesity rate goes from 35% to 40% is a 14% increase. That can be a bit misleading?

Sun, 08/09/2015 - 17:28 | 6407730 Ralph Spoilsport
Ralph Spoilsport's picture

What? No missile defense system?

There's still plenty of what used to be considered large yachts in the area but those are owned by people from DC. They mostly stay tied up in their slips and serve as discreet places to party.

Sun, 08/09/2015 - 17:32 | 6407745 New_Meat
New_Meat's picture

"They mostly stay tied up in their slips ..."

aground on gin bottles we used to say ;-)

Sun, 08/09/2015 - 16:53 | 6407625 Sudden Debt
Sudden Debt's picture

Welcome to the world. Retail in Europe is in way bigger trouble then that.

 

 

Sun, 08/09/2015 - 17:12 | 6407672 Winston Churchill
Winston Churchill's picture

Please tell, is Harrods going bust or just the serfs Malls.

Sun, 08/09/2015 - 17:18 | 6407690 arbwhore
arbwhore's picture

LOL! Harrods is for serfs. Its a trinket shop only visited by obese tourists from Milwaukee.

Sun, 08/09/2015 - 17:39 | 6407765 piratepiet2
piratepiet2's picture

and for arb whores

Sun, 08/09/2015 - 17:41 | 6407770 Winston Churchill
Winston Churchill's picture

Shows how long since I graced its doors.

Fortnums then.

Sun, 08/09/2015 - 17:14 | 6407673 kareninca
kareninca's picture

Their leaders are terrified because they see that they have created an ecoonomic trainwreck, and they aren't sure what the economic outcome will be but they know it will be bad.  So they are having a political purge which is barely making our press, but which has scared the hell out of officialdom (since their "corruption" purges involve jail time and executions).  I don't think the "mood" of the ordinary Chinese person has caught up to this reality, any more than the mood of the ordinary American has; they'd love to still be buying flashy crap and "gifts".  The Chinese government is trying to get out ahead of this in order to save its own neck.

Sun, 08/09/2015 - 17:19 | 6407697 Antifaschistische
Antifaschistische's picture

but the obsession with name brand items covers all economic classes in China.   It's a tulip fad behavior.   I'm sure ten years from now those girls who make the equivalent of $5.00 per/hour will look back and realize how foolish it was for them to save up for a $500.00 purse.   But, we American's are just as foolish...I'm amazed at the number of people I see now driving cars that are as much as 2x their anual income...thanks to 8 year financing.   At least a purse or a watch doesn't cost thousands of dollars a year to maintain.

 

Sun, 08/09/2015 - 17:20 | 6407702 arbwhore
arbwhore's picture

Credit must be drying up as most luxury goods are purchased by people who really cannot afford them.

Sun, 08/09/2015 - 17:30 | 6407742 Ajax_USB_Port_R...
Ajax_USB_Port_Repair_Service_'s picture

I drive a totally de-badged Lexus. De-badging the front was not easy, as it required some custom work. It was worth it. Don't need a target on my back in 'certain areas' I travel.

Sun, 08/09/2015 - 20:31 | 6408263 Mentaliusanything
Mentaliusanything's picture

Its a Toyota!, Gay Boy (not that there is anything wrong with that)

Mon, 08/10/2015 - 17:14 | 6411472 Abbie Normal
Abbie Normal's picture

There is a certain irony in paying more for an overpriced Lexus and then debadging it so people think it's a Toyota, which content-wise, it really is.

Sun, 08/09/2015 - 17:39 | 6407766 Peter Pan
Peter Pan's picture

The only luxury good that will always be bought is gold.

Sun, 08/09/2015 - 17:41 | 6407768 erk
erk's picture

There is not much more socially damaging thing in the economy than unafforfable rents, be it commerical or residential. Everyone needs to live and work somewhere. If business can't afford rents, then that costs jobs.

Mon, 08/10/2015 - 09:16 | 6409514 The Ingenious G...
The Ingenious Gentleman's picture

In Hong Kong's case it's complicated. These luxury goods, watch and gold retailers drove rental prices up so high that no local restaurants and shops that had been in these areas for decades could afford them and were forced to close down. That destroyed the most popular areas of Hong Kong for local people. They were simply taken over by European retailers and Mainland shoppers. A lot of people think these retailers and their customers ruined Hong Kong. So there is a fair amount of schadenfreude when Hong Kong people hear these retailers crying about high rents.

There won't be many tears shed for Hong Kong landlords when they have to start offering 50% rent cuts.

Sun, 08/09/2015 - 17:56 | 6407802 Normalcy Bias
Normalcy Bias's picture

No worries, nothing to fear from a China collapse.

They can solve solve their problems by throwing away a few hundred million extra men while kicking the shit out of their neighbors.

 

Sun, 08/09/2015 - 17:57 | 6407808 yellowsub
yellowsub's picture

It wouldn't surprise me, it appears the Chinese are heading to Japan to buy their luxe goods.

Sun, 08/09/2015 - 17:57 | 6407809 hmmmm
hmmmm's picture

I'm having trouble selling an art piece entitled "Spot on the Wall" by the artist Hoo Flung Poo; the afluent in China are nolonger hitting the ask

Sun, 08/09/2015 - 18:14 | 6407844 piratepiet2
piratepiet2's picture

just say Hoo Flung Poo is a Chinese dissident artist who is decrying the lack of freedom of expression in China.  The CIA could possibly be interested in setting up covert funding.

Sun, 08/09/2015 - 19:33 | 6408086 Normalcy Bias
Normalcy Bias's picture

Hint: Just use a Campbell's Soup can next time...

Sun, 08/09/2015 - 23:01 | 6408634 What you talkin...
What you talkin about Willis's picture

"Brown Spots on the Wall" had a much better compostion then "Spot on the wall" IMO.  I belive "Spot on the wall" was from an earlier period of Flung Poos life. 

Sun, 08/09/2015 - 17:58 | 6407811 TimmyM
TimmyM's picture

Yes, but are skirt lengths dropping?

Sun, 08/09/2015 - 18:43 | 6407948 Chuck Knoblauch
Chuck Knoblauch's picture

China is still communist, zh.

Sun, 08/09/2015 - 18:55 | 6407984 ozzzzo
ozzzzo's picture

America is still communist too. What is your point?

Sun, 08/09/2015 - 21:19 | 6408389 roddy6667
roddy6667's picture

China hasn't been communist since 1978. News flash for the factually retarded. Mao Zedong is dead. He died in 1976 and most of his policies were cancelled or reversed. A country that has private property, free enterprise, foreign companies operating freely, freedom to travel, private banking, free markets for investments, is not communist by anybody's definition. China uses the term "socialist with Chinese characteristics".

Of course, the illeterates who still regurgigate 1956 Cold War propaganda fed to them by their handlers will disagree.

Sun, 08/09/2015 - 21:34 | 6408426 reader2010
reader2010's picture

China had never been communist since the beginning and that's what Stalin told FDR that the Chinese communists were fake or "manmade butter" in his own words.

Sun, 08/09/2015 - 21:52 | 6408467 vincenze
vincenze's picture

If I were a rich Chinese, I would buy a few Italian garments and ask my tailor to create copies using my favorite fabrics.

Essentially, when you buy an expensive garment, you still have to send it for alterations to make it fit you nicely. In the USA, alterations are expensive; not to mention bespoke tailoring.

Tailors in China are cheap.

 

Mon, 08/10/2015 - 01:07 | 6408826 TeethVillage88s
TeethVillage88s's picture

What was HK Gold and Jewelry in 2014?? Well what was 2013? Trends??

Looks like Supply for 2014 was 61 Metric Tons.

http://www.gold.org/supply-and-demand/gold-demand-trends#full

Table 7, Gold Demand By Country for 2014, Tons:

Greater China, 1,051,
China, 974,
Hong Kong, 61,
Singapore, 22,
Taiwan, 16,
Indonesia, 63,
India, 811,
Malaysia, 19,
Thailand, 107,
Vietnam, 67,

Table 11: Global Historical data for gold demand(World Gold Council)
Year Gold Demand, Type Demand Jewelry, Tons Metric,

2005, 2,721,
2006, 2,301,
2007, 2,425,
2008, 2,306,
2009, 1,816,
2010, 2,052,
2011, 2,091,
2012, 2,136,
2013, 2,671,

Mon, 08/10/2015 - 01:53 | 6408908 starman
starman's picture

Retail?  What's that?  I'm only interested in coctails.

Mon, 08/10/2015 - 06:48 | 6409138 confidant64
confidant64's picture

I hope they will stop buying good wines as well, bringing them down to a decent level for the rest of us, who at least understand whats in the glass.

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