China’s ‘Zero-Covid’ Policy Poses Renewed Threat to Luxury

A month into a strict lockdown that has seen Shanghai’s 25 million residents largely confined to their homes, people are growing increasingly impatient in China’s most international city. Despite restrictions which have prompted food rationing, supply chain disruptions and concerns for stalled economic growth, the authorities have yet to divulge any plans for an exit strategy.

Covid-19 cases recorded outside quarantine centres are down to around 200 per day but the goal of reaching zero transmission in the community remains stubbornly elusive. Even if restrictions are loosened within the next few weeks, as many hope, the city remains scarred by the events of the past month.

People are feeling both weary and anxious from a lockdown that was initially slated to last just four days. More frustrating for some than the inability to leave home for weeks on end has been the breakdown of logistics and delivery services, leaving people struggling to access food, medicine and basic necessities. In such an environment, the thought of shopping for fashion has either been impossible or undesirable for many residents.

“I was talking to a friend in Shenzhen and we were both saying we’re focussed on things we need for home. She said to me, ‘Outside of what my child needs, I’m not going to casually spend even one cent now.’ She’s afraid that the economic situation will get worse,” says Shanghai-based teacher and mother-of-two Yang Zengdong.

“People are feeling really unsettled. My friends in [other Chinese cities] have heard about my experience and they’ve bought freezers to stock up on food. Now a lot of households [around the country] are preparing for their situation to get worse.”

Lockdown’s negative impact on consumer sentiment has not been limited to Shanghai. It is a frightening example of mismanagement for people across China who worry that if such a debacle can strike the country’s largest metropolis, other cities may also fail to cope with a widespread outbreak of the highly contagious but less severe Omicron variant under the government’s ‘zero-Covid’ policies.

In Beijing, there have been reports of panic buying of essentials this week after a new outbreak prompted the government to start mass testing nearly 20 million residents of the capital.

With consumer spending down, retailers are feeling the pinch. In March, which coincided with a week-long lockdown in China’s tech capital Shenzhen, the National Bureau of Statistics reported a decline in national retail sales of 3.5 percent compared to a year earlier. The decline is likely to be even more apparent in the soon-to-be-released April figures as tourists who usually flock to Shanghai from around the country to shop for fashion and other discretionary goods have been unable to do so.

Recent speculation that the latest lockdowns would boost the fashion e-commerce sector like they did in 2020, has proven moot in the context of Shanghai’s lockdown, where a logistics breakdown has hindered even the online purchase of essentials. One of China’s top livestream sellers Li Jiaqi has reportedly reduced his sessions by half, as accessing products to sell from his base in Shanghai proved impossible. His viewership is also reportedly down by half.

Given the broader economic environment, even if logistics providers are able to quickly recover service to Shanghai and avoid similar disruptions in future lockdowns, questions remain about short-term future demand for non-essential categories like fashion and beauty among certain consumer demographics.

Short-term dent to China luxury sales?

In recent quarterly earnings calls, the world’s largest luxury conglomerates and brands reported that the Shanghai lockdown’s closure of stores had dented sales in their China units, though they expect the impact to be short-lived.

“We’ve seen [in previous lockdowns that] once this is over demand comes back to stores as prior to lockdowns. There’s no reason this shouldn’t be the case this time,” said LVMH’s chief financial officer Jean-Jacques Guiony. “We are reasonably hopeful that this should be a moment in the history of luxury in China and not more than that.”

Hermès’ executive vice president for finance Eric du Halgouet sounded similarly confident when announcing the Birkin-maker had made a strong start to the year in China until restrictions prompted some store closures, including three in Shanghai.

“We are confident and hope that these stores in Shanghai will reopen quickly — in any case the fundamentals are excellent in China,” he said.

Kering’s chief financial officer Jean-Marc Duplaix seemed to agree with du Halgouet’s assessment that the fundamentals of Chinese demand were intact, though he noted that virus-related restrictions, notably in Shanghai, were still “extremely difficult.”

We’ve been locked up for quite a while and people want to go shopping… I don’t think the mentality of Shanghai’s luxury consumers has been [fundamentally] changed by this experience.

Prior to the new round of lockdowns, Euromonitor data showed China’s personal luxury market reached a market value 90.76 percent higher in 2021 than pre-pandemic levels in 2019, boosted by reshored spending from luxury consumers unable to shop abroad, with additional growth of 14.67 percent tipped for 2022. The research firm was unable to provide an update on those figures based on any impact of the new restrictions.

According to market observers like luxury brand consultant Leaf Greener, any negative impact on consumer sentiment for most locals will be short-lived and pent-up demand or even more enthusiastic ‘revenge spending’ might provide a momentary boost.

“I think after Shanghai’s reopening people are going to be the same. We’ve been locked up for quite a while and people want to go shopping; they want to go to parties. I don’t think the mentality of Shanghai’s luxury consumers has been [fundamentally] changed by this experience,” she said

Yet the confidence that observers seem to share for a quick rebound of luxury sales in the China market might only be justified if Shanghai’s lockdown were an isolated incident. But it is not.

Long-term impact on consumer confidence

Analysis from independent economic research firm Gavekal Dragonomics shows that, as of April 22, 57 of China’s top 100 cities by GDP had lockdowns or movement restrictions in place which suggests the future impact of 2022 lockdowns on the Chinese economy will be greater than some fashion brands may be expecting if they are focused only the one getting most of the media attention — Shanghai’s.

The official GDP growth target the Chinese government set for 2022 of around 5.5 percent already looks shaky. Economists at Allianz have cut their forecast for China’s GDP growth from 4.9 percent a month ago, to 4.6 percent last week.

If Shanghai’s lockdown lasts for two months, and other large cities are also affected, they say China’s 2022 GDP growth would slow to 3.8 percent, and in a worst-case scenario where the economy suffers a similar shock to that experienced in the first quarter of 2020, it would grow by only 1.3 percent this year.

Maybe for the first time in China, [consumers] don’t have confidence that better days are coming.

“Looking at when Shanghai’s lockdown will end is not the right milestone, because this is not about the lockdown. It’s about consumer confidence,” says Pablo Mauron, China managing director and partner at Digital Luxury Group (DLG), who added that, unlike the situation in 2020, the concern people have in 2022 is much more focused on economic suffering than health concerns.

Mauron raises the possibility that “maybe for the first time in China, [consumers] don’t have confidence that better days are coming. [China’s] constant optimism… has been the one of the main consumption drivers.”

Indeed, the severity and unpredictable nature of the current Shanghai lockdown has caused concern among Chinese that — no matter what the cost to the economy — the authorities will doggedly stick with their zero-Covid strategy and introduce more lockdowns around the country.

Political analysts suggest that one reason for the unwavering approach is that President Xi Jinping has staked a large part of his legitimacy as leader on his success controlling the coronavirus. No loosening of China’s zero-Covid policy is expected before the Communist Party National Congress in November where the announcement is likely to be made that he secured an unprecedented third five-year term in office.

“Judging from the tone of the government, this will be the new normal for this year. The government is not going to [follow a] ‘live with the virus’ [approach like other countries], they are going to take very proactive control of the virus so they don’t sacrifice people’s lives. The head of the CDC (Centre for Disease Control and Prevention) in China has said we can expect this for the rest of the year,” said Jason Yu, general manager of Kantar Worldpanel China, though he and others are hopeful that the experience of Shanghai will mean future city lockdowns are implemented earlier and can be lifted within a shorter time frame.

All eyes on middle-class customers

However mild or severe China’s future economic pain may be due to its pursuit of zero-Covid, the consumer cohorts that will be disproportionately affected are low and middle income earners.

“People who are earning less will really struggle and they will look to downgrade their product choices and brand choices,” Yu said, with non-essential categories like fashion and beauty among the first to feel any impact of belt-tightening.

As China’s number one apparel brand by market share, Uniqlo is a global retailer that many use as a bellwether for consumption trends in the world’s largest fashion market.

Uniqlo-owner Fast Retailing, said earlier this month that it expects declines in revenue and profit in its Greater China unit in the second half and whole fiscal year 2022, a poor signal for global brands dependent on China for a significant percentage of business.

In 2021, China’s fashion market overall (both non-luxury and luxury segments) had exceeded the pre-pandemic market value in 2019 by 12.6 percent, according to data from Euromonitor, with expectations it would grow less than one percent this year. However, these figures were forecasted before the current spate of lockdowns, meaning even that minor gain is under threat.

Though wealthy consumers are more insulated from the immediate economic impact of lockdown restrictions, this doesn’t mean the luxury sector won’t suffer. Having been boosted in recent years by the growth of China’s 400 million strong middle class, the sector could see some of these customers fall away as they trade down for more affordable non-luxury products. And though brands will likely retain most of their current wealthy client base, they could see a slowdown in the acquisition of entry-level clients.

According to Mauron, the result will be that luxury’s biggest winners widen their margins between themselves and the rest, as they have the resources to continue investing in China even without the promise of an immediate return on that investment.

“What drives the consumption of luxury brands is their equity and the level of aspiration that is associated with it,” he said. “That’s an element that you need to feed and fuel and I hope that brands are going to see it that way, because that is what they need to do.”

时尚与美容

FASHION & BEAUTY

China Lockdowns Weigh on Kering Results

After announcing Gucci sales had risen 13 percent year-on-year last quarter, missing estimates of a 19 percent bump, Kering chief financial officer Jean-Marc Duplaix said on a call with analysts that the fundamentals of Chinese demand were intact but that the Covid-related restrictions, particularly in Shanghai, were still “extremely difficult.” Of the wider China business, chief executive officer Francois-Henri Pinault said Thursday that Kering is “boosting its organisation to fully capture the vitality of the market.” Gucci earlier this month named Laurent Cathala president of its Greater China fashion business. (BoF)

Xiaohongshu Tracks Top Beauty Trends

According to the “2022 Xiaohongshu Beauty Trends Report” trending keywords on the social media platform related to beauty include “simplified skin care”, which rose 170 percent in 2021. Searches for “square face makeup” increased by 1,100 percent; “how to define olive skin” increased by 470 percent, and “facial angling” increased by 163 percent. Male beauty also continued to gain traction, with searches for “men’s eyebrow shape” and “men’s makeup cream” up 130 percent and 354 percent respectively. (Xiaohongshu)

科技与创新

TECH & INNOVATION

WeChat Feature Helps Censored Lockdown Video Go Viral

A sharing feature that WeChat has heavily promoted since 2020 was particularly helpful distributing a six-minute video montage of audio clips from Shanghai’s lockdown which struck a chord with netizens, and was shared millions of times. Soon, though, Chinese state censors began scrubbing “The Voice of April” video from social platforms, prompting people to find clever ways to evade censorship and help it reach the next viewer. The video was largely shared using WeChat’s Channel feature. (MIT Technology Review)

消费与零售

CONSUMER & RETAIL

Chinese Consumers Look to Save Rather Than Spend

A quarterly survey conducted by the People’s Bank of China shows Chinese consumers are more cautious than they were at the start of the pandemic. Survey respondents who said they were more inclined to save their money, rather than spend or invest it, in the first quarter rose to 54.7 percent — the highest percentage in 20 years. (CNBC)

政治,经济与社会

POLITICS, ECONOMY, SOCIETY

Containers Pile Up at Shanghai Port

Though Shanghai Port — normally the world’s busiest — has been exempt from lockdown restrictions that have seen the rest of the city of 25 million virtually close for business since April 1, the difficulty of getting trucks in and out of the city is impacting the port’s efficiency. As of April 18, imported containers were waiting on average for 12.1 days before being picked up by truck and delivered to destinations inland, according to supply chain data provider Project44, compared with an average of 4.6 days on March 28. (Bloomberg)

Panic Buying in Beijing as Mass Testing Campaign Underway

Beijing kicked off three rounds of Covid-19 testing for residents of its biggest district, Chaoyang, Monday after dozens of cases were reported, prompting people to stock up on food over fears of a Shanghai-style lockdown. Chaoyang district officials told residents to reduce public activities and suspended in-person private tutoring classes, but schools, stores and offices remain open. The area is home to most of Beijing’s foreign embassies, and is a popular location for nightlife venues and corporate headquarters. (Reuters)

China Decoded wants to hear from you. Send tips, suggestions, complaints and compliments to our Shanghai-based Asia Correspondent [email protected].