Traffic Rebound Signals Fast-tracked China Recovery

SHANGHAI — Continued improvement in metro traffic data, which could be an indicator of shopping mall traffic improvement, signals a fast-tracked recovery for the world’s second largest luxury market, according to the latest report by Barclays.

Traffic in major Chinese cities, such as Beijing and Shanghai, has almost returned to pre-COVID-19 levels, while Shenzhen and Chengdu have already significantly surpassed pre-COVID-19 levels.

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Barclays expects Mainland China’s luxury market to grow by 19 percent in 2023.

With tourism roaring back and excessive savings to support spending, travel retail will continue to recover, but “considering the current flight capacity constraints, offshore spending could be skewed towards wealthier Chinese at the moment,” said the report.

Barclays anticipates incremental growth in offshore spending that would only partially cannibalize the local luxury market.

“Our discussion with one of the biggest luxury shopping mall operators in China indicated that VIP consumers had already resumed their spending abroad,” the report continued. “However, we would expect more Chinese to travel during the year and buy luxury goods abroad.”

Beyond big spenders, Barclays noted that Chinese shoppers are ready to spend their COVID-19 savings after the reopening in early January.

According to data from McKinsey, the sum of extra household savings during COVID-19 reached 2.1 trillion euros in 2022.

Barclays expects around 15 percent of Chinese spending to occur abroad this year, which have helped luxury stocks to rally.

Shares of LVMH Moët Hennessy Louis Vuitton rose 18.1 percent since the beginning of 2023, Kering rose 20.1 percent, Hermès increased 19.2 percent, while Richemont and Swatch Group gained 20.4 percent and 23.2 percent, respectively.

However, Barclays noted that Gucci remains a weak spot at Kering.

“We note that new creative director Sabato de Sarno will join Gucci during the second quarter and present his first collection in September, which will hit stores at the beginning of next year,” wrote the report. “We remain in wait-and-see mode until we know how customers receive his collections, particularly in China where the brand has been weaker.”

At LVMH, the report noted that the reopening would benefit the group’s Selective Retailing unit, which includes the company’s duty-free business and is the second-largest division for the luxury conglomerate, generating around 20 percent of sales.

Barclays noted that Swatch Group could gain the most from China’s reopening, as the company with the greatest exposure to Chinese consumers before the pandemic, with 50 percent of sales from China.

Richemont is also well positioned to gain from China’s reopening, with around 40 percent of sales coming from China pre-COVID-19.

“We like Richemont’s exposure to watches and jewelry, which may be seen this year by consumers as an alternative asset that can hold value in inflationary times. Also, key brands Cartier and Van Cleef & Arpels continue to benefit from strong momentum, particularly with younger customers, which we think will matter this year as consumers face a possible squeeze,” wrote Barclays in the report.

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