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Luxury retailers relocating from HK to China: Is HK losing its shine as Asia's luxury hub?

Luxury retailers relocating from HK to China: Is HK losing its shine as Asia's luxury hub?

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French luxury conglomerate LVMH has dominated headlines recently as it reportedly looks to shift resources out of Hong Kong to focus more of its investment in other Chinese cities such as Shanghai, Chengdu, Guangzhou and Shenzhen. The news was first reported on Bloomberg, but the conglomerate has yet to respond to media requests for confirmation.

Rather, the LVMH's spokesperson pointed to the company's recent earnings announcements. According to its official statement, LVMH Moët Hennessy Louis Vuitton recorded revenue of €21bn (approximately US$23bn) in the first quarter of 2023, up 17% compared to the same period of 2022. Organic revenue growth was 17%, of which Asia experienced a significant rebound following the lifting of health restrictions, with a 14% increase in sales growth in the first quarter of 2023 compared with -8% in the last three months of 2022. Its subsidiary travel retailer DFS also benefited from the recovery of international travel, and the gradual return of travellers to the flagship destinations of Hong Kong and Macao.

MARKETING-INTERACTIVE has reached out to LVMH for a statement. In the meantime, we explore the wider context of this development and what it could possibly mean for other luxury brands and retailers in the region.

Don't miss: LVMH reportedly shifts resources out of HK

Given that LVMH saw a huge sales growth in Asian markets, LVMH's potential relocation of resources from Hong Kong to China has retail players and the general public questioning whether Hong Kong has lost its shine as Asia's luxury hub. In terms of social sentiments, media intelligence firm CARMA saw over 3,000 mentions across social platforms globally regarding the relevant media coverage over the past week, with 20% positive and 12% negative sentiments.

CARMA’s HK GM Charles Cheung said this shift has garnered a range of reactions from the public, with some individuals viewing it as a natural response to changes in consumer demand for luxury goods in the region. “Some netizens have also speculated that this move will prompt further changes in consumer behaviour, with Hong Kong shoppers potentially traveling to mainland China for luxury shopping instead of the previous trend of mainland tourists traveling to Hong Kong,” Cheung added.

In addition, a group of netizens have suggested that LVMH's departure from Hong Kong will lead to lower property rents in prime districts, making it more feasible for small and medium-sized local businesses to establish themselves in these areas. 

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On the retail front, the move doesn’t seem to surprise many industry players MARKETING-INTERACTIVE spoke to. Xen Chia, strategic marketing director, XGATE, an Asian agency specialised in retail marketing, said luxury brands such as LVMH moving their operations to China is not unusual. “LVMH’s China market probably contributed a significant portion of their yearly sales. The lower operational costs in the short term will bring better business profitability,” he said.

The consumerism trend among Chinese young affluent consumers is also a contributing factor, Chia said. “They will prefer to buy luxury products from the country of origin because travel and cultural experiences to those countries are just as important motivations,” he added.

Agreeing with his view was Carmen Wu, head of Havas Market, an eCommerce consultancy of Havas Media Group HK, who said if LVMH is really planning to move its forces from Hong Kong to China, it is a clear indication of the company's ambition to secure its luxury leadership position in China.

As China's luxury market continues to grow, luxury brands are shifting their investments and resources towards China market and investing in localised strategies tailored for Chinese consumers and comprehensive retail infrastructure.

Another noticeable trend in the luxury market is the shift towards a direct-to-consumer model, with more brands bypassing wholesalers and retailers to build a direct relationship with end consumers, according to Wu. "This model not only allows luxury brands to cut down on unnecessary costs but also enables them to secure sustainable growth, higher gross margins, and consistent pricing strategies to encourage loyalty, which means more dedicated teams and end-to-end operation systems," she added. 

In fact, China accounted for 80% of the group’s activity in the region, as LVMH CFO Jean-Jacques Guiony told the Financial Times. Therefore, LVMH might be looking to take advantage of the China market's size and potential, as well as to adapt to the changing dynamics of the global luxury industry, said Yvonne Ma, founder and managing director of Eighty20, an agency which specialises in destination and retail marketing.

Kevin Kan, chief experience officer of Break Out Consulting Asia, also said the news is not unexpected, “Logically, with the geopolitical and economic turmoil the world is currently in, it makes absolute sense to go to where the consumer is and let’s face it, China is the world’s largest consumer market,” Kan added.

With the trend of globalisation and China opening up, Kan said that brands which relocate offices directly to China makes absolute sense. “Hong Kong’s relevance as the entry point into China is no longer required.  You do not need the ‘middleman’. Just go directly. More efficient and cost effective,” he added. However, he said it is just the operations and decision-making employees who have relocated, the brands within LVMH will still operate and flourish in Hong Kong. 

Does the shopper really care where operational or design decisions are made?  For the brand conscious consumer, “NO”. 

Will more luxury brands follow suit? 

According to aStatista report, revenue from the luxury goods market in China stood at over US$42.7 billion in 2021. By 2027, the Statista Consumer Market Outlook estimates revenue in this market to reach around US$65.6 billion. This might perhaps attract luxury brands to expand their operations in China and seek to tap into the country's growing consumer base, according to Ma. 

“For example, in recent years, brands such as Gucci, Chanel, and Burberry have opened a few new stores in mainland China and launched big marketing campaigns targeting mainland Chinese consumers. Some brands have also formed partnerships with Chinese companies to expand their presence in the country,” she added.

Echoing her view was Break Out Consulting Asia’s Kan, who said it is not surprising if more luxury brands will follow suit. “It’s not just fashion brands, just look at Tesla, BMW or Mercedes-Benz. They’ve setup operations in China to be where the aspirational and affluent brand consumers are.  Let’s be honest, Asians are brand flaunting consumers.  As the old cliché goes, ‘go where the buyers are,” he added.

The luxury landscape has undergone significant changes in the past three years, with over 55% of the world's new luxury stores opening are shifting to China, according to a 2022 survey conducted by Savills PLC. As such, Havas' Wu believed that more and more brands are adopting a global price strategy.

This trend is forcing brands to shrink the retail price gap and adapt to Hainan's duty-free plan, which threatens Hong Kong's shopping heaven status.

Wu believed that it's possible that more luxury brands will follow suit and shift their resources from Hong Kong to mainland China as China has become a dominant force in the global luxury market.

"While China's luxury market has been on a bull run over the past five years, brands must step back and adopt a suitable growth strategy that aligns with their independent value proposition for sustained business growth," she added. 

While China might have what it takes to lure investments from global luxury and fashion houses, it doesn't necessarily mean that Hong Kong has lost its shine as Asia's luxury hub. Tim Durgan, VP, strategy and insights, APAC, global omnichannel agency Assembly, said it's not unreasonable to suggest that luxury brands will invest more in mainland domestic markets as they need to drive growth in this nuanced but colossal market, but it's too early to say whether this means that others will follow suit and shift resources out of Hong Kong.

"The shift is a reflection of the changing APAC luxury landscape as new markets emerge but not a direct signal that Hong Kong is losing its lustre," he said.

Hong Kong has had a rich history in the industry and will continue to serve as an anchor and test bed for luxury brands looking to deliver more elevated consumer experiences in the region. 

XGATE’s Chia also believed that Hong Kong is still a strong contender for global luxury and fashion brands as it's a cultural melting pot between east and west, as well as its free economy status, “One of the contributing factors is our foreign exchange financial system allowing currencies to flow freely around the world. Luxury brands moving their businesses to Shenzhen or Shanghai will not be expecting this level of freedom,” he added.

How can HK regain its status to lure these global luxury and fashion companies? 

Speaking on a macroeconomic perspective, Breaking Out Consulting Asia’s Kan said that Hong Kong needs to reinvent or regain its global city stature, “A little of the gloss has worn off Hong Kong. Putting a bit of polish to return Hong Kong to the world map will not only lure luxury brands to set up China headquarters in Hong Kong, but also bring investment into the city.” 

With sustainability being an ongoing trend in Hong Kong, the city can reinvent itself into an innovation hub for sustainability, he said. “With the mass consumerism in Hong Kong, recycling product packaging or creating innovative sustainable packaging for luxury goods or fashion would be something that could attract global luxury and fashion brands to invest in operations in Hong Kong,” he added.

Meanwhile, Eighty20’s Ma suggested Hong Kong to create a more attractive business environment by offering tax incentives, reducing bureaucratic red tape, and providing other forms of support to global luxury and fashion companies.

Hong Kong could encourage innovation and creativity in the luxury and fashion industry by funding research and development programmes and offering support to start-ups.

Agreeing with her view was Assembly's Durgan, who said Hong Kong needs to maintain efforts to stay top-of-mind and rebuild Hong Kong's “Asia's World City” identity and drive overall tourism recovery, "The city's proximity to Southeast Asia growth engines such as Indonesia, Malaysia, and Singapore, and even the rest of the world, can be one of the drivers of luxury consumption," he added.

Moreover, Hong Kong remains a gateway for Chinese travellers to visit other countries, according to Durgan. "Hong Kong can pivot into a luxury stopover destination and leverage its position in this way. Continued investment into digital innovation will help drive parity with the mainland and other global offerings. Hong Kong also still holds a strong position for regional trade and commerce and doubling down on this strength builds a path for sustainable growth," said Durgan. Furthermore, he said Hong Kong would be wise to differentiate itself from other tax-free/duty-free locations by focusing on its strong cultural identity.

In terms of customer experience, Havas Media's Wu believed that Hong Kong can leverage its prime cross-border location to offer a unique and personalised shopping experience that caters to the demands of mainland shoppers and Asia's high-spending groups. "By focusing on offering exclusive products with customised services, showcasing international luxury trends, and upgrading the shopping experience, Hong Kong can attract luxury consumers from around the world," she explained.

Explaining further, Wu added that Hong Kong should tackle the rise of millennials and Gen Z, who are highly digital-savvy and demand a personalised and interactive shopping experience. "Consequently, luxury brands should consider investing in their own digital infrastructure such as direct-to-consumer eCommerce platforms, social media territories, digital technologies, and data governance to engage with these high-spending consumers and disruptive digitalised behaviours," she said.

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