Luxury brands experiencing poor sales in the Chinese market are sequentially closing their offline stores in China. As even luxury brands begin to withdraw, there are concerns that the stagnation of the Chinese real estate market will prolong.
According to the South China Morning Post (SCMP) on the 9th (local time), the French luxury group Kering closed all Gucci stores in the Shanghai Lilac Plaza and in luxury retailer Shinsegae on Nanjing Road, which had been operating for over 10 years. The Italian luxury brand Prada also recently withdrew from its store at Shanghai Hongqiao International Airport, where it had been operating for two years.
In the case of Louis Vuitton, it closed its store in the Joy City department store in Shenyang, China, last October and integrated it with a nearby store. Additionally, brands such as Chanel, Tiffany & Co., and Bulgari have also closed some stores in China. According to the retail information platform Linkshop, two luxury brand stores closed in the third quarter of last year, but the number surged to eight in the fourth quarter, a fourfold increase.
The reason luxury brands are withdrawing from the Chinese market is due to continued poor sales. According to a January report by the consulting firm Bain & Company, luxury market sales in China decreased by 18% to 20% in 2023. In particular, as consumers turned their attention to assets that can preserve value, the jewelry and watch segments were particularly hard hit.
Kering relies on Gucci for more than half of its sales, and with poor sales in its key market of China, the company's operating profit dropped by 51% last year. The share of Gucci's sales from China is reported to be around 35%. As for LVMH, it achieved sales of 23.9 billion euros (approximately 38 trillion won) in the fourth quarter of last year, an increase of 1% compared to the same period the previous year, but sales in Greater China decreased by 18%.
Yelena Sokolova, a senior equity analyst at global market information provider Morningstar, noted that "most brands are experiencing a sharp decline in sales in mainland China," adding that "this is due not only to the domestic consumer sentiment slump but also to the impact on Chinese consumers' overseas shopping."
The contraction of luxury brand stores is bound to have a significant impact on the Chinese real estate market, which has been struggling for years. According to real estate consulting firm Savills, the retail vacancy rate in 11 first- and second-tier cities in China is expected to rise from 10.4% in 2024 to an average of 10.5% this year. While this rate is lower than the average of 11.4% during the pandemic lockdown in 2022, high vacancy rates are anticipated.
Vincent Li, head of research for northern China at Savills, stated that "high-end luxury brands are very cautious about opening offline stores, unlike popular brands like Nike," adding that "their withdrawal from stores means that there were insurmountable obstacles."
The struggles of luxury brands in the Chinese market are expected to continue for some time. Guo San, a partner at consulting firm Huachuang Research, remarked that "consumers prefer sports or entertainment-related products over purchasing luxury handbags," and this change will complicate the outlook for the luxury market. In fact, while consumption in the apparel sector increased by only 0.3%, consumption related to sports and entertainment surged by 11.1%.