Burberry’s recovery in China may be short-lived as the Chinese economy stutters, but the importance of the Land of the Dragon to luxury brands cannot be understated.
“Should the Chinese economic recovery continue to stutter, its new financial year could present more challenges for Britain’s most high-profile fashion house,” said Garry White, chief investment commentator at wealth manager Charles Stanley (LSE:CAY) Group.
Economic data released by Beijing earlier this week for April suggests the nation broadly missed internal expectations.
This prompted banks, including JPMorgan and Barclays, to lower China’s GDP growth target.
China is an important market for luxury brands, and any macro factors that impact sales in the region have huge ramifications on performance.
Burberry, for example, missed sales expectations for its third quarter in January due to lockdowns which heavily disrupted travel.
But why is China so important for luxury companies?
China’s economy has grown exponentially this century, from a GDP of US$1.2tn in 2000 to US$17tn in 2021, second only to the US.
Economic growth leads to a swelling of the middle class. Data from the Pew Research Centre found that China’s middle class accounted for over half the population in 2018, compared to just 3% in 2000.
The middle class is renowned for its appetite for the luxurious and lavish, and a relatively new middle class will want to demonstrate their wealth through expensive purchases, hence the popularity of Burberry, but also LVMH, Kering etc.
China is such an important market, in fact, that brands are tuned in to the politics to ensure they avoid falling foul of Xi Jinping and the Chinese Communist Party.
“Brands have become more cautious in recent years, avoiding mistakes on sensitive issues,” said Zainab Atiyyah, retail analyst at insights house Third Bridge.