Generation Z poses a problem for the luxury industry

SHANGHAI/PARIS, Aug 18 (Reuters) – From $300 bucket hats to $900 sneakers and $700 t-shirts, the high-flying luxury sector is worried about the appetite of Gen Z consumers financially strained for such “aspirational” purchases.

Executives are particularly troubled by a blow to young Chinese shoppers, not only because mainland China has been a major driver of industry growth in recent years, but also because high-end consumers in the second world economy are ten years younger than the world average of 38.

Young adults around the world have been “a very important factor in the growth of luxury over the past decade,” said Gregory Boutte, client director and chief digital officer at Kering, owner of Gucci.

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Data this week showed China’s economy unexpectedly slowed, leading central bank rates to cut, while macroeconomic trends have a disproportionate impact on the extra funds people born between 1996 and 2012 could use to enter the world of luxury.

While in North America and Europe, inflation and the rising cost of living are hitting the discretionary incomes of younger consumers particularly hard, China’s problem is different.

“In the United States, inflation is a huge problem, the main objective of many luxury companies … In China, it is the youth unemployment rate that is alarming right now,” said Kenneth Chow, director of the consulting firm Oliver Wyman.

Government data for July records the unemployment rate for China’s urban population aged 16-24 at a record high of 19.9%, exacerbated by the impact of COVID-19 lockdowns and a crackdown on big business technologies that traditionally hired many graduates.

“This may be the first time that many young adults (in China) have faced (such) an economic impact, so it will be a testing ground for how these consumers will spend on luxury items. in the future,” Chow said. .

“If a recession happens, then I’ll 100% buy less or maybe even stop buying altogether,” said Jeffrey Huang, 28, a US-based TikToker on lifestyle and travel from luxury, which shares its Louis Vuitton shopping trips with its 150,000 subscribers.

A recent study by Oliver Wyman showed that some luxury brands are drastically reducing their sales forecasts for the Chinese market in response to current conditions, with 80% of executives surveyed not expecting a ‘V’ recovery this year. Oliver Wyman declined to name the brands he interviewed.

Nonetheless, last month’s earnings from companies such as LVMH (LVMH.PA) and Kering (PRTP.PA) painted a picture of resilience in the face of economic headwinds, with luxury players riding a wave of post-COVID spending. of their wealthiest customers.

And big brands have signaled plans to boost sales of high-end $10,000 handbags and $5,000 coats rather than focus on attracting new entrants at the lower end.

Chanel, Louis Vuitton and Dior have raised prices for high-margin leather goods several times over the past year, with Chanel planning dedicated stores for VIP consumers. Read more

“As the prices go up, I’m becoming more and more cautious because I feel like I spent a lot of money last year,” said Sara Yogi, a resident of San Francisco, Calif. 26, adding that she can wait to buy a $2,900 Prada bag and a $3,200 bag from Bottega Veneta which are both on her wish list.

This shift to focus on core luxury consumers also encompasses a cohort of affluent Gen Z consumers less likely to be impacted by inflation or unemployment.

But the concern centers on potential buyers who were expected to help Gen Z account for a fifth of all luxury goods spending globally by 2025.

And brands such as Burberry have already noted weak sales of sneakers and slides, products that Gen Z and millennial consumers have traditionally used to enter the world of luxury brands. Read more

PLAN B FOR GENERATION Z?

One way for luxury players to continue to appeal to Gen Z consumers may be to offer ambitious options at entry-level prices that can be worn often, said Yi Kejie, a content marketing manager at 26 years.

Luxury brand cellphone cases, earrings, hair clips and perfumes are all popular among his Gen Z peers in China, Yi said, adding, “These are items with the threshold the lowest for (them) to have this logo, this icon”.

Some luxury brands, including Balenciaga and Dior, are embracing the metaverse to pique the interest of teens and young adults, offering them affordable ways to outfit their virtual identities on gaming platforms such as Roblox.

Virtual sneakers from brands like Gucci have already proven to be very popular, with a price tag of $17.99.

Whether in the real or virtual world, entry-level products require significant creative investment.

“There’s this younger crowd of consumers entering the market who require a lot of creativity at more affordable prices,” said Bain partner Claudia D’Arpizio, adding that not all brands are equipped for this.

There is, however, good news for brands.

If they find the right entry-level product offering, or if the economic situation of Gen Z consumers improves, the desire for luxury products remains intact.

“Young people in China are excited about luxury goods,” Yi said. “Lockdowns or the temporary unemployment rate will not change their long-term preferences.”

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Reporting by Casey Hall, Doyinsola Oladipo and Mimosa Spencer; Editing by Alexander Smith

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