Site icon Glossy

Why China’s ‘revenge spending’ phenomenon won’t be replicated in the US

louis vuitton ny soho

Since early April, there’s been news of “revenge spending” in China — the idea that a cooped up populace finally free from lockdown would celebrate with a big boom in spending, especially on luxury goods. Revenge spending throughout China in May allowed the country to be one of the only places where luxury spending was growing while the rest of the global market suffered. Since that time, fashion brands and retailers have held out hope that a similar rising tide will hit the U.S. once the country is vaccinated and things are, relatively, back to normal.

But China and the U.S. are very different economies and had very different experiences with the pandemic that have shaped consumer responses and shopping behavior. And analysts say that revenge spending in the U.S. will be much milder than what was seen in China.

In summer of 2020, revenge spending drove many luxury brands to pivot to China. For example, in May, while Tiffany saw a 40% drop in its global net sales, it saw a 90% increase in spending in China. Such results caused brands like Dior, Cariter and Michael Kors to pivot more resources to China. 

In the U.S., brands like Suitsupply and Frame have opened new brick-and-mortar stores or invested in renovating existing stores in the last six months, even as brick-and-mortar shopping is down and e-commerce is up. Both brands did so with the idea that an impending return of New York’s retail shopping scene would help offset the costs.

“We’ve seen business return across China and South Korea, but it’s still recovering in Europe and the U.S.,” said Fokke de Jong, founder of Suitsupply, which invested in a multi-story expansion to its New York store last fall. “At the end of the day, we’re certain that people are going to be buying clothes even more than before once they can. People say the world is going to change completely, but in reality it will only change a little bit. People will go out, restaurants will be full — we’re confident that people won’t want to sit in their homes anymore.”

American Eagle’s parent company AEO Inc., which is hoping to grow its subsidiary brand Aerie to $2 billion in revenue this year, is banking on a resurgence of in-store shopping by its target demographic of people ages 15-22: It’s increasing its store fleet from from 342 locations to 550 by 2023.

“Fashion is going to come back stronger than ever,” said Jen Foyle, newly promoted chief creative officer of AEO Inc.. “Especially with our core age demographic. Imagine when the world feels safer again — those kids are going to want to get out and spend.”

And while there will most likely be some increase in spending once the retail environment becomes safe, it’s unlikely to be at the same level that China saw for several reasons.

For one, China was already in a much higher growth position than the U.S. prior to the pandemic. In 2019, China accounted for 90% of the growth in luxury spending, and 35% of all luxury transactions were in China. Meanwhile, the U.S. saw only 4% growth in luxury spending in 2019. 

The other factor for the boom is that Chinese luxury spenders were forced to shop at home, due to strict travel restrictions. In the year prior to the pandemic, around two-thirds of sales to Chinese shoppers happened outside of China. While Americans also shop abroad — being the second-highest spending tourists in France behind Chinese shoppers in 2019, for example — the majority of their spending is done at home.

The Brookings Institute says it doesn’t expect consumption in the U.S. to reach 2019 levels until at least 2023, with 2020 spending being more than half a trillion dollars lower than the year before.

So some luxury brands are taking a measured approach when planning for the future outside of China. On an earnings call on Tuesday, LVMH CFO Jean-Jacques Guiony refused to commit to the idea that luxury shopping would experience a big resurgence in the U.S. market, saying it was impossible to predict exactly how people’s shopping habits will change.

“It’s not a simple choice between eating out, traveling or going to luxury stores,” Guiony said on the call. “There are other things to be done. It’s difficult for me to elaborate on that, because we don’t really know. We shall need a few quarters to really understand what’s going on, we have to make surveys and also, we have to observe the behavior of customers, when the situation normalizes, which will probably come this year. But nobody really, really knows.”

What is known is that it’s a different customer and a different circumstance. China was in lockdown for a period of barely three months, from January to March. In the U.S., meanwhile, parts of the country have gone in and out of lockdown for close to a year, with mixed results and a vast death toll. Both countries suffered bouts of mass unemployment, but China’s unemployment rate went from around 4% in 2019 to a high of 6% in Feb. 2020, while the U.S. saw its rate jump from around 4% to 15% in the same time period.

“When Chinese consumers went back to work, they were looking to buy new ready-to-wear pieces,” said Peter Gray, vp of fashion and luxury at ForwardPMX. “But luxury brands can’t rely on this sentiment in the U.S., because at the same time, there’s likely to be a greater focus on conscious spending. This might mean that customers will pull back from buying luxury goods for a time, instead focusing on the essentials, knowing that the next global crisis could happen again and because they may be dealing with personal ramifications of the crisis.”

Exit mobile version