China’s luxury demand is becoming increasingly polarized: ultra-luxury remains robust, while the middle class faces mounting pressure.
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China’s luxury demand is becoming increasingly polarized: ultra-luxury remains robust, while the middle class faces mounting pressure.
Bernstein’s China survey indicates that luxury consumption remains resilient, while middle-class demand is fragile and increasingly price‑sensitive; it recommends a defensive portfolio allocation, with a preference for high‑quality industry leaders and brands that have successfully undergone transformation.
- Demand for luxury goods in China has stabilized from its recent lows, but remains highly polarized: top-tier consumption is robust, while demand among the middle class remains fragile.
- Hong Kong’s market has delivered strong performance, with retail sales rising for the 11th consecutive month, driven by the return of local consumers and tourists.
- First-tier cities in mainland China are showing early, albeit uneven, signs of improvement, primarily driven by the stabilization of the real estate market.
- Overcapacity in shopping malls and retail stores continues to exert downward pressure, prompting brands to close underperforming outlets and consolidate their presence in key flagship locations.
- Brand differentiation is intensifying: leading brands such as Hermès and Louis Vuitton remain robust, while second- and third-tier brands struggle to maintain relevance.
- “Tailored for China” has become the strategic cornerstone, with the brand adapting to the Chinese market through localized products, storytelling, and customer engagement.
- Local brands are gaining ground in the beauty, apparel, and jewelry sectors, capturing market share through their strong value proposition and cultural resonance.
- Middle-income consumers are placing greater emphasis on value, shifting toward entry-level products, outlet stores, or domestic brands, and becoming more price-sensitive.
Report interpretation
Overview
This report is based on field research conducted by the Bernstein analyst team in Hong Kong and Shanghai, summarizing ten key observations about the current Chinese luxury‑goods market. The central conclusion is that demand for luxury goods in China is stabilizing from a weak base, yet exhibits pronounced polarization: high‑end consumers continue to spend robustly, while middle‑income buyers remain cautious, more selective, and increasingly price‑sensitive. The report notes that the global recovery trajectory of luxury‑goods demand remains uncertain and recommends adopting a defensive stance amid this uncertainty, favoring high‑quality blue‑chip stocks and brands with clear transformation narratives.
Core views
Demand-side dynamics are clearly bifurcating. The top-tier affluent segment continues to ramp up spending on luxury goods, travel, and hospitality, underpinning strong RevPAR (revenue per available room) performance in the luxury hotel sector. By contrast, middle‑class consumers, weighed down by macroeconomic headwinds, have become more cautious and selective, scaling back discretionary spending and shying away from high‑priced, logo‑laden products. Regionally, Hong Kong stands out as a bright spot. Driven by a “feel‑good” effect stemming from stabilizing residential real estate markets and rising transaction volumes, coupled with a rebound in tourist arrivals, Hong Kong’s retail sales have expanded for 11 consecutive months, while hotel metrics have improved, supporting both discretionary consumption and demand for luxury goods. Meanwhile, China’s first‑tier cities are showing early but uneven signs of recovery: although trading activity has picked up and prices in select core areas have begun to firm, mainstream districts and shopping‑mall projects remain under pressure. On the supply side and across distribution channels, oversupply—particularly in non‑core locations—continues to weigh on the market. Luxury brands are streamlining their retail networks, closing underperforming stores, reducing their footprint, and concentrating resources on a smaller number of high‑productivity flagship outlets. Data indicate that non‑core locations now account for 88% of total retail space in shopping centers, compared with just 12% in prime locations. The competitive landscape among brands is becoming increasingly polarized. Hermès, Louis Vuitton, Chanel, Van Cleef & Arpels, and top‑tier Swiss watchmakers remain exceptionally resilient, expanding their presence, maintaining pricing power, and investing in premium customer experiences. In contrast, many second‑ and third‑tier players are struggling to sustain relevance and productivity, often resorting to retrenchment of their retail networks and eroding consumer mindshare. At the same time, domestic Chinese brands are emerging as formidable competitors in beauty, ready‑to‑wear, and jewelry—especially at the entry level—such as Songmont, Grotto, Lao Pu Gold, and Mao Ge Ping. These brands are gaining market share by blending credible product offerings, compelling cultural narratives, and superior value propositions. In terms of strategic responses, “China for China” has become a cornerstone of global brands’ strategies. Rather than simply replicating their global playbooks, brands are tailoring products and pricing to meet the preferences of mainland Chinese consumers, building WeChat‑centric CRM systems, and partnering with local KOLs to cultivate lifestyle ecosystems—such as cafés, museums, and club‑style spaces—that resonate with Chinese customers’ aspirations. Moreover, amid subdued demand from the middle class, global brands are leaning heavily on creative activations and experiential formats—like Shanghai’s “The Louis” concept store or Hermès’ artisanal exhibitions—to safeguard pricing power and maintain brand equity.
Analysis framework
Institutional analysts employ an analytical approach that combines on-the-ground field research with a dual‑pronged macro‑micro framework. First, they gather first‑hand market sentiment data through face-to-face engagements in Hong Kong and Shanghai with listed companies, private firms, retailers, and industry insiders. Second, they cross‑reference these insights with macroeconomic indicators—such as property prices, hotel RevPAR, and retail sales—to validate shifts in consumer confidence. Finally, by comparing performance across brand tiers (premium vs. second‑tier), geographic regions (Hong Kong vs. mainland first‑tier cities), and consumer segments (top‑tier vs. middle‑income groups), they draw conclusions about market segmentation and formulate tailored investment recommendations accordingly.
Methodology notes
Analysis of Supply and Demand Dynamics in the Luxury Goods Market
The research report assesses market pressures and the direction of brand strategy adjustments by analyzing the alignment between demand-side factors—namely, top-tier versus middle-class purchasing power—and supply-side dynamics—specifically, overcapacity in retail outlets versus the scarcity of flagship stores.
Brand Equity and Pricing Power
The research report points out that top-tier brands, backed by robust brand equity, enjoy stronger pricing power and greater cyclical resilience, whereas weaker brands lack this competitive moat, resulting in a decline in their market position.
Same-store sales and organic growth outlook
The research report draws on consensus‑estimated organic sales growth (OSG) data to compare the growth prospects of various brands over the next 24 months, using this as a basis for assessing the sustainability of their turnaround efforts.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Richemont (CFR.SW)Benefits: Strong momentum in the jewelry business and a leading market position.
- Strengths
- A premium brand portfolio with a distinct competitive edge in the jewelry category.
- Comparison
- The research report’s top-pick stock
- LVMH (MC.FP)Benefits: Strong performance of the LV brand, Dior’s resurgence, and improved cost efficiency.
- Strengths
- A diversified brand portfolio, with the core brand LV demonstrating remarkable resilience.
- Weaknesses
- The W&S division’s transformation still faces uncertainties, particularly regarding family succession issues.
- Comparison
- Between high quality and self-help narratives
- Burberry (BRBY.LN)Benefit: Transformation strategies are proving effective, and brand momentum is improving.
- Strengths
- Full-price sell-out rate has improved, with a solid foundation.
- Weaknesses
- Store productivity still needs to be improved.
- Comparison
- A representative of companies with well-progressing transformation
- Kering (KER.FP)Downgraded/Cautious: Reliance on the middle class, with insufficient evidence of sustainable transformation.
- Weaknesses
- Core brands such as Gucci are facing challenges, and the outlook for recovery remains uncertain.
- Comparison
- Compared with LVMH and Richemont, the certainty of recovery is lower.
- Risks
- The recovery trajectory remains uncertain.
- Hermès (RMS.FP)Neutral/Prudent in the Short Term: Valuations Already Reflect Expectations
- Strengths
- An exceptionally strong brand moat
- Weaknesses
- If short-term growth falls short of expectations, it could trigger market volatility.
- Comparison
- Long-term quality, but short-term valuations are relatively high.
- Risks
- Risk of Slowing Growth
Key data
- Duration of Hong Kong’s Retail Sales Growth11 monthsConsecutive growth indicates the momentum of market recovery.
- Proportion of Retail Space in Non-Core Locations88%The CAGR from 2019 to 2026 is 6.2%, significantly higher than the 0.9% observed in prime locations.
- Luxury Hotel RevPAR Year-over-Year Change (1Q26)+8%Far surpassing both mid-to-high-end and budget hotels, this underscores the resilience of top-tier demand.
- Soft Luxury Price Inflation (2023 vs. 2020)Double-digitFar exceeding the typical 5–7% range, this has led to heightened price sensitivity among consumers.
Impact & implications
For investors, research reports recommend adopting a more defensive stance amid the uncertain trajectory of global luxury‑goods demand recovery, with a core allocation to high‑quality stocks that are relatively unremarkable. Specifically: 1. Favor high‑quality names anchored in “fair value”: Richemont is the top pick, supported by robust momentum and a leading position in the jewelry segment; Brunello Cucinelli is also favored for its quality and the potential for mean reversion. While short‑term prospects for Hermès remain challenging, the market may be willing to overlook its brief soft patch if it can return to high single-digit growth. 2. Focus on “self‑help” stories with more promising trajectories: LVMH sits at the intersection of high quality and self‑help; Dior’s revival, cost efficiencies, and the strength of Louis Vuitton help offset concerns about W&D’s transformation and family succession. Burberry’s turnaround is progressing smoothly, with improved sell‑through rates at full price, and the next priority will be boosting store productivity. Ferragamo remains in the early stages of its transformation, trading at lower valuation levels, and management changes could herald a turning point. 3. Exercise caution with Kering and other groups reliant on the middle class or second‑tier brands, as they lack clear evidence of sustainable transformation and face uncertain recovery prospects.
Risks
- The macroeconomic environment is fragile, and geopolitical tensions are intensifying.
- Short-term investors’ bullish–bearish tug-of-war has amplified sector volatility.
- Consumer demand among the middle class remains persistently weak.
- Ineffectual brand transformation execution or outcomes that fall short of expectations
What to watch
- Further signs of stabilization in real estate prices in China’s first-tier cities
- The divergence in sales growth rates between top-tier brands and second-tier brands
- Market Share Changes of Domestic Brands During Key E-commerce Shopping Festivals
- Progress in optimizing the retail networks of various brands in the Chinese market