Silvia Aloisi and Casey Hall

SHANGHAI/MILAN – Chloe Kou is a Shanghai-based beauty brand marketing manager. She won’t buy her “one or two” expensive handbags. She plans to spend less and save, which is good news for luxury brands.

China’s current Zero-COVID Policy, along with the attendant restrictions, lockdowns, and economic impact, has taken a toll on consumer financial security.

“Luxury handbags or clothing are definitely unnecessary at the moment,” says Miriam. [because of]Kou spoke out about the financial uncertainty surrounding my situation.

“We need to be protected from the uncertainty surrounding the economy,” she stated.

Her behavior is typical for many urban and middle-class young professionals living in China. That is good news for luxury brands, which heavily rely on China’s growth over the last few years.

Last year, the country accounted for 21% of the world’s personal luxury goods market, behind North America and Europe, according to consultancy Bain & Co. The country is predicted to be the world’s top market in 2025.

Luxury sales are returning to normal across many countries, with a notable spike in sales in the United States. However, falling Chinese sales threaten luxury brand’s growth plans.

Luxury firms, from LVMH and Watches of Switzerland to executive management Estee Lauder In recent weeks, (NYSE:) acknowledged that China’s lockdowns will affect their future outlook. The expectation that consumers will bounce back quickly – which was seen in 2020 following initial COVID lockdowns, remains a concern.

“We anticipate a rebound. We’re ready for it. “We have purchased inventory, we are investing ahead,” Julie Brown (Burberry’s chief operating officer and chief financial officer) said this week.

Johann Rupert (Richemont Chairman) was cautious on Friday. He said that the Chinese economy will suffer longer than most anticipate and that he expects consumers to behave more conservatively in the future.

According to him, even if China emerges from its isolation, there will be a slow and gradual bounce back. He also said that he expects a lot of large companies to lay off employees.

Burberry, like Richemont which receives about a third sales from Chinese customers, stated that 40 percent of its mainland China retail network is out of commission and that online delivery has also been halted due to closed warehouses.

Imke Wouters from consultancy Oliver Wyman said, “We believe it will be an even more bumpy recovery than previously.”

MIDDLE CLASS ENGINE –

The market value of top luxury brands was hit last August following the unveiling of Chinese President Xi Jinping’s “Common Prosperity” policies to reduce income inequality. Luxury spending was driven by middle class Chinese consumers, but it now seemed that status symbols might be in decline.

But luxury executives said that back then, the policies might have been targeted more towards the super-wealthy.

Jean-Jacques Guiony chief financial officer of LVMH stated at that time that “there is no reason to believe this could be harmful to the upper middle and affluent classes that are the bulk our customer base.”

But Zero COVID is a bigger threat than common prosperity. It will impact all consumers in China, even luxury-shoppers.

It is hard to estimate the economic damages likely to be caused or to predict when and if the current lockdowns end.

But China’s long-vaunted rising middle class, a cohort now 400-million strong “is clearly squeezed in the current pandemic,” Alicia García Herrero, chief economist for Asia Pacific at Natixis, said.

Ben Cavender, Director of China Market Research Group said that young people were disproportionately affected. Youth unemployment is on the rise. This presents a problem for luxury brands who have pursued China’s Gen Z consumers, who are free to spend in China.

“It won’t be about getting stuff,” he stated, with quality time spent with family and friends likely to prevail over status-affirming luxury brands.