: Global luxury sector set for largest ever fall in 2020. But China is flourishing

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Chinese women walk by a luxury store in Beijing.

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China will become the world’s biggest luxury market by 2025, with Chinese consumers set to make up almost half of global spending on luxury goods by 2025, according to a new report.

Mainland China was the only region globally to end the year on a positive note, with sales rising 45% to €44 billion, as international travel restrictions led more consumers to shop in their home country, Bain & Company said in a report published on Nov. 18.

“Local consumption has roared ahead across all channels, categories, generations and price points,” the consulting firm said.

International luxury goods companies are stepping up their efforts to connect with China’s shoppers. Earlier in November, online luxury retailer Farfetch FTCH, +1.12% secured a $1.1 billion investment from luxury-goods company Richemont CFR, -0.76% and Alibaba BABA, +1.54%, which will allow it to tap into the Chinese technology giant’s 757 million customers.

Despite the strong recovery in China, Bain forecasts that sales of luxury goods worldwide are set to fall by 23% to €217 billion ($257 billion) this year, with operating profits dropping by 60%. That marks the largest drop recorded since 2009.

The overall luxury market, which encompasses both luxury goods as well as experiences such as private jets and yachts, fine wines and gourmet food, shrank at a similar pace and is now estimated at approximately €1 trillion.

“We have all experienced a difficult year of rapid, unexpected changes and luxury has not emerged unscathed,” said Claudia D’Arpizio, Bain partner and lead author of the study, which was done in collaboration with Altagamma, the Italian luxury goods manufacturers’ foundation.

“While the industry has suffered from a pause in global travel and ongoing lockdowns, we believe it has the necessary resilience to manage through the crisis,” D’Arpizio said.

Europe bore the brunt of a collapse in global tourism, with sales of luxury goods in the region down 36% at current exchange rates to €57 billion.

Read: Here’s How French and German COVID-19 Lockdowns Could Rattle Luxury-Goods Sales

The Americas experienced less impact, with the market falling by 27% at current exchange rates to €62 billion. In the U.S., department stores face an uncertain future, and the map of luxury consumption has been redrawn to move away from city centers, Bain noted.

The consulting firm expects the recovery to gather pace over the next three years, with the market returning to 2019 levels by the end of 2022 or early 2023, depending on macroeconomic conditions, the evolution of COVID-19, and the speed of return to travel globally.

Following on the second quarter, which was the worst the sector has ever experienced, there were signs of recovery in the third quarter.

Read: Hermès Shares Climb on Strong Demand in Asia. Why That’s Good News for the Luxury Goods Industry.

French luxury group Hermès International HESAF, +1.42% RMS, +0.14% returned to growth in the third quarter, as consumers started buying its products again, including its classic Birkin bags. British luxury-fashion group Burberry BRBY, -1.86% also returned to sales growth in October, and said the recovery was under way as it was attracting new and younger customers.

Fourth-quarter sales are expected to drop by 10%, although the decline could be bigger, depending on the future evolution of COVID-19 and the additional restrictions that national governments could put in place.

Read: China gears up for world’s largest online shopping festival

Online shopping for luxury goods skyrocketed in 2020, almost doubling its share of overall spend to 23% in 2020 from 12% in 2019, as the pandemic forced a shift away from brick and mortar. Bain expects e-commerce to become the leading channel for luxury purchases by 2025.

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