China Recovery Seen as Key to Luxury’s Return To Mid Single-Digit Growth

A new Bernstein report finds that while discretionary spending is beginning to recover, the luxury sector will continue to face turbulence and reshuffling as Chinese consumers — particularly younger shoppers — reassess their outlook.

“Moderating luxury demand growth has led to higher competition and helped open the door to challengers,” Bernstein argues in the report titled “Global Luxury Goods: Chinese Demand Dynamics.”

“Western fashion and luxury brands need to stand up and compete in China today; failing to do so could see them on the defensive at home tomorrow,” the report warned.

Bernstein estimated that Chinese nationals accounted for 23 percent of global luxury demand in 2025, while top luxury companies are even more exposed to the cohort.

Based on a recent Bain report, Mainland China’s personal luxury goods market contracted by 3 to 5 percent in 2025. Premium beauty rebounded by 4 to 7 percent, the fashion category declined 5 to 8 percent, outperforming leather goods, which declined 8 to 11 percent during the same period.

However, during the latest reporting period, luxury behemoths have begun to see clearer signs of recovery in the Chinese market. In the latest fourth quarter, LVMH recorded 1 percent sales growth in Asia, excluding Japan but including China. Group annual sales were down 5 percent year-over-year.

Driven by Gen Z consumers, Burberry’s sales in China jumped 6 percent in the fiscal third quarter that ended December 27. Overall retail sales growth in the third fiscal quarter was up 3 percent on a like-for-like basis.

“Support from American, European, and Middle Eastern consumers is all very well. Yet, moving back to 6 percent or more organic growth will demand the Chinese to revive,” according to Bernstein.

The report went on to explain how China’s macroeconomic slowdown, ongoing real estate woes, and a youth unemployment rate in the mid-teens will continue to change consumer attitudes and behaviors, in particular among younger shoppers.

“Young people had worked hard, played hard, and spent like there was no tomorrow a few years ago. They had all thought they would have great careers, set up their companies, and become millionaires. With employment and career prospects dwindling, young people are not as keen to put all of their energy into work, and are — like it or not — trying to find cheaper ways to live well. A hike in the mountains costs nothing,” the report said.

On the other end, older and richer consumers are less affected by the macro environment. “If your real estate is paid for, or you have close to no mortgage, whether your flat is worth X or Y million on paper will not make a huge difference,” Bernstein argued. “You will want to enjoy the good things in life. That includes buying luxury products from time to time. The stock market revival has prompted this cohort to spend more already in fiscal 2025,” said the investment bank of China’s “slow bull” that began in the latter half of 2025.

“This is the first serious crisis in China in 35 years of growth. But do crises last forever? In the West, we have seen many, and we know they don’t. The Chinese will find the same is true for them in due course,” argued Bernstein.

The report also noted that discretionary consumer demand has already turned in the second half of 2025, which aligns with the bank’s base-case scenario of a U-shaped recovery in 2026.

“Landlords told us that fourth quarter 2025 has been the best quarter in traffic and revenues in a long time — more so in the mass market and premium space, and less so in the high end, even though both have seen incremental improvements,” said the report.

Even though high desirability, flawless execution, and broad-based innovation prove essential to sustain consumer interest, “value for money questions take the foreground,” according to Bernstein.

In essence, Chinese consumers are still willing to shell out for true luxury, trade down in other areas, or find a local alternative.

Western brands such as Polo Ralph Lauren and Coach, local labels including Songmont and Cafune, and Gu_de from South Korea have benefited from consumers’ renewed interest in entry-level luxury.

“Chinese domestic brands operating at a fraction of the COGS [cost of goods sold] multipliers of Western brands — four to five times rather than ten times or more — are finding very fertile ground. There are plenty of them, and not only from China but from all across Asia,” explained Bernstein, noting similar trends in hard luxury and the outerwear category, with brands like Laopu Gold for the former and Bosideng for the latter.