The Unlikely Beneficiary of the Hong Kong Crisis: Mongolia’s New Luxury Market
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China drives the world's luxury market. Mongolia wants a slice of that pie.
Mongolia isn’t a country commonly associated with luxury. Its nominal per capita GDP sits below that of Armenia, Tuvalu and Sri Lanka. Its only real city, Ulaanbaatar, is the planet’s coldest capital and often its most polluted. But some of the world’s biggest luxury brands are betting on it. Chinese consumers are the trump cards Mongolia is counting on. And the crisis simmering in Hong Kong promises to serve as an unlikely catalyst.
For years, Mongolia’s economy has depended on mining — in particular copper — that has left it vulnerable to repeated boom and bust cycles as commodity prices fluctuate. Now, it is pinning its hopes on a surge in tourism from consumerist China to also drive its emergence as a destination for luxury spending, hoping to add a fresh arrow to its economic quiver.
Over the past year, Rolex, Versace, Burberry and Gucci have all established bases in the capital. Commercial buildings housing luxury outlets, such as the Shangri-la Mall, are becoming a more regular sight. Meanwhile, Mongolia saw a 19 percent increase in Chinese visitors in 2018, and a 15 percent rise in sales of luxury products that industry insiders say simply can’t have been driven solely by the domestic market. Overall, retail sales rose by 22 percent, to $2.9 billion, according to latest figures.
Despite China’s slowing economy, there is still a huge rising demand for luxury goods.
Thomas Klein, Creative Union
And in the first half of 2019, a period which overlaps with the start of the Hong Kong protests, mainland Chinese tourists made up more than a third of all visitors to Mongolia — even as Chinese tourism to Hong Kong has fallen by 42 percent. Chinese consumers and tourists drive the global luxury economy — they’re responsible for a third of the industry’s spending — but experts predict sales figures for luxury brands in Hong Kong will fall between 30 and 60 percent this year. Yet that could prove a surprising fillip for Mongolia’s luxury sales, they say, as Chinese tourists pick the country’s northern neighbor more.
“Despite China’s slowing economy, there is still a huge rising demand for luxury goods,” says Thomas Klein, co-founder of Beijing-based digital strategy firm Creative Union. “Chinese consumers will continue to be the engine of worldwide growth in luxury spending, and it is crucial for luxury brands to have a piece of the pie.”
To attract Chinese tourists, Mongolia has taken a series of steps — and is plotting several more. Over the past year, the government has started free Mandarin classes to Mongolians working in the tourism industry. In 2019, Ulaanbaatar’s tourism department launched a series of “Culture and Tourism Days” in cities across the Chinese province of Inner Mongolia to highlight the Mongolian capital as a tourist destination. In a separate move, the tourism board is organizing sporting events, including a motorsport festival, specifically targeting enthusiasts from China.
The country needs to do that in part to support its high-end offerings such as luxury brands, says a partner at an investment advisory firm based in Ulaanbaatar, who requested anonymity. “The domestic Mongolian consumer market is simply too small to sustain luxury brands in the long run,” he says. “Ulaanbaatar could feasibly become a new destination for Chinese luxury spending.”
For Mongolia, the advantages are simple. According to McKinsey & Company, Chinese consumers spent $115 billion on luxury goods in 2018. By 2025, this figure is predicted to reach $170 billion, meaning Chinese consumers will be responsible for 65 percent of market growth over the next six years.
The benefits to Chinese visitors are clear too. Over 70 percent of China’s luxury spending is by tourists when they travel abroad. That’s because China — despite the flush of big brands that dot its cities — charges taxes as high as 56 percent on luxury products. In August, the same luxury products in China were on average 33 percent costlier than in France, according to global research firm Gartner.
Traditionally, Hong Kong — famous for some of the lowest tax rates in the world — has been the preferred destination for Chinese luxury shoppers. But the pro-democracy protests have changed that in recent months. According to financial services firm Jefferies, Burberry’s Hong Kong sales will be hit to the tune of $122 million this year. Watch and jewelry firms are expected to be harder hit, with third-quarter sales down 47 percent in Hong Kong.
That’s where Ulaanbaatar — a shorter flight away from Beijing compared to Hong Kong — could come in. Mongolia’s sales tax is 10 percent, with no additional luxury tax. Janet Yu, who lives and works in Beijing and until last year visited Hong Kong several times a year for designer goods and luxury cosmetics, has for the moment shifted her loyalty to other established luxury destinations such as Japan and South Korea. But she likes the idea of Mongolia as an alternative. “If Mongolian outlets sold the brands I like and I was confident of their authenticity, I would certainly shop there,” she says. “It’s close, and I like the idea of shopping somewhere not many others do.”
To be sure, Ulaanbaatar can’t compete with Hong Kong in terms of connectivity or a cosmopolitan culture. And sustaining its gains once Hong Kong’s crisis dies down won’t be easy. Fluctuations in Mongolia’s domestic economic fortunes — still dependent on minerals — could once again derail the nation’s plans.
But for now, confidence is high. The Asian Development Bank has amended the country’s economic outlook from 4.3 to 6.1 percent growth for this year. The country is targeting 1 million foreign visitors in 2020 — compared to 598,000 in 2018. (Mongolia’s own population is only 3 million.) A survey by real estate firm Mongolian Properties in 2019 showed that four in five retail owners planned to increase the number of outlets they operated in Ulaanbaatar.
And this is just the start of Mongolia’s coordinated efforts to establish itself as an emerging market for Chinese luxury spending. The land of sweeping grasslands, vast deserts and nomadic herders is making its move so that it is also known as the land of designer bags, luxury watches and high-end shoes.