BEIJING, China — For the first time in six years, the Chinese luxury market has been set back after several consecutive years of double-digit growth. Indeed, behind the news that, last year, the country dethroned the United States to become the largest luxury market in the world, China’s luxury spending growth rate has slowed to 7 percent, a drastic drop from the 30 percent growth seen the previous year.
Numerous reports have suggested that China’s much publicised crackdown on extravagant consumption has played a significant role in the slowdown. Announced by Party General Secretary Xi Jinping late last year, the policy — which discourages officials from extravagant spending and displays of wealth — is meant to diffuse the general population’s frustration with corrupt government officials, who are known to except bribes in the form of gifted luxury goods, and the increasing wealth gap between rich and poor.
But what impact are these measures really having on the vast Chinese luxury goods market?
It’s worth considering that Beijing is unique in its luxury consumption patterns. In the Chinese capital, demand for luxury goods peaks every March, the height of the Chinese gift-giving season, followed by an influx of returns and exchanges in April and May. Such is the scale of gifting activity that many luxury brands allow for exceptions to their sales policies during this period; for example, Dior extends the timeframe within which shoppers can make returns or exchanges after the date of purchase.
In recent years, Beijing’s Shin Kong Place, a shopping mall opened in 2007 that’s home to many luxury brands, has typically seen 30 to 50 percent growth in annual same-store sales. In 2012, by contrast, it’s a very different story; same-store sales have dropped 12.3 percent. Whereas sales at the Shin Kong Place Gucci store would have dwarfed those at the brand’s other locations before 2012, Gucci’s Wuhan store is now its top-performer in China. Other Gucci stores in Beijing have also fallen below the company’s top ten performers nationwide.
A person familiar with Gucci in China indicated that the decline in the brand’s Beijing sales is a direct result of the shrinking gift market. Accessories and other products that are not dependent on personal measurements are very popular gifting items; Gucci’s crocodile-skin briefcases and other leather goods, in particular, have long been favoured gifts. In the wake of the anti-corruption campaign, this category has been the hardest hit.
But many sales representatives for luxury brands indicate that senior-level management at their respective brands are aware of the negative sales impact stemming from the anti-corruption campaign and deem it to be short-lived and confined primarily to Beijing.
The truth is, the luxury market in China was in decline well before the anti-corruption campaign was introduced. Indeed, it’s much broader changes in Chinese consumer behaviour and sentiment — and not the anti-corruption campaign — that are the likely culprits behind the recent slowdown.
Cartier, the top luxury timepiece company in the country, saw a sharp sales decline starting in May of last year. Even over the Chinese New Year festival, which stretches from the first of the year to the Lunar New Year and is normally a boon for luxury brands, Cartier sales dropped 60 percent on a year-over-year basis.
Similar signs have emerged in the advertising sector. According to a KPMG report released in January, the volume of advertising for luxury brands delivered through traditional media has declined steadily throughout 2012, a reflection of marketing budgets that were likely set by the end of the previous year in response to what brands were seeing in the marketplace.
Swiss pen maker Montblanc attributes the slow growth to overseas consumption and the rising popularity of online purchasing agents. “The Chinese consumers have become more and more flexible in the way they purchase. To some degree, it exerts negative impact on our sales in Chinese market,” said Gu Jitao, chief executive of Montblanc China.
Indeed, Chinese shoppers increasingly make their luxury purchases while traveling abroad in Europe or the United States. More shoppers, as well, are taking advantage of e-commerce. Taobao, China’s largest e-commerce platform, revealed that luxury transactions doubled year-on-year in 2012.
Price is the main driver behind both increased overseas consumption and online purchases, as the Chinese government imposes high local duties and taxes on imported luxury goods. Additionally, services provided by some luxury brands have not kept pace with the number of new store locations, leading some Chinese consumers to prefer the experience of shopping overseas.
“Many Chinese are purchasing wristwatches in Switzerland. Due to the price gap, some would buy four or five watches at once. For a Cartier watch, which sells for 500,000 ($81,100), the price in Switzerland could be 30 percent off,” said a saleswoman at a Cartier store in Shanghai, who requested to remain anonymous.
What’s more, Chinese consumer tastes are changing quickly. While many consumers still purchase luxury goods with blatant logos stamped across them as loud displays of status and wealth, a practice that remains especially prevalent in second- and third-tier cities, new consumption patterns can be seen, especially amongst young people, aged 25 to 35, in the growing middle class, who buy in accordance with their own personal preferences and tastes, and tend to be less enthusiastic about overexposed, heavily logo-ed products.
Some brands are responding to the slowdown by adjusting their product mix. Gucci, for one, is putting more exclusive leather goods on store shelves, while limiting the percentage of canvas products to 10 percent or less. The brand is also stocking more non-traditional colours and avant-garde designs.
Many brands are also reining in expansion. “In the past, luxury brands tried their best to reach every part of the first tier cities or extend to second tier or third tier cities. Popular brands like Dunhill are such cases. But now they have made fewer such moves,” said Zhang Jiapeng, executive director of RET Real Estate Consulting in Beijing.
Alongside store reduction policies, advertising in urban newspapers is being limited to second and third tier cities. But more ads for luxury goods are being shown on television and online, on social networks in particular, in order to expose new potential consumers to international luxury brands. Many companies, including Chanel, Zegna and others, are also staging museum-style exhibitions to introduce themselves to new consumers.
“But it’s a slow process for new consumers to grasp and appreciate a brand’s attributes,” said Zhang. “They do not rush for something newly discovered.”
A version of this article first appeared in leading Chinese business magazine CBN Weekly.