SHANGHAI, China — "When LV is the first to lower its prices in China, but you still can't afford anything," wrote Shandong People's Radio Station host and verified Weibo user Fang Hua on July 16. Hers was one of several sarcastic comments shared on social media after the Chinese government's decision to reduce import duties, which triggered a domino effect of markdowns among European luxury brands earlier this month.

"The government's efforts are a clear positive for consumers," countered a Burberry spokesperson who was quoted in a news post on Weibo, to which one user, Xiliangmozi, cheekily responded: "I don't lack the 4 percent [reduction], but the remaining 96 percent." Despite the irreverent mood of these and other Chinese netizens, many avid luxury consumers across the country welcome the savings.

Though 4 percent might not be the discount that consumers were hoping for, marginally lower prices in China are a positive short-term outcome.  Many hope that modest markdowns this month could signal a potential pivot towards better global pricing harmonisation in the long run.

For brands, passing savings onto customers is only secondary to viewing the lower tariffs as an opportunity to streamline the way they run their businesses, by better synchronising prices on a global level to provide much-needed consistency for consumers. In other words, the markdowns are less concerned with encouraging shoppers to buy more bags now, but rather, more about where the purchases happen in the future.

Price arbitrage is a big issue for Chinese consumers, who have been the main driver for Europe's booming travel retail sector.  According to Exane BNP Paribas, luxury goods purchased in Italy and France in 2017 cost 22 percent less than the global average, while the same goods in China were about 21 percent more expensive. As such, Chinese luxury consumers are often trained experts at navigating the uneven terrain of price gaps. "You hear about which boutiques and outlets in which cities have the best stock and which airports have the easiest VAT refund system," said Ashley Yang, a 25-year-old fashion student who owns coveted pieces by Céline and Gucci. "It's not rocket science."

A Domino Effect

Louis Vuitton took the lead on making price cuts ranging from 3 to 5 percent on both its e-commerce site and in stores. The price of the brand’s Neverfull MM tote bag was reduced to 9,900 yuan ($1,462) from 10,400 ($1,536) on the brand’s official site by July 3rd, according to China’s Caijing news platform — a price difference of 500 yuan ($73.85).

Days later on July 6, Gucci announced that it would be "adjusting its retail prices downwards across all categories” including both new arrivals and extended styles, at an average rate of 5 percent. Hermès and Burberry have both implemented a 4 percent price reduction on goods, and other brands are expected to follow suit.

The price cuts stem from the Chinese government's policy to reduce import duties and VAT on consumer goods, which officially came into effect on July 1. The average import tariff rates for apparel, shoes and accessories dropped from 15.9 percent to 7.1 percent, whereas rates for cosmetics decreased from 8.4 percent to 2.9 percent.

“The government has realised that any future economic growth is not going to come from basic manufacturing, investment or infrastructure projects and that it’s going to come from the consumers,” China Market Research Consulting’s senior researcher Benjamin Cavender told BoF. According to official figures from the National Bureau of Statistics, China’s retail consumption is going strong, with 9 percent year-on-year growth in June alone and a 30.1 percent surge in e-commerce sales over the first half of 2018. Robust retail sales have helped offset a wider slowdown in industrial output and investment, as trade tensions with the US continue to cast a shadow.

Beyond inconsistent pricing, fashion houses have long dealt with siloed operational systems, for which upgrades are long overdue. “When loyalty programmes, inventory control and pricing aren’t synchronised, it’s difficult to manage a brand efficiently,” said Cavender. The result? Poorly coordinated assortment and inventory planning — and lost sales. “Even before any of the tax cuts came into play, brands were already thinking about how to achieve uniformity, so that Chinese consumers wouldn’t go to their stores and see them as showrooms for what they’ll eventually purchase overseas,” he continued.

Price Alignment Strategy

Most luxury brands now depend on the Chinese like no other nationality. It is estimated that the Chinese  account for one third of all global luxury sales, though most transactions take place overseas.  In recent months, Hermès reported a 16 percent rise in revenue in Asia (excluding Japan) and LVMH’s first-quarter sales grew 13 percent due to strong demand from its Chinese customers. “It’s now up to brands to upgrade the shopping experience for the customers that they’re increasingly relying upon,” said Cavender.

Chanel decreased some prices in China as a part of its global price harmonisation strategy in 2015. Hence, the brand will not be implementing further reductions. "The differences of taxes and duties already have been taken into account in our pricing policy; this is why we do not consider decreasing our prices," a spokesperson for Chanel told BoF.

In any case, the reduced prices are a small but significant step for the global luxury industry because they have wider repercussions . In addition to baiting domestic consumption, the reduced tariffs target the daigou market of overseas personal shoppers, which has long thrived on the price differences between China and the West. If price harmonisation becomes a reality, “demand for daiogu will certainly go down,” said Mike Vinkenborg, market research specialist at Daxue Consulting. “Brands will be able to sell themselves to consumers within China, rather than relying on overseas buyers to bring products back.”

Brands will be able to sell themselves to consumers within China, rather than relying on overseas buyers to bring products back.

As price harmonisation comes closer and closer to becoming a reality, brands will also need to consider how they can maintain consistency while steering clear of monotony, considering that around three-quarters of Chinese luxury spending now happen overseas, according to Vinkenborg.

Providing exciting experiences abroad will remain valuable for brands, “who are likely to emphasise special experiences that might be related to a specific city or store, so that there’s still a reason for someone to visit a store in Milan or New York,” said Cavender. The initial markdowns are a pivotal first step for the fashion houses that are becoming increasingly reliant on Chinese wallets and consumers may be able to enjoy price parity in coming years. “It's hard to predict when exactly total price normalisation will occur, but I wouldn't be surprised if we see some brands setting China to the same price point as Europe within the next 5 years.”

Shandong Ruyi eyes Acne Studios, seals the deal with Secoo.

Beijing-based e-commerce platform Secoo has announced a strategic partnership with Chinese textile and clothing company Shandong Ruyi. According to representatives, the deal will allow the two companies to establish a global omni-channel retail supply chain by leveraging their joint resources and expertise in branding and technology.

The Shandong Ruyi Group has been on a global acquisition spree in recent years: from Paris-based SMCP (whose brands include Sandro, Maje and Claudie Pierlot) to British brand Aquascutum, Hong Kong-based menswear group Trinity (which operates Cerruti 1881, Gieves & Hawkes and Kent & Curwen) and Swiss luxury brand Bally, in which it acquired a controlling stake in February 2018. The group is also rumoured to be acquiring Swedish label Acne Studios, although Lanvin owner Fosun International has been named as another potential buyer.

Cosmo Lady hires Victoria’s Secret’s ex-chief executive.

Cosmo Lady, China’s top lingerie brand by market share, has appointed Sharen Jester Turney as its chief strategic officer. In her new role, the former Victoria’s Secret chief executive and president will advise on branding, design recruitment, mergers and acquisitions and retail operations.

Turney helmed Victoria's Secret for almost 40 years, during which the brand launched its famed annual fashion show and saw its revenues grow from $4.5 billion to $7 billion. On July 17, the brand opened its flagship store in Hong Kong, after opening its first 25,850-square-foot Chinese flagship in Shanghai last February. The brand made its ambitions to tap into the market clear after bringing last year's fashion show to Shanghai, in which Chinese VS regulars such as Liu Wen, He Sui and Ming Xi joined the clan of 55 angels to walk the runway. According to Euromonitor, China's underwear market is expected to grow to a retail value of $33 billion by 2020 and sales are expected to equal, if not exceed, the US in the long run.

Dazzle Fashion’s entrepreneur joins China’s growing billionaire population.

Womenswear label Dazzle Fashion's chairman Ma Ruimin has made the billionaire ranks following the company's Shanghai IPO last month. Dazzle, alongside its sub-brands "Diamond Dazzle" and 'D'zzit' are red carpet favourites and have been worn by the likes of Liu Wen and Yang Mi. The company's revenue rose by 7 percent in 2017 to $293 million and the $246 million raised in June will be used to add over 300 retail stores to its current 1,038 across the country. According to Forbes, China is home to the world's second-largest group of billionaires after the US.

Zara to launch recycled garments programme in China, while Alibaba and L’Oréal make anti-plastics pledge.

Zara owner Inditex announced its plans to launch an at-home pick up service to recycle apparel in China this September. According to the group, the programme has enabled Zara to collect over 25,000 tonnes of garments in 21 markets since 2016 and is run nationwide across its native Spain. Zara, ASOS, H&M and Kering were among the leading retail players who in January signed a commitment to reduce the fashion industry's waste problem under the guidance of the Global Fashion Agenda. Inditex, which also owns Stradivarius, Massimo Dutti, Bershka and Pull and Bear, pledged to launch garment collection schemes across 2,000 stores by 2020, and partner with local organisations to recycle and re-distribute the clothes thereafter.

Earlier this month, L’Oréal and the Alibaba Group agreed to reduce waste in China through using environmentally friendly packaging. L’Oréal pledged to decrease its use of single-use plastic materials and switch to FSC-certified sustainable paper and paper adhesives. The agreement seeks to promote “green, healthy and sustainable social values,” Jet Jing, the head of Alibaba-owned Tmall, said. “The upgrade of consumption is both an upgrade in quality of life as well as consumer awareness.”

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