NEW YORK, United States — One of the biggest stories to come out of the global luxury industry in recent weeks was Chanel’s decision to increase prices for some handbags in Europe, while lowering prices in mainland China. This move, which took effect on April 8, is aimed at fighting a flourishing grey market and narrowing the price gap between China and Europe, which in some cases makes items up to 70 percent more expensive in China than in the EU.
Chanel isn't the only brand that has been spurred into action by currency fluctuations, rampant grey market sales in China and a yawning global price gap. Last week, Tag Heuer said it would cut prices eight percent in Switzerland, China, and the US and 13 percent in Hong Kong to combat a price gap exacerbated by the recent Swiss currency revaluation. Other brands to recently announce price adjustments include Cartier and Patek Phillippe. This could be just the tip of the iceberg.
However, price drops alone won't cause a massive reversal of fortunes for luxury brands in mainland China. Despite photos of lines forming outside Chanel stores in China in the weeks preceding the price increase (which likely included a significant number of grey market sellers checking prices) and articles predicting a rebound for the brand, Chinese shoppers make roughly 70 percent of luxury purchases overseas for myriad reasons, with pricing just one piece of a much bigger puzzle.
The practice of buying luxury goods in Hong Kong, Japan, South Korea, Europe or the US is entrenched as what one does on overseas trips, especially as such travel becomes far more accessible for a growing number of mainland Chinese. Middle-class workers save up for big-ticket items to bring back to China, whether for themselves, friends and family, or to sell online. Meanwhile, the most affluent consumers (the Chinese VIPs coveted by the likes of Chanel) are spending an ever-greater amount of time and money abroad. As such, a price drop in Shanghai doesn't matter to someone who actively prefers to shop in Seoul or Seattle.
Some of the most fervent Chinese buyers of luxury goods are the US or Europe-based offspring of high-profile figures — who themselves have cut back on conspicuous consumption at home. Pricing adjustments may cause a bump in sales of small, lower-priced accessories in mainland China, since middle-class shoppers can't justify an intercontinental trip to save a few thousand yuan, but those overseas rich kids won't travel all the way home to shop at Chanel.
The factors that have long driven overseas purchases — greater prestige, better service and product selection, privacy and anonymity, lower taxes and, yes, prices — are structural and set in stone. Quite simply, China's most active luxury consumers are accustomed to buying abroad and see no compelling reason to stop now — unless price is their only concern. This is only the case for some grey market sellers or less affluent buyers, who do not make up luxury brands’ core consumer base anyway.
Chanel’s high-profile move to unify pricing worldwide is a good step, and other brands will undoubtedly follow suit. However, it may be too little, too late. Really, brands should have taken steps to make their prices more consistent before regular price increases took place in 2013 and 2014 and the ongoing anti-corruption crackdown sent China's many of wealthiest consumers on a permanent overseas shopping trip.
Avery Booker is a partner at China Luxury Advisors.
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