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The China Luxury Downturn Is Real - Global Luxury Brands Must Adjust

The China Luxury Downturn Is Real - Global Luxury Brands Must Adjust

Jan 17 2014, 11:46am CST | by

吃苦 (chī kǔ): To Eat Bitterness.  For centuries Chinese people have used this term to teach and remind themselves and their children that it is important to endure hardship, to develop a thick skin...

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36 weeks ago

The China Luxury Downturn Is Real - Global Luxury Brands Must Adjust

Jan 17 2014, 11:46am CST | by

吃苦 (chī kǔ): To Eat Bitterness.  For centuries Chinese people have used this term to teach and remind themselves and their children that it is important to endure hardship, to develop a thick skin and to keep persevering no matter how many obstacles are put in your way, and ultimately you will get through tough times and succeed.

Luxury companies currently operating in China and those who are considering market entry are looking back on 2013 as a period where growth in the premium luxury market slowed and the trend is looking to continue in 2014.

Things were especially hard for companies that depend on gifting (an important cultural and business practice in China) and for high end restaurants and beverage purveyors.

I have preached Chi Ku as a corporate philosophy to the hundreds of companies that I have worked with on entering and growing in China over the last twelve years and advise Luxury brands to internalize it now as well.  While there is an overall downturn, marked by steeper drops in some categories than others, and marked by upticks in others, the overall trajectory of the luxury industry, like that of the overall consumer market in China is still pointing up.

Here we will look at why there has been a downturn, why luxury companies should stay the course and where the opportunities for continued growth are even during a slowdown.

A number factors have driven growth down to about 2% from 7%-15% over the last few years.

1.    President Xi Jingping is intent of making a huge dent in the endemic corruption in Chinese politics and business.  Luxury items are sometimes used as a form of currency for favors and Guanxi (recipricol relationships).  One way Beijing is enforcing its anti-corruption edicts is by cracking down of gift giving, government group buying and conspicuous consumption.  They also see luxury buying as an outcome of officlas receiving Hongbao (payoffs.bribes). All of this is making some wealthy Chinese private citizens and public employees think twice about buying and wearing $50,000 watches and $10,000 suits and drinking $1,000 bottles of Baiju at nightly banquets.

2.     The desire for and increased sales of “Accessible Luxuy” brands (a sub-category of luxury below premium luxury) has been a key growth driver in the China luxury  market.  This trend is also fueling a desire among the nouveu riche as well as emerging middle class luxury consumers for the casual luxury of American brands and lifestyle living. This has had an effect on top-tier luxury products but has also been a bright spot.  Brands like COACH, Michael Kors and Tory Burch are thriving in China.

3.    Chinese luxury spending on the mainland is down in part because Chinese global consumer purchases are up in the rest of the world. Almost 60% of all luxury purchase made by Chinese citizen happen outside the mainland.

4.     Chinese luxury consumers are turning increasingly toward spending their ample disposable income on lifestyle purchases in addition to pure social status products.

Roy Graff, an expert in Chinese luxury travel and hospitality and founder of China Edge also points out that “the intense competition among established and new entrants to the Chinese luxury market” has affected growth for established brands and that “the growth of e-commerce has driven prices and value down for many of the previously highly desirable brands.” Online sales of brands like GUCCI and PRADA have increased and are not always sold through brand sanctioned platforms.

This has made some Luxury companies nervous. Some are considering slowing their China growth and others are even considering pulling out altogether.  Sidelining, shrinking or avoiding China is a huge mistake for luxury companies as this slowdown is a temporary situation and long-term China is and will be the most important luxury market in the world.

Some key reasons for luxury brands to continue investing in China as a long-term growth market and not to make impulsive short-term decisions are:

  • China’s
  • After 30 years of exponential  economic growth and development, China’s economy is slowing, but this is relative, from 10% to 6%-7%, which is still robust – luxury purchases will continue to grow with the economy in general.
  • Urbanization and an ever enlarging middle and upper class is fueling further growth for the best things in life – While 1st Tier cities and regions have been saturated, the new growth will come from Tier 2, , 3, 4 and 5 cities, representing another potential 300 million new luxury buyers.
  • Current events and government policy are always fluid in China.  When the differences between legitimate and illegitimate purchases are sorted  out “this too shall pass.”
  • The accessible luxury market will continue to grow and prosper

Sage Brennan, co-founder of  the consultancy China Luxury Advisors and an expert in Chinese luxury branding and retail says that “nothing has really changed, there are always ups and downs in the China market, this is a down, but the consumer is still spending, they just might not be spending where the brand is investing”.  Brennan also notes that “Growth over the last few years has come from lower tier cities and that will deep and be long-lasting trend, along with overseas spending.  “Brands need to focus on these realities.”

There are some key strategies luxury brands can implement to prosper in a temporary downturn that will also have long-term positive benefits.

  • Invest in identifying, attracting, serving and retaining the Global China Traveler. More than 100 million Chinese will be traveling abroad in the next couple of years and almost 60% of Chinese luxury purchases are made outside the mainland. Luxury brands must invest in the global and lifestyle desires and needs or Chinese luxury consumers.
  • Integrate domestic, global and China operations more closely.
  • Invest in more robust e-commerce and social media strategies inside the China market.
  • Rethink product lines, price points and merchandising.
  • Focus on Tier 2,3, and 4 cities.

Roy Graff also says that “brands must better manage a global inventory and sales system that understands how Chinese approach luxury purchasing. The Chinese customer is now global. The sooner those companies understand this the better. In most cases, China is a separate profit center, competing with other regions for the same customer. Thus, they do not share data across national borders.”

The premium luxury market has definitely slowed, but it will pick up again soon and in my opinion may grow even faster in the next ten years because of the established luxury demographic cohorts and the 300-400 million more potential buyers coming on line.  Luxury brands and retailers need to stay the course , continue to invest in China, but need to adjust their strategies for both short and long-term growth. Luxury companies must “eat bitterness”  for now with promise of sweets served for dessert.

Source: Forbes Business

 
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