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Is the shine gone from luxury goods?
Chinese mainland visitors line up at a Prada shop in Hong Kong. Although growth has slowed for many luxury retailers in China, Chinese consumers last year still purchased luxury goods with an estimated value of $10.2 billion in domestic and foreign outlets, 47 percent of the world's total. (Geng Feifei/China Daily)
Publication Date : 19-02-2014
Sales of high-end items from foreign retailers in China slowed dramatically last year, necessitating new strategies
It's the largest consumer market in the world and potentially the largest market for luxury goods.
But 2013 was a tough sell for many luxury retailers in China, the world's second-largest economy. After a 7 per cent rise in 2012, the luxury goods market declined to about 2 per cent growth, with expectations of similarly slow growth in 2014, Bain & Co found in a recent study.
Despite the general slowdown, Chinese shoppers are the biggest buyers of luxury goods when they go abroad, according to the Bain study.
For foreign retailers selling luxury goods in the world's most populous country or considering setting up shop in it, it may be decision time: Stay and reduce operations? Or stay out until there is a rebound?
"I don't think brands are going to pull out or that new brands will stop investing in China," said Gregory J. Furman, founder and chairman of the Luxury Marketing Council. "But I don't think brands are going to invest as aggressively in retail as they did before."
"Most people who have been following the news should be getting the sense of potential in the long term, which is always the Chinese strategy. Any luxury brand that looks for the long term is not going to be daunted or discouraged by a momentary setback," said Furman.
Last year, more than half of major international retailers in China missed their target numbers for store openings, according to Knight Frank Research.
The property consultancy said that more than 60 per cent of the 45 international retailers it surveyed missed their targets due to a range of factors, including difficulty in finding good sites and a slowdown in expansion plans as the government put the brakes on wasteful spending and corruption, which curbed a general demand for gifts.
Louis Vuitton, with 47 stores in China, exceeded its target for adding stores in 2013, but it announced last March it would curb expansion in China's second- and third-tier cities.
Since President Xi Jinping took office in November 2012, the anti-corruption drive has sent chills through China's luxury market. The average spending of China's high-net-worth individuals decreased by 15 per cent in 2013, and spending on gift-giving plunged 25 per cent, according to a Chinese luxury consumer survey released in January by the Hurun Report.
But on Thursday, French retailer Hermes reported record fourth-quarter sales in China, and CEO Alex Dumas dismissed the effect of the corruption crackdown on its sales.
"We have not been affected by that movement," he said in reporting that sales in the Chinese mainland rose 19 per cent last year at constant exchange rates and 17 per cent in the fourth quarter alone.
"There has been a very rapid evolution of Chinese customers' tastes, which means they increasingly look for discrete products, and this has played in our favor," Dumas told Reuters in an interview.
Shirley Young, president of Shirley Young Associates, and governor and ex-chairman of the Committee of 100, said the government's austerity programme will cut into luxury purchases in the short term.
"You'll have the whole trend of the country when 300 million people come to the cities, like a whole United States moving in, which will happen in five years or so," she said. "You'll have a much bigger urban population that has much more access to purchasing."
"It's part of human aspiration as they rise up in society that they will look beyond basic needs, which is luxury," she added. "The long-term trend is positive."
"The (luxury) market is like the stock market that rises and falls," said Furman. "In a down market, the realtors, the shopping malls and the government would want to encourage brands to come in by offering better deals. From a business standpoint, a new brand can grow as the market comes back."
Sun Baohong, the dean's distinguished chair professor of marketing at Cheung Kong Graduate School of Business in Beijing, said new luxury brands are building flagship stores in Shanghai and Beijing.
"The bigger, the more flamboyant and the more luxurious they look, the better," said Sun. "It showcases the brand's status."
In early January, L'Oreal decided to end sales of its Garnier-branded products in China, a week after New York-based competitor Revlon pulled out of the Chinese market.
"Revlon's exit is due to their marketing failure in the mid-priced cosmetics segment," said Ann Lee, author of What the US Can Learn from China and a senior fellow at British think tank Demos. "The Chinese consumer market is highly competitive, and Revlon just didn't have the right strategy, as opposed to the Chinese being anti-foreign."
"Regarding Garnier and others, their exits are simply that there are always going to be winners and losers in a competitive market. China's market is even more competitive than that in the US," she said.
According to Sun, emphasising the foreign origin of a company might have helped international brands capture Chinese consumers in the early years when the Chinese market opened up.
But, he said, "Chinese consumers have become more sophisticated over the years. As the quality gap between foreign brands and local brands has gradually narrowed, if a foreign brand does not pay attention to Chinese consumer habits and offer unique features of its products, it's only a matter of time before it is dismissed by the market."
Young recalled a time in the 1980s, when she was involved in development of General Motors' $1.5 billion joint venture in Shanghai.
"We had a smart financial idea, which is that we could sell the Chinese an existing product and appliance. It would be at very low cost, very safe and well-tested and ahead of the China market by 10 years. But the Chinese did not want that. They said then we will always be behind.
"You have to understand that part of the Chinese mentality. If they are going to pay, they want the best," said Young. "If they buy a Cadillac, a high-end car, it's obviously more than functions they are paying for. They need to feel it is technologically the best in every way, and that's how the brand is going to project itself."
Many luxury brands in China are still sales-oriented and profit-driven in terms of brand building, marketing strategies and customer service, Sun said. "What they should be doing, however, is careful planning, including understanding what Chinese customers want, cultivating purchasing habits, educating on brand heritage and offering customised services."
Sun's observations were echoed in the 2014 China Luxury Forecast conducted by Ruder Finn Public Relations and Ipsos Group.
The study revealed that Chinese consumers primarily attributed their decisions to shop overseas to experiencing poor customer service and staff knowledge in their home country. Dissatisfaction with brands' services at home was reported by 92 per cent of consumers from China, according to the study.
"Five years ago, you'd see people lined up in front of the Louis Vuitton store at Plaza 66 in Shanghai. Today, it's no longer the case," said Jessica Tu, chairman and CEO of the Luxury Marketing Council China.
"The taste of Chinese luxury consumers is gaining sophistication with remarkable speed, but the luxury retailers seem slower in catching up," said Tu.
"For example, customer-service policies in China are not equivalent to those in the US. Some boutique stores in China do not accept returns, citing reasons such as for fear of receiving counterfeit returned items, which will most certainly discourage luxury buyers."
According to a 2012 survey of Chinese luxury customers conducted by McKinsey & Co, two-thirds of the respondents agreed or strongly agreed that they prefer luxury items that are "low-key and understated," up from 50 per cent two years ago.
"Bottega Veneta handbags are getting very popular in China as they are more understated than some other brands with logos all over, and yet the woven strips of soft leather are instantly recognisable. So are Hermes, Ferragamo and MaxMara," Tu noted.
Furman said that American Express has done research on stages of consumption of luxury products and services by nationality.
"What they discovered, which is true universally in the US, Japan, the UK and Europe, are four stages of luxury consumption: acquisitive, inquisitive, authoritative and meditative," said Furman.
"Acquisitive means the bigger the brand, the bigger the logo, the more they can boast about it, the happier they are. That's where China was, and that's where Russia is and moving out of, and was the US in the 1970s," he said.
"Inquisitive is a wake-up call. The customers want to understand the price and value equation," said Furman, "why this is valued at $12,000 and why great things command a premium price. China is moving toward that stage very quickly, much more quickly than any other nation.
"In China, more and more people are moving into the authoritative phrase. They can tell experts what their opinion is and start feeling comfortably knowing what luxury means.
"Meditative is about the experience, the memory of a great product or a service story - the intelligence of being able to say I am in the know, I understand what luxury is. And it's a reward to oneself for having achieved the ability to understand what luxury is and share it with one's family.
"It took the US from the late '70s till the '90s to get to this meditative stage. China is going to be there in the next five to 10 years. The mainland consumers are moving at a record pace that more and more people will get more and more sophisticated faster and faster.
"It's a good sign for luxury products and services. Because if people understand the inherent value of the craft, the thought and the imagination that have gone into a product or a service, if they understand that truly, then price does not matter. They will pay anything," Furman said.
Luxury brands need to have a fundamental understanding of Chinese customers' likes and dislikes, Sun said. "Some argue that it's a buying pattern that Chinese like to show off with logos, but I don't think it's unique to China."
"It's a process by which people move up the food chain in terms of how they view the luxury product and services and how much they are willing to pay for it," Furman agreed. "It's a learning curve."
The question is: Where is that education going to take place?
"I think the retail experience is probably the primary experience of luxury in China because it's the easiest way with properly trained staff, which is a big issue, by the way, to educate the highly sophisticated consumers - the Chinese mainland consumers, the aspirational consumers who want to move up the food chain and spend money on luxury goods. It's the most direct way to educate the population what luxury is," said Furman.
In the West, luxury education often is done by newspapers, magazines, radio and TV. "But in China, the media structure has not evolved to the same level yet. Retail is probably the most important and the most powerful way customers experience the brand," he said.
"The Chinese are a bit touchy-feely," said Sun. "They like to feel and touch an item before they bring it home."
"That's why a lot of brands invested early on aggressively because they realise that the presence is as much 'advertising' as it was a retail business," said Furman. "Many brands were willing to invest even the metrics, meaning the number of the retail performances, was not equivalent to what one would experience in the West. But it's better than advertising."
E-commerce is another arena where luxury brands in China don't want to lose out. In Bain's study, 73 per cent of consumers use the Internet to learn about luxury goods purchases, and 36 per cent of the Chinese mainland and 34 per cent of Hong Kong Special Administrative Region respondents indicated that they preferred to shop for luxury online, according to Ruder Finn and Ipsos.
China's online shopping market is dominated by domestic operators. The biggest two players, Tmall.com and 360buy.com, occupy 50 per cent and 21 per cent of the total business-to-consumer market, whereas international online shops represent less than 3 per cent of market share, the Knight Frank and Woods Bagot report said.
"There are three formats of e-commerce for international brands to operate in China, and they are not mutually exclusive," said Sun.
"Brands such as Ralph Lauren opened stores on established e-channels. Some, such as Zara and Coach, chose to build their own shopping site, and some partnered with e-retailers such as Macy's 2012 investment in VIPStore Co in order to launch its branded products on Omei.com."
But launching an e-store for luxury brands on one of China's highly popular domestic e-channels is a double-edged sword. "You don't want to appear too available; you'll lose the luxury status," said Sun.
On the other hand, brands may miss out on exposure to a massive customer base and open the door to imitators selling products that masquerade as their own, the report concluded.