Chanel's China Price Cuts: Should Other Luxury Brands do the Same?

    While some luxury brands have cut China prices in the wake of a falling euro, others are taking a "wait and see" approach to the price gap.
    The Chanel store at Shanghai's IFC shopping mall. (Shutterstock)
    Philip GuarinoAuthor
      Published   in Fashion

    The Chanel store at Shanghai's IFC shopping mall. (Shutterstock)

    Chanel's announcement in March that it would increase prices in Europe by 20 percent and drop them a similar amount in China raised eyebrows in the luxury industry and set off speculation that many other brands may follow suit. Ostensibly, Chanel's move was designed to “align” prices in anticipation of an international e-commerce push as well as discourage China's daigou or overseas shoppers, who purchase abroad and resell in China. The decision followed a sharp depreciation in the euro since mid-2014, which accelerated significantly in the month of March.

    Since then, what has been the fallout in the luxury industry? And from the consumer perspective, has this move been beneficial for Chanel? What other dynamics should we be considering?

    Some brands quickly made similar pricing adjustments, following Chanel's lead. Prada, for example, lowered pricing in China but decided to keep Europe pricing unchanged given weak domestic demand there. Burberry hinted at an imminent change similar to Chanel's, stating that it was keeping a close watch on exchange rate variations. Most, however, have been more cautious. Kering has taken a “wait and see” approach while LVMH has categorically stated that unified exchange rates (consistent pricing across markets) was not a strategy that they espoused, as it does not allow flexibility for luxury brands.

    Unquestionably, a weaker euro caused the already sizable price differential between Europe and China to soar even higher. Goods in some cases were 60 percent more expensive in China than they were in Europe. That differential still exists, albeit to a lesser degree, between China and other markets. Japan and South Korea in particular—two of the most important destinations for Chinese tourists—are choice destinations for luxury shoppers. And the United States, with prices being on average 30 percent higher than Europe, still remains an attractive place for Chinese travelers (and resellers) to purchase luxury goods.

    Since March, some economic factors have shifted, favoring those firms who have taken a “wait and see” approach. Most importantly, market weakness in the United States has led the Federal Reserve to postpone increasing lending rates. This has led to a rapid and significant downward for the US Dollar. Reaching a high of 1.04 in March, the dollar has now lost almost 9 percent against the euro, pricing currently at 1.14. Where the dollar will settle is uncertain, although the euro is not expected to strengthen significantly given the current expansionary monetary policy of the ECB. Nonetheless, the correction has been significant in a very short time.

    Yet with respect to China, there is another side of the equation that many firms have underestimated: the renminbi (RMB). The assumption that China’s currency will remain resolutely stable is one that has recently been questioned. China still has immense assets at its disposal, but with a housing bubble, a slowing economy, and whispers of increasing capital flight, absolute stability of its currency cannot be guaranteed. A devaluation of the RMB could be tremendously negative for luxury firms, particularly those that that are already overextended in China. Stay tuned.

    Currencies aside, another key development—which may potentially change the dynamics for many luxury brands—was the recent crackdown by China's State Council on gray market imports. The Council recently ordered more transparent and consistent tax collection while increasing seizures of counterfeit products. At the same time, the Council has requested a reduction in import duties by July in order to stimulate local demand (which has been weak). Which products and how much of a reduction will apply has not yet been announced.

    But the bigger question is whether a reduction in price in China would release the genie in the bottle, stimulating local demand and delivering better performance from Chinese business units. It’s unlikely that this alone will change the behavior of the Chinese consumer, and their penchant for buying luxury abroad. Price is just one factor among many that drive purchasing decisions. Service, trust, experience, and perceived prestige also drive Chinese consumers to want to purchase overseas at brands' countries of origin. Even with a 20 percent price hike in Europe or a 20 percent decrease in China, multiple factors still make it more attractive for Chinese consumers to purchase overseas. And it is possible that it might backfire, eroding the perceived value of a brand.

    There is some indication that this may be the case after Chanel's price adjustment. In May of 2015, China Luxury Advisors conducted a sentiment analysis across Chinese social media platforms to measure and observe the reaction of Chinese consumers to Chanel’s announcement. Discussion was lively, and a hashtag appeared on Weibo equivalent to #Chanelpricedecrease. While about 40 percent of consumers spoke positively of the price decrease, close to 60 percent had a negative reaction to the decrease. Some welcomed the decision stating that they intended to buy quickly, but more consumers bemoaned the fact that (Chanel) “shouldn’t forget LV” or asked, “Where’s the exclusivity?" Others worried that “lower prices will leave us overseas buyers with less profit."

    How international economic dynamics and Chinese policy shifts evolve in the short to medium term will have a significant impact on the luxury industry. Currencies are notoriously prone to volatility, so basing strategy on currency fluctuations can prove to be risky at best. In summary, those brands which chose to “wait and see” are probably in the best position to be resilient.

    Philip Guarino is the Europe director at China Luxury Advisors.

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