China’s Slowdown Means End of ‘Low-Hanging Fruit’ for Foreign Luxury Brands

    As the era of easy China sales growth ends for foreign brands, they need to develop a strong understanding of their Chinese customers in order to stay ahead in this challenging yet vital market.
    A Prada store in Shanghai. (Shutterstock)
      Published   in Finance

    A Prada store in Shanghai. (Shutterstock)

    For many foreign brands—even those with more than two decades and large dedicated teams on the ground—China has become increasingly challenging, with earnings dropping amid stiff competition and surging local competition. Far from being an issue of lower demand for “bling,” which was exacerbated in recent years by President Xi Jinping’s ongoing anti-corruption crackdown, the range of foreign brands facing tougher times is indicative of a range of issues, from pricing to the nature of marketing in an ever-changing China.

    Although recent months have seen flatter demand even for products such as dry milk powder from New Zealand (demand for which skyrocketed from 2008 to 2013), luxury brands—owing to their high-profile nature—have attracted greater attention. Last week, Prada put part of the blame for lower first-quarter profit on a significant drop in sales in China, noting a 17 percent decrease in revenue in the Asia-Pacific region—where Chinese shoppers remain the main powerhouse.

    As the Italian luxury giant said in a statement, “Performance in [the Asia-Pacific] area has been affected mainly by the market conditions in Greater China, especially in Hong Kong and Macau, where the decline in Chinese tourist numbers, already seen in the second half of 2014, shows no signs of abating.”

    The first-quarter headaches in Asia weren’t limited to Prada, with Gucci noting a 10 percent decrease in sales at its owned shops in the region during the same time period.

    For luxury automakers as well, China—still the world’s number one auto market—is in a period of transition. This week, Maserati closed its showroom on Beijing’s Financial Street in a move that indicated to some China watchers that the pendulum has swung in a very real way towards more modest luxury cars like Mercedes and BMW sedans. Non-supercar makers, such as Jaguar Land Rover, have also seen sales flag in 2015 in China, with JLR reporting a 20 percent decrease in sales in the quarter up to the end of March (despite a nearly 4 percent growth rate in overall car sales in the market in that time period). This is a stark contrast to JLR’s performance just one year before, when sales grew 36 percent.

    For several luxury brands, recent China struggles have been an impetus to cut prices. As Jaguar Land Rover CEO, Ralf Speth, told analysts in late May, "It is quite clear we will see a certain slowdown in the (China) market and we read that many competitors are going to reduce prices.” This has been the case for the likes of Gucci and Chanel as well, which cut prices this spring in response to a weaker euro and in the hopes of narrowing the massive luxury price gap between China and the EU or North America. (And, in the process, discouraging some third-party daigou or gray-market sellers.)

    However, decreasing revenue and an overall tougher time in China cannot be chalked down only to the anti-corruption campaign. The fact remains that the campaign is aimed at government officials, and millions of consumers—particularly younger professionals and entrepreneurs—aren’t directly affected. Other factors, either established or emerging, continue to bite into brands’ China income.

    Increased West-Bound Travel#

    With international tourism becoming increasingly affordable and accessible, more shoppers are traveling (and shopping) outside of China, with many opting this summer to skip popular South Korea—due in no small part to a dangerous MERS outbreak—for Japan or the West. According to the Japan National Tourism Organization, Chinese arrivals to Japan soared 134 percent year on year in May, making that month the first time China topped the charts of foreign travelers in Japan.

    The United States is expecting a strong sustained rise in Chinese tourist arrivals through 2020, spurred in no small part by moves last November by the Obama administration to extend Chines tourist visas to 10 years, encouraging travelers to make multiple trips. According to the Commerce Department, this move will help the United States attract more than 7 million Chinese visitors—up from the current 2.1 million—by 2021. More recently, the UK took steps to allow Chinese tourists to apply simultaneously for UK and Schengen visas beginning on July 1, in an effort to create, as British Home Secretary Theresa May put it, “a one-stop shop for Chinese visitors to the UK and Europe, whether they are coming here for business or leisure.”

    As Reuters notes, the UK’s policy shift has been lauded by the British Hospitality Association (BHA), which estimates that Britain loses out on 1.2 billion pounds ($1.9 billion) a year from Chinese travelers opting for wide-ranging European vacations due to the simplicity and relative efficiency of obtaining Schengen visas.

    What this easier and more affordable travel means for luxury brands is that they will continue to face difficulties in closing sales within China. Lowering prices may help somewhat for some brands, but if consumers see overseas shopping as a luxury in itself—which bestows “face” and status among their peer group—brands are going to have to give these shoppers much more compelling reasons to shop at home.

    More Complex Marketing Environment#

    Another reason foreign brands—from consumer goods to luxury—are struggling in China is simply that they’re being outmaneuvered from a marketing standpoint by local companies. One example of this is the small local cosmetics brand Bai Queling, which has seen surging sales through a high-profile endorsement by Chinese First Lady Peng Liyuan (who handed out lotions and creams created for her by the brand when on overseas trips last year), and by savvy sponsorships of programs like “The Voice of China.” The brand also smartly tackled China’s fast-growing e-commerce market, offering special online-only exclusive products with greater profit margins. Meanwhile, as WSJ points out, much larger competitor Unilever has a consistent selling strategy across all of its portfolio brands, with industry observers criticizing Unilever’s reliance on traditional buy-one-get-one-free promotions instead of boosting its e-commerce efforts.

    Although local Chinese luxury brands probably aren’t giving the likes of LVMH and Kering any nightmares quite yet, they are making inroads particularly by leveraging e-commerce. According to the Deloitte Touche Tohmatsu (DTTL) “Global Powers of Luxury Goods 2015” report, Chinese luxury goods firms posted 33.4 percent growth in FY2013, outpacing their Western counterparts. In particular, Chinese jewelry firms continue to see rising sales, with Chinese newcomers to DTTL’s new list including Lao Feng Xiang (which recently opened a flagship on New York’s Fifth Avenue), Chow Sang Sang, Luk Fook, and Zhejiang Ming, joining large-scale fellow countrymen such as Hong Kong’s Chow Tai Fook—which recorded $8.29 billion in year-on-year retail sales value growth, and 29.3 percent e-commerce growth in FY2015.

    If they are to retain their hard-fought status in China market, boost flatter sales, and fend off local competition, clearly major luxury brands must re-evaluate their existing strategies. What exactly does this mean? It means more unified pricing across major markets (to encourage more purchases in China), service and retail consistency worldwide (to build loyalty among those who visited stores abroad and want to have that same experience at home), smart marketing efforts that leverage emerging trends, popular culture, and the right influencers (beyond the usual high-profile celebrities and bloggers).

    But more than anything, it means the days of complacency towards a dynamic China market are long gone. Now, the ball is in brands’ courts to make a change.

    Avery Booker is a partner at China Luxury Advisors.

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