Should Luxury Brands Give Up or Double Down on Mainland China?

    With a multi-year luxury market slowdown in China, brands consider shifting more of their focus to tourist spending abroad.
    A Louis Vuitton store in Hangzhou, China. (Shutterstock)
    Jing DailyAuthor
      Published   in Finance

    A Louis Vuitton store in Hangzhou, China. (Shutterstock)

    Amid continued bad news from the mainland China luxury market—most recently lower sales forecasts from Audi and stagnant H1 2015 revenue reports from Diageo—brands looking to set their strategy for the remainder of 2015 and 2016 may be tempted to cut back, potentially closing underperforming stores or slashing marketing budgets. But facing the current market situation, is pulling back the right strategy, or should major brands instead take the opposite strategy and double down?

    Although it is easy to dismiss the China luxury market, given the staggering growth rates of recent years have dropped precipitously since the onset of Xi Jinping’s anti-corruption crackdown, looking at domestic growth figures is deceptive. As economist Ludovic Subran of Euler Hermes recently told Financial Times, "Companies thought China was the land of opportunity, but it's not living up to that promise…They realize that the business environment is changing for the worse."

    Unpacking Subran’s observation indicates how muddy the waters have gotten in the global luxury market, since Chinese consumers continue to power sales for many—if not most—major luxury brands and conglomerates worldwide. Both LVMH and Kering boasted strong sales in Europe and Japan in their most recent earnings reports, while conceding that a significant proportion of these sales were made to traveling Chinese consumers. This year, Chinese tourist-shoppers have headed to Japan in droves, with an estimated four million Chinese tourist arrivals expected by year’s end.

    But since Chinese spending in Japan or Europe doesn’t help a brand’s China team, the question becomes: is continued spending on a brick-and-mortar retail presence, dedicated China team, and pricey advertising in mainland China worth it?

    Double Down?#

    Facing continued difficulties in China—luxury sales are expected to remain stagnant there in 2015 after negative growth in 2014—the instinct for some brands may be to simply decrease the investment and refocus efforts on other, more profitable, markets. But this threatens to make the China situation even worse. Many Chinese tourist-shoppers will visit their local luxury mall ahead of a trip overseas for reconnaissance, finding the items they’ll later target for purchase when visiting France, Japan, or the United States.

    If they visit that mall to see that a favorite brand has shut their local boutique down due to the current bump in the road, they’ll likely visit a competitor—and possibly make that purchase abroad. Keeping brick-and-mortar stores open (if a brand has them in China) may be expensive, but it can serve as the storefront to a purchase made elsewhere.

    Slashing prices in mainland China, too, seems like a rational strategy—and one that Chanel, Patek Philippe, and TAG Heuer have employed—but also one that sets the precedent for Chinese shoppers to react more negatively to planned price increases, which brands enact from time to time. Similarly, brands may look to cut marketing budgets in China, considering shoppers really aren’t being driven to make purchase locally.

    However, cutting back in the market is most likely the wrong strategy for most brands, and instead of giving up in the face of current market conditions, the right thing to do is simply work smarter, not harder.

    Online and Mobile#

    One way to do this is to target the younger consumers who have so far been immune to the government anti-corruption campaign where they live—online and on their mobile devices. This means considering a robust e-commerce strategy, as well as a stronger (not weaker) social media presence that incorporates a multifaceted approach.

    What this kind of approach means in practice is increasing resources dedicated to platforms like WeChat, as well as other platforms regularly used by the target consumer. This will be tailored based on the type of brand, ranging from online forums for car lovers or cosmetics aficionados, or niche platforms like NICE for mass-market high-street fashion brands or Qyer for travel destinations.

    Retreating to the minimum required effort—spending resources on expensive magazine ads or a cursory online ad campaign—won’t cut it anymore. Consumers need to feel a brand is as engaged in China as it is with consumers in Western markets, or Japan and South Korea.

    While certainly not an approach for every brand, considering an official online presence on major e-commerce platforms is another option. Other options include incorporating advanced functionality in a brand’s WeChat account, giving consumers the option to reserve items online and pick up in store.

    Revamping Existing Stores

    Another timely approach to the weaker China market is to revamp existing stores and provide a value-added reason for consumers to consider buying locally. This is an approach taken in recent years by the likes of Burberry, which worked hard in recent years to infuse stores with high-tech features. Gucci, too, is refurbishing stores worldwide in 2015 as part of a more wide-ranging brand overhaul.

    Fixing up older stores and engaging local shoppers to give the location another shot via WeChat or other exclusive invitations gives brands the opportunity to show consumers that it’s not giving up on a given city.

    Optimizing for the Reality of the Market#

    In addition to a stronger online presence and refurbishing older stores, brands simply need to factor in the realities of the market and optimize strategies accordingly. If a brand knows that most of its sales to Chinese shoppers are happening in Japan, a strong CRM system needs to be in place to gather as much information about where in China these shoppers live. While short-term measures like price drops or store closings may stem some bleeding in the China market, providing highly publicized services at China locations, with the understanding that sales are generally going to happen overseas, can encourage more footfall over the medium term.

    For example, for customers who present a receipt from a purchase overseas, a brand can offer VIP after-sales services like personalization, free repairs, or free accessories. While these visitors may not make another purchase while in-store, getting them to drop by closes the loop, and may influence these shoppers to consider buying small items locally next time.

    Still a New Market#

    Regardless of what ultimately happens with Xi Jinping’s anti-corruption campaign, and whether Chinese shoppers do start making more purchases on the mainland, what is crystal clear about the China market is that it remains, more than anything, very new. Although some brands have been in the market for well over two decades—and some nearly three decades—the vast majority of China’s luxury consumers have only made their first luxury purchases within the last decade (or even half-decade).

    Bumps in the road are to be expected, particularly considering the speed with which major luxury players expanded into the market. Giving up at the first sign of trouble—which, in China’s case, is less-than-double-digit-growth—sets a poor precedent. Instead, refocusing investment into more high-impact areas (for example, online vs. print advertising, digital influencers vs. celebrities, younger shoppers vs. middle-aged shoppers) while gritting one’s teeth and expecting retail locations to underperform in the medium-term, is a more rational strategy.

    Although Chinese shoppers continue to crowd luxury boutiques in Paris, Tokyo, and New York, over the long term they may see the value in making a greater proportion of purchases in Beijing or Chengdu. Despite the cost savings and greater prestige, the novelty of flying halfway across the globe to buy a handbag will wear off, and as long as their favorite brands don’t give up in mainland China, they’ll eventually be ready to buy locally.

    Discover more
    Daily BriefAnalysis, news, and insights delivered to your inbox.