Why Luxury Brands' China Price Cuts Won't Hurt Overseas Sales

    Recent China price cuts by Chanel and other brands don't mean that Chinese consumers are going to stop buying luxury in Europe, South Korea, or Japan.
    Lines outside Chanel at the Shanghai International Financial Center in Shanghai on March 19, 2015. (China Daily)
      Published   in Travel

    Lines outside Chanel at the Shanghai International Financial Center in Shanghai on March 19, 2015. (China Daily)

    One of the biggest stories to come out of the global luxury industry last week was Chanel's decision to increase prices for some handbags in Europe while lowering prices in mainland China. This move, which will take effect on April 8, is aimed at fighting a flourishing gray market and narrowing the price gap between China and Europe, which in some cases makes items up to 70 percent more expensive in China than in the EU.

    Chanel isn't the only brand spurred into action by currency fluctuations, rampant gray market sales in China, and a yawning global price gap. Last week, Tag Heuer said it would cut prices 8 percent in Switzerland, China, and the US, and 13 percent in Hong Kong to combat a price differential exacerbated by the recent Swiss currency revaluation. Other brands to recently announce price adjustments include Cartier and Patek Phillippe, and this could just be the tip of the iceberg.

    However, price drops alone won't cause a massive reversal of fortunes for luxury brands in mainland China. Despite photos of lines forming outside Chanel stores in China last week (in all likelihood mostly populated by gray market sellers checking prices) and articles predicting a rebound for the brand, the reasons Chinese shoppers make roughly 70 percent of luxury purchases overseas are myriad, with pricing just one piece of a much bigger puzzle.

    In many ways, the choice to buy luxury goods in Hong Kong, Japan, South Korea, or Europe or the US is entrenched—it’s simply what one does on overseas trips, which are far more accessible for a growing number of mainland Chinese. Middle-class workers save up for big-ticket items to bring back to China (whether for themselves, friends and family, or to sell online). Meanwhile, the most affluent consumers (the VIPs so coveted by the likes of Chanel in China) are spending an ever greater amount of time and money abroad. As such, a price drop in Shanghai don't mean anything to someone who actively prefers to shop in Seoul or Seattle.

    Right now, some of the most fervent Chinese buyers of luxury goods are the US- or Europe-based children of high-profile figures—who themselves have cut back on conspicuous consumption at home. Pricing adjustments may cause a a bump in sales of small, lower-priced accessories in mainland China, since middle-class shoppers can't justify an intercontinental trip to save a couple thousand yuan, but those overseas rich kids won't travel all the way home to shop at Chanel.

    The factors that have long driven overseas purchases—greater prestige and "face," better service and product selection, privacy and anonymity, lower taxes and, yes, prices—are structural and set in stone. Quite simply, China's most active luxury consumers are accustomed to buying abroad and see no compelling reason to stop—unless price is their only concern, which is the case for some gray market sellers or less affluent buyers. (Who were never core consumers for the brands anyway.)

    Although Chanel's high-profile move to unify pricing worldwide is a good step, and more brands will undoubtedly follow suit, it may be too little, too late. Brands really should have moved to make prices more consistent before regular price increases in 2013 and 2014 and the ongoing anti-corruption crackdown sent China's wealthiest consumers on a permanent overseas shopping trip.

    Avery Booker is a partner at China Luxury Advisors.

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