Luxury brands slash prices to fire up China market

After braving a half-hour queue at a Louis Vuitton (LV) store in Paris' trendy Champs-Elysees avenue while on holiday in France last October, Shanghai native Guo Aiting emerged with a leather bag in hand - and 1,800 euros (S$2,700) poorer.

"It was a lot of money but buying the bag in Paris saved me at least 30 to 40 per cent compared with if I bought it in China," she told The Sunday Times. "LV has always been cheaper in France but with the euro depreciating substantially, it was a no-brainer decision."

Ms Guo, 32, is part of a growing pool of well-travelled Chinese citizens who are making their high-end purchases abroad on the back of a weakening euro - with the subsequent widening price differences - leading to slowing sales in China's luxury sector.

With the sector shrinking for the first time last year by 1 per cent to 115 billion yuan (S$25 billion), according to consultancy Bain and Company, luxury brands have taken the rare step of slashing prices in a bid to make what was once the sector's hottest market sizzle again.

Last week, Gucci stores in China halved the prices of many of their items in a sale, following a 20 per cent cut by French label Chanel in March, in a bid to boost local demand - already hurt by anti-corruption efforts and a slowing economy - and to combat a thriving grey market.

This consists of "daigou" shopping agents purchasing goods abroad and reselling them in China, but this is frowned upon by luxury labels which say it tarnishes their brand and hurts business.

Industry analysts say that while luxury goods in China are typically more pricey due to high mark-ups and hefty taxes, recent currency fluctuations have stretched price differences to as much as 70 to 80 per cent - a gap that has become unsustainable.

The euro, for instance, has tumbled 18 per cent against the yuan and the US dollar over the past year.

As a result, even as the Chinese made up 46 per cent of global luxury sales last year, 76 per cent of their spending was done outside of China, according to research firm Fortune Character Institute.

This equals US$81 billion (S$110 billion) spent overseas in 2014, a 9 per cent increase from the previous year, even as a string of high-end brands shuttered many of their local stores.

Professor Wang Jing of the China Europe International Business School said the price cuts are part of a larger strategic move by luxury brands to better manage their image and reputation in China.

"By tackling the problem of shopping agents, who might sell fakes or poor-quality products, luxury brands want more Chinese to buy from stores so they can take back control of the consumer's brand experience," she said. "Only then can they build a more complete customer database and develop a loyal following."

But some experts say it is unlikely that price cuts alone will change Chinese consumers' behaviour.

Mr Philip Guarino of China Luxury Advisors said 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," he said.

In fact, lowering prices might backfire as it erodes the perceived value of a brand, he warned.

But the move has been welcomed by the Chinese authorities who are hoping for lower prices to stimulate domestic consumption, firing up a new engine of growth.

The luxury discounts coincide with China's recent cuts to import tariffs on certain types of clothes, shoes and skincare products by an average of more than 50 per cent.

But HSBC's global co-head of consumer and retail research Erwan Rambourg said the tax cuts should be part of a wider consumption package if Beijing wants to raise domestic demand more effectively.

"It should include consumption tax reductions, changes in duty free regulation and other measures that would further support demand," he said in a note. Still, Ms Guo is willing to take some of her spending back home should prices fall.

"Foreign brands are often expensive in China. If prices become more competitive, I will definitely consider buying things here because of the convenience," she said.

esthert@sph.com.sg

This article was first published on June 7, 2015.
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