Luxury goods makers have long valued Chinese consumers not just because of their huge appetite for Gucci bags and Cartier watches, but also for their willingness to pay more than their Western counterparts. So it wasn’t business as usual in July when a pair of light brown Salvatore Ferragamo Carla leather pumps was being sold at 40 percent off, for 3,120 yuan ($507) on a site run by e-retailer Xiu.com, which is less than the item’s European retail price. 1 OF 1 VIDEO 2:56 Kering CEO on China Market, Strategy for Gucci 4 months ago Likewise, at a downtown Shanghai outlet of Kering SA (KER)’s Gucci, a light pink Soho leather shoulder bag was discounted 30 percent to slightly more than 12,000 yuan, about the same price as a similar bag in the U.S., Bloomberg Businessweek reports in its Sept. 1 issue. Several forces are fueling the price slides. Sales in China of goods from Europe’s most prestigious fashion houses have been damped by the government’s anti-graft campaign, which has curbed gift-giving. And steep import and consumption taxes on luxury goods bought in China have led an increasing number of wealthy locals to shop more while overseas. Left with stacks of unsold merchandise in their mainland stores, high-end brands are resorting to something they rarely had to do earlier: price-cutting. “Even during the financial crisis, I don’t think we saw this amount of discounting,” said Franklin Yao, managing partner of Shanghai-based SmithStreet, which advises companies on their China strategies. “Inventory has become an issue for brands across the board, and this is a big problem.”
Slower Spending
Consultancy Bain estimates that Chinese purchased a third of all luxury goods sold globally in 2013, but growth in luxury spending in mainland China will slow to 2 percent this year after rising 30 percent in 2011, it forecasts. Christian Dior SA (CDI) and Ermenegildo Zegna Group both held sales at their China stores in July, with Milan-based Zegna cutting as much as 40 percent off menswear, leather items, and shoes. Some discounting is more understated, as luxury houses try to avoid lowering the value of their brands along with their prices. Hermes dangled price cuts of as much as half off on dresses and shoes in April at an invitation-only sale, held in the eastern city of Hangzhou, according to reports by Chinese media. Guests were invited by mail to the four-hour sale, at a hotel in the city’s West Lake district, and barred from taking pictures, according to a story posted on the website of the People’s Daily, the official newspaper of China’s Communist Party.
Price Difference [eap_ad_1] One aim is to keep Chinese shoppers such as Ann Hu from taking their wallets to Europe. On a trip to Milan in July, the 27-year-old marketing executive from Shanghai picked up a Loewe leather handbag for 8,000 yuan, about half what she would have forked over in China. “The price difference between Europe and the mainland can pay for a round-trip ticket for me to Paris or Milan,” explains Hu, who’s collected luxury bags since she was 23. “If I could do that and holiday for a few days there, why wouldn’t I?” China imposes duties as high as 25 percent on imported products such as leather handbags, dresses, shoes, and watches, depending on their value, according to data from the World Trade Organization. The country also levies consumption taxes of 20 percent on high-end watches and 30 percent for cosmetics. The effect of taxes and a price markup means luxury branded items end up costing 50 percent more in China than in Europe, said Sanford C. Bernstein analyst Mario Ortelli. Last year 67 percent of luxury products purchased by mainland Chinese were acquired outside the country, according to Bain. Sales Contribution Keeping mainland consumers spending is key for makers of luxury brands because China now accounts for a major portion of their sales. LVMH Moet Hennessy Louis Vuitton SA (MC) got about 30 percent of its 2013 revenue from Asia, excluding Japan, while Kering’s luxury unit got 31 percent of sales from the region, according to data compiled by Bloomberg. Neither company breaks out China sales. About a quarter of fiscal 2014 sales at Cie. Financiere Richemont SA (CFR), owner of tony brands such as Cartier and Piaget, came from China and Hong Kong. A record number of luxury brands approached website Glamour Sales China this year about running flash sales online events held over a few days, said Chief Executive Officer Thibault Villet. The Shanghai-based Frenchman quit as Coach’s president for Greater China in 2009 to start the website, which sells off-season products from Fendi, Tod’s, Dolce & Gabbana, and other luxe brands to its 4 million Chinese members.
