CHANEL, Burberry, Gucci and other top global fashion houses have begun cutting the prices of their luxury brands in China as sales growth slows. In part, the central government crackdown on corruption, ostentatious living and official gift-giving has been blamed for lower sales.
Then, too, an active gray market of Chinese scalpers shuttling between Europe and China to take advantage of cheaper continental prices and sell the goods back home has hurt mainland luxury goods sales.
Chanel announced in March that it was dropping mainland prices of its goods by an average 20 percent. Shortly after, Cartier said it was lowering prices on its watches by 5 percent. Patek Philippe and TAG Heuer soon followed suit, with discounts of up to 18 percent.
The trend is a blow to luxury goods makers, who have reveled in the prospects of a Chinese market that has grown into their biggest growth area. According to a Fortune Character Institute report on the Chinese luxury industry in 2014, Chinese customers bought 46 percent of the world’s luxury goods.
About two-thirds of those luxury goods were bought by Chinese visiting overseas. Tourists and scalpers have been eager visitors to fashion shops in Paris, Milan, London and elsewhere, drawn by cheaper prices. In France, for example, a top-name handbag could be 40 percent cheaper than in China, where customs duties shove up prices.
Since the realignment of price discounts in China, Chanel handbags on the mainland cost about 5 percent more than in France. A Le Boy purse is now available for about 26,000 yuan (US$4,193.55), down from 32,700 yuan.
China is Chanel’s third-largest overseas market after the United States and Japan. Scalpers who once shuttled between the mainland and Europe are now finding very little profit in the gray market.
“The price adjustment has significantly affected my business,” said Cherry Lin, 30, who often traveled between Shanghai and Paris to arbitrage price gaps. “Fewer people now ask me to buy luxury goods for them in France because the price difference is not that big.”
Zhou Ting, president of the Fortune Character Institute, said European luxury goods makers had little choice if they want to maintain the global value of their brands. “They are trying to bring Chinese consumers back from overseas through the most effective method — dropping prices,” she said.
Most recently, Gucci announced a huge sale of up to 50 percent on selected items. A Jackie Soft bag, for example, now costs 7,300 yuan, down from its original 14,600 yuan.
Last Wednesday, when Gucci first dropped its prices in China, long lines of bargain-hunters formed outside major boutique stores.
The question remains: Will price cuts reverse the fortunes of luxury brands in China?
“I can’t afford to buy these luxury items normally because they are outrageously expensive here in China,” said Ivy Chen, 28, one of those queuing outside a Gucci store on Shaanxi Road N. in Shanghai. “But with this huge price drop, this is the perfect buying opportunity.”
There’s no doubt about it, Chinese fashionistas are addicted to high-flying labels.
“I simply love brand bags,” said Yi Xin, as she stood in a line outside the Shanghai Gucci store. “So when there is a price drop like this in Shanghai, of course I am going to be here to buy.”
Shoppers are braced for more special discounts, and lower prices will gradually become the new normal, Zhou said.
She said tariffs are not solely to blame for the exorbitant mainland prices of the past. Luxury goods makers set and control price regimes for various regions. The Chinese market was once considered by some luxury producers as a “primary, immature market,” full of opaque pricing mechanisms, so prices in China were set much higher than in developed economies.
Many Chinese chase luxury goods for the sake of “face.” The amount spent on luxury items is often disproportionate to disposable income. Being seen sporting a luxury brand handbag on a crowded Metro confers a status, of sorts.
Of course, this relentless interest in owning luxury labels has spawned some criminal behavior – not least of which is piracy.
A 25-year-old office worker from Shanghai was detained by police in March for exchanging fake handbags for genuine ones via an online shopping site. Police said the woman had been buying Dior, Prada and other luxury brand bags and shoes on JD.com since May 2013. Then she returned them to the vendor, substituting them with pirated versions bought on another online platform. Her deception cost JD.com more than 190,000 yuan before she was caught.
While the drop in luxury goods prices may be especially attractive to middle-income shoppers, who don’t often go on international shopping trips, many of China’s nouveau riche still prefer the cachet of making purchases in chic shops overseas.
One VIP shopper who asked to remain anonymous, said she likes Chanel and Louis Vuitton brands, and she still prefers to buy them during trips abroad. It’s part of the fun of travel, she said.
“The buying environment is also very important,” said a shop assistant who works in a Shanghai luxury store. “There’s a cachet about shopping in a swanky boutique that isn’t crowded. More price cuts may bring in more crowds.”
The chief editor of the Chinese fashion magazine Fu Shi said it’s high time prices across the globe are more standardized. That will be good for consumers and good for the fashion houses.
“It will definitely increase the number of middle-income shoppers buying for luxury brands,” she said, “but it’s too early to tell if they will really become loyal and frequent customers.”