China's luxury market saw a contraction in 2014 ending eight consecutive years of growth. While the ongoing anti-graft campaign has contributed to the sluggish sales, changes in consumer tastes and behavior have also weighed down on the luxury market in China. 

Two women walk past a Louis Vuitton boutique at a shopping mall in Shenyang, Northeast China's Liaoning Province, in December 2014. Photo: AFP

  

Nothing could stop Chinese tourists from taking overseas luxury shopping trips this weeklong Spring Festival holidays, and the souring relationship between global luxury brands and the Chinese market may have set in.

China's luxury market has experienced a downward trend for the first time after eight years of growth, according to consulting firm Bain & Co's 2014 China Luxury Market Study, which was released in January.

Purchases of luxury goods on the Chinese mainland were down 1 percent to 115 billion yuan ($18.7 billion) in 2014, with watches, men's wear, and luggage and bags being hardest hit, the study showed. Sales of men's wrist watches were down 13 percent year-on-year, men's fashion by 10 percent.

Poor sales vs 'daigou'

The sales of Swiss luxury giant Richemont dropped 4 percent in the third quarter (3Q) of 2014, an indication of the poor performance of other luxury brands including Montblanc, Rolex, Armani and Ferrari.

Hugo Boss shut seven mainland shops in 2014, followed by six shops from Ermenegildo Zegna and four from Burberry.

The amount of polished diamonds brought into China declined for a fourth consecutive month in January as a result of a weak domestic demand as well as the sluggish global economic recovery, according to the Shanghai Diamond Exchange.

China's economy grew 7.4 percent in 2014, official data released in January showed. It was the slowest pace in 24 years.

Corruption and bribery were said to have driven unsustainable growth in China's luxury market, where expensive watches, bags and clothes were given in exchange for "favors."

However, the Chinese luxury market has been hit hard since President Xi Jinping introduced a nationwide anti-corruption drive in November 2012.

Sociologist Guo Xinping of Shanxi University believes that a broad drop in luxury sales was inevitable when the frugality campaign started in late 2012. Extravagance among officials has been contained somewhat. Officials fear being named, shamed, fired or even imprisoned, let alone hauled over the coals by the public.

 Although luxury retailers are entering winter amid the ongoing anti-corruption campaign, "daigou," which in Chinese means overseas shoppers who buy and send luxury goods to customers in China, are on the rise.

 The Bain study showed that daigou had an estimated market value of 55 billion yuan ($8.96 billion) to 75 billion yuan in 2014. It also shows that 70 percent of luxury goods bought by Chinese were purchased abroad or through daigou services.

A report from Fortune Character, a domestic luxury market research institute, claimed that Chinese customers bought 46 percent of global luxury goods worth $106 billion in 2014, compared with a mere $25 billion domestically.

Among Bain's 1,400 respondents, 70 percent said they had used daigou. Respondents cited competitive pricing, convenient mobile applications and safer payment methods as factors to use daigou.

Adaptation

Confronting the new normal of lower long-term growth and emerging sales channels, such as daigou, global luxury producers are actively adapting themselves to the changing market dynamics.

Winning the country's growing middle class has become the priority for struggling luxury brands, as a McKinsey & Co report predicted that the nouveau riche in second- and third-tier cities would be the new drivers of the domestic luxury market.

According to the consultancy's predictions, this group, who do not frequent luxury shops, now accounts for up to 61 percent of luxury customers in China.

Luxry fashion brands such as Louis Vuitton, Gucci and Coach are all actively shifting their strategies - ditching flashy logos being the most notable trend - to woo this emerging group, who are believed to have a different take on "luxury."

In its Shanghai-based flagship store, Coach has minimized the number of handbags emblazoned with its iconic logo, and now accounts for less than a quarter of the store's display.

Gucci, instead of "standing high above the masses," streamed its fashion show online.

Other mainstream luxury brands including Tiffany, Catier and Chaumet invited popular fashion bloggers from China to their events.

In addition, accounts on China's many social networking sites have become a must for luxury brands wanting to promote new collections.

Cosmetic brands, such as Clinique, have lowered the prices of some products in China. Luxury watch brands, including Zenith and Hublot, are expected to be similarly priced in Chinese and overseas shops.

Zhou Ting, president of the Fortune Character Institute, said the "consumption drain" following a shift in promotions and purchasing channels has prompted luxury brands to consciously slash prices in the Chinese mainland.

Xinhua - Global Times