SHANGHAI — In what could be a further blow to luxury consumption in China, the nation’s leadership is deepening its pledge to crack down on corruption and ostentation with the release of new rules outlining how officials should avoid extravagant spending on activities ranging from overseas travel to the purchase of new vehicles.
This story first appeared in the December 4, 2013 issue of WWD. Subscribe Today.
With 12 chapters outlining 65 rules on how to manage funds and employ more transparent spending, the document, released last week, is extensive and is causing analysts to question whether the antigraft campaign that began nearly a year ago under the new administration of President Xi Jinping will continue to have a far-reaching impact on China’s luxury sector. Spending on luxury products has historically been bolstered by the purchase of expensive gifts between officials and business associates as bribes.
RELATED STORY: China Leadership Releases Guiding Principles >>
Some say the ongoing campaign, reinforced by the new rules, could portend a slower shopping season over the upcoming January Chinese New Year, a period known for elaborate gifting, particularly between businesses and governments as a form of collateral to ink business deals in the coming year. While it may still be too early to gauge the effect, there are already signs of a slowdown. In recent days, Chinese media have reported how companies that make greeting cards, which are used to give presents of cash or gift cards, are reporting steep declines on orders from government offices.
“Certain companies in certain sectors will continue to be under serious constraints in coming months,” Shaun Rein, managing director of China Market Research, a consultancy in Shanghai, said. “The crackdown is far more serious than analysts projected and will continue to impact luxury gift-giving. The crackdown on corruption is so serious that officials can no longer help, so people are giving smaller gifts, something cheaper.”
“For very high-end products, I would not be surprised if sales are hurt,” James Button, a senior manager with Smith Street Solutions, a Shanghai-based consultancy, said. “They can’t justify spending that much on something the way they could before. But Chinese New Year is one of the top times to travel abroad. The spending may not be in China.”
Bain & Co. projects luxury sales in China will reach $21 billion in 2013, an increase of just 2.5 percent from last year. In 2012, luxury-goods sales increased by 20 percent. Sectors that have been the hardest hit include luxury watches, accessories, alcohol, high-end catering and cars.
“People will continue to feel more cautious when buying gifts for government officials, or they will find other gifts to give, such as art,” said Zhou Ting, head of Fortune Character Institute, a luxury think tank in Beijing.
Yet, according to Zhou, there are other factors that will have a potentially larger impact on the sale of luxury goods in China. Against the backdrop of slowing economic growth and a new government working to reengineer China’s economy toward more sustainable growth alongside a campaign to infuse hard-line Communist doctrine across multiple layers of society, affluent Chinese feel increasingly worried about political stability and the security of their assets at home.
“Chinese are always sensitive to the political situation,” Zhou said. “Although they still have strong buying power, they will worry about their businesses and living situation, which will decrease their expenditure in China and spend more overseas. Their purchasing behavior will influence luxury brand sales in China in the short term but also cause huge changes in the future.”
In a luxury report released last month, Fortune Character Institute projected high-net-worth Chinese consumers, who are the core buyers of luxury products, will increasingly purchase these goods overseas. Marginal consumers, or those with less spending power who have less-sophisticated knowledge of brands and who are influenced by core consumers, will also decrease luxury spending in China. “In the next three to five years, the escape of the core consumers will negatively impact the consumption enthusiasm of marginal and potential consumers,” the study said. “As a result, luxury brands will experience a large-scale decline.”
Luxury sales to Chinese are and will continue to be influenced by changing consumer tastes. Rein, of China Market Research, said his firm is finding more Chinese who would rather spend money on experiences instead of an expensive handbag. “The bigger hit is coming from Chinese consumers not wanting to buy luxury products anymore,” Rein said. “Pollution is so bad, they are looking for experiential [consumption], traveling, getting out, clean air. A lot of women are buying cheaper accessories and spending the rest of their money on a trip.”
There is also a noticeable shift away from more mass luxury brands to niche labels with understated sophistication. With a decline in gift-giving, Chinese are more focused on what they can buy for themselves, and more focused on individuality.
“Just a few years ago, clients tended to be interested in luxury goods that were more conspicuous in style and flash factor,” said Christine Lu, a cofounder of Affinity China, a company that offers tailor-made overseas trips for affluent Chinese. “In the last year, that has changed. Those who are more sophisticated tend to become subtler with how they project their wealth.”
Lu added: “However, I do think the current climate definitely encourages a departure from conspicuous luxury consumption. You are seeing an increasing focus on experiences, real estate and investment opportunities. It is important to understand the effects that the corruption campaign has had on the entire psyche of Chinese consumers. The signals coming from the government definitely have had a direct effect on luxury consumer behavior and, in many ways, I think that is the point.”
For luxury players, what all this means is embracing adaptability. Adopting new strategies to reach an increasingly complex Chinese market will be the key to survival, according to Button of Smith Street Solutions. There is still consumer confidence; it is just now consumers are much more disciplined about how they spend and what they buy.
“The market is not growing as quickly as it used to, and it is definitely shifting,” Button said. “When talking about winners and losers, for most brands, it is a function of how you react to it. For most of the traditional luxury players, it is how do you reset your business for this environment? That has been happening for a while and most of them have gotten the message, but the new regulations reinforce that this is something they must be doing.”