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SHANGHAI — China’s luxury market is in reboot mode.
This story first appeared in the March 25, 2013 issue of WWD. Subscribe Today.
Major players, including PPR, LVMH Moët Hennessy Louis Vuitton and Compagnie Financière Richemont have all signalled a rethinking of their strategies in Mainland China, cutting back on store openings in far-flung locales in order to focus on improving their offerings within the cities they already serve.
“We will be staying in the same cities, but we are moving a lot of stores. There are times when a neighborhood is really hot and there is a lot of footfall, and three or four years later the footfall has moved to another spot,” Jean-François Palus, group managing director of PPR, said last month.
The last 12 months have certainly been a period of rapid change for China’s luxury market, with the rise of fast-maturing consumers coinciding with new anticorruption government regulations that have stymied the previously prosperous gifting market. The crackdown on ostentation under new Chinese President Xi Jinping has particularly hit such categories as watches and leather goods, long popular gifts to senior government officials.
The stakes are high for all luxury brands, since China remains key to their strategies. And despite a possible slowdown, this year is expected to see continued strong growth in Greater China, which has overtaken Japan as the sector’s second-largest market after the U.S., according to a study last year by Bain & Co. in association with Italy’s Altagamma. Bain estimates Chinese consumers now represent half of all luxury purchases in Asia and nearly a third of those in Europe. One in four luxury purchases worldwide is made by Chinese consumers, the study found.
Still, Charles de Brabant, founder and chief executive officer of luxury consultancy Saint Pierre, Brabant, Li & Associates, believes that first movers in the Chinese market — brands such as Gucci and Louis Vuitton — are now at something of a disadvantage as Chinese consumers become more sophisticated.
“They have the LV bag, maybe also Gucci already, so they are looking for something else,” de Brabant said. “It used to be the case that you could open stores and customers would come, but now you have to be really good at retail, merchandising, marketing and distribution in order to attract these increasingly sophisticated Chinese consumers.”
He believes the move to wind back expansion within the China market is a smart play for brands that may be risking overexposure, and an opportunity to “re-create their brand desirability” for the next stage of the country’s luxury retail evolution.
To be sure, China has seen a rash of luxury brand store openings and lavish events over the past few years. All that activity has created extensive distribution networks for certain brands.
According to a recent Merrill Lynch study comparing China to the more established Japanese luxury retail market, Gucci currently operates 59 stores in Mainland China, compared with 48 in Japan. Louis Vuitton has 41 in Mainland China compared with 58 in Japan.
Some brands have taken more cautious approaches to expansion in the country, Merrill Lynch noted. Chanel, for example, boasts 12 stores in Mainland China, compared with 47 in Japan. Prada has 25 stores in China and 40 stores in Japan. Hermès has a similar number of stores in China, yet last week pointed to the market as one of the reasons it was able to boost profits 24.6 percent last year and margins to a record 32.1 percent, far above its luxury peers.
Patrick Thomas, Hermès’ ceo, said the brand’s sales in Greater China rose 34 percent in the fourth quarter and 28 percent in 2012, driven by sales in the men’s category, including ready-to-wear, as well as in fashion accessories and silks. China now accounts for about 10 percent of the group’s total revenues — although Chinese consumers represent 30 percent of the overall business worldwide.
De Brabant believes the low store numbers of brands like Hermès, Prada and Chanel indicate room for growth in the China market, particularly in the women’s sector, which is still less developed here than its male counterpart.
“This overexposure of some early-moving brands means opportunities for newer brands to enter the market. There is a real desire for newness,” he said, citing examples including Balenciaga, Alexander McQueen, Céline and American brands such as Michael Kors and Ralph Lauren as those with enough brand awareness among Chinese consumers to capitalize and accelerate their growth in the near future.
One major factor influencing every brand targeting Chinese consumers is the latter’s newfound love of travel. Chinese shoppers spent a whopping $8.5 billion on luxury goods overseas last month alone, according to a report from the Beijing-based World Luxury Association, representing an 18 percent rise from the same period in 2012.
“Luxury consumers in China are probably the most important in the world. These brands might be cutting back in China, but that doesn’t mean they are giving up on China, just realizing the Chinese are going overseas to do their shopping,” said Rupert Hoogewerf, founder and compiler of the Hurun China Rich List.
The main factor driving this growth in overseas spending is obviously price, with taxes and government surcharges in Mainland China guaranteeing a designer handbag will cost about 40 percent more from a store in Shanghai than a store in Paris.
Another trend currently having an impact is Chinese shoppers’ infatuation with the provenance and brand story of particular labels. Many of these consumers are seeking a more authentic retail experience by undertaking a shopping-themed pilgrimage to the home of their favorite brands, rather than spending their money on buying the same products from their local mall in a second- or third-tier Chinese city.
“The very fact that brands like LV, Hermès and Cartier have had such deep penetration in China has been brilliant for France, because Chinese luxury consumers want to visit the homeland of these goods,” Hoogewerf explained. “Burberry is similarly flying the flag for Britain. These brands work really hard to find a connection with the Chinese, leveraging their heritage, and now you can’t separate talking about luxury retail and China without talking about Chinese consumers traveling [in order to shop].”
According to Hoogewerf, this situation makes the quality, rather than quantity, of physical locations more important than ever before, as they are essentially operating as rather ostentatious advertisements for brands who are actually looking to nab Chinese consumers buying up big overseas.
“If you can build awareness in China, then you’re going to catch the luxury Chinese consumer when they do their shopping,” he said. “You will do the advertising in China but will reap the rewards in New York, Paris and London.”
Further complicating matters for international luxury brands looking to expand in China is the domestic retail real estate market, which has a limited number of desirable properties available for luxury brands to utilize.
“Whilst there is a substantial pipeline of new projects opening in cities across China, much of the supply is in new emerging retail areas. A luxury brand will usually only consider the leading established retail area in a new market, where the supply is far more limited and competition intense,” said Joel Stephen, CBRE’s head of retailer representation for China.
Stephen is emphatic about the Chinese market not yet having reached saturation point but said it is definitely maturing. It would be impossible to maintain the kind of explosive growth seen in recent years, he explained.
“The larger luxury groups have pretty ambitious expansion plans for the numerous smaller brands within their portfolio [even as they wind back expansion for their biggest name brands],” he explained.
“It’s natural that the consumer behavior changes as markets mature, and some brands adapt to the changing market. Brands that are more niche may become more relevant, and some brands may become less relevant,” Stephen said.