China Crackdown Could Hit Men’s Market

Watchers are concerned for the men’s market, which is traditionally buoyed by the cultural practice of “gift giving.”

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Men'sWeek issue 02/14/2013

SHANGHAI — With incoming President Xi Jinping repeatedly flagging a crackdown on corruption and conspicuous consumption as top priorities for his government, China watchers are concerned the result may be a hit for a men’s market traditionally buoyed by the cultural practice of “gift giving.”

This story first appeared in the February 14, 2013 issue of WWD.  Subscribe Today.

A new “frugal working style” rule on civil servants also officially went into effect last October, banning those paid from the public purse from throwing lavish banquets, buying expensive cars and accepting luxurious gifts.

Gift giving and bribery are both widespread in China, and their pervasiveness has been something of a boon for the world’s top luxury brands — particularly in regards to the men’s sector, which has traditionally been the backbone of China’s luxury market. According to research from brokerage CLSA, men account for about 55 percent of China’s luxury goods market, well above the global average of 40 percent.

Studies from Bain & Co. have indicated that, between 2005 and 2009, the luxury goods market for men in China grew by 48 percent. By 2011, sales data at Beijing’s Sogo Department Store showed that men contributed 30 percent to its total sales, yet their individual expenditure was two to three times higher than female customers.

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Many within China are waiting to see just how serious the flagged crackdown will be and how much impact it will have on gift giving, with experts divided on the potential for damage to China’s luxury retail sales.

“If there is an effective crackdown on corruption, the gift-giving culture will be changed in China,” said He Jiahong, a professor at Renmin University and an expert on corruption. “I think the corrupt officials will be more careful, and will find more invisible means for their wealth.”

Flora Sapio, a professor of Chinese law at the Chinese University of Hong Kong, said that while she believes the incoming government is serious about cracking down on corruption, the affect on gift giving and a culture of conspicuous consumption among China’s political and business elite will be minimal.

“Today, gift-giving is a minor form of corruption. The best corrupt deals are to be made elsewhere: in the real estate sector, on the stock market, through the manipulation of public-private partnerships, just to name a few,” Sapio said.

“The display of luxury goods testifies to the lifestyle of China’s political-economic elite, their income levels and consumption patterns. None of these is going to change significantly in the near future, unless China experiences a serious economic downturn, which is highly unlikely,” added Sapio.

Whatever the future impact, the idea of a crackdown on corruption has been popular with the chattering classes, with a number of high profile “outings” of corrupt officials by Chinese netizens.

One standout was the case of “Brother Watch.” The nickname was bestowed by the Chinese Internet on a lowly bureaucrat (with a commensurately lowly salary) who was photographed wearing a number of expensive, prestige brand watches.

Prestige watches have been a favored gift for politically, economically and socially — and sometimes all three — powerful men in China and, in recent years, Beijing’s regular Party Congresses have become a parade of straight-faced suits sporting Rolex, Omega, Cartier and Patek Philippe timepieces.

“The first watches were brought to China by French missionaries in the 17th century and were originally a gift to emperors and so on. So the love affair between watches and China and the relationship between men in China and the culture of gifting have developed in tandem,” David Sadigh, chief executive officer of Digital Luxury Group, told WWD. The group recently released a report called “World Luxury Index China: Watches.”

Research from Bain showed yearly sales of luxury watches fell 5 percent on Mainland China in 2012, compared to growth of as much as 40 percent in 2011, and statistics from the Federation of the Swiss Watch Industry show that Swiss watch exports to Mainland China dropped 27.5 percent year-on-year in September.

China’s slowing economy is obviously one factor at play in the slowdown of the formerly red-hot men’s prestige watch market, but Sadigh points to the corruption crackdown as another cause.

“The impact of a crackdown on corruption in China is very important and we have already seen this,” Sadigh said. “I think we have to be very careful and we don’t know what will happen, but I think for watches especially, as far as global brands are concerned, they should be very careful with how luxury goods and these kind of things will be perceived by this government.”

There is an upside for some within with high-end men’s market in China, with Microsoft Advertising’s “Luxury Connoisseurs” study finding that more men are buying luxury goods for themselves than ever before.

“If you look at the percentage of men buying for personal versus gifts, the majority is personal, even for men. Of the gift giving, men do a larger percentage, but over three-quarters of the men’s market is still personal buying,” said Adam Anger, the Greater China region’s general manager for advertising and online at Microsoft.

Pierre Xiao Lu, author of “Luxury China, Market Opportunities and Potentials” and a luxury business consultant, said this shift away from gifting and towards personal consumption will be a boon for the men’s personal care segments, which he predicted will grow at a “positive double-digit” rate.

Though other segments of the luxury market traditionally driven by men will perhaps grow at a slower rate than in recent years, Lu is quick to emphasize that there will still be growth.

“For fashion and accessories, I think they will be stable, but still growing. The most affected sectors will be watches and jewelry, other things — from wine and spirits, yachts, cars, private jets — will continue to grow at a stable rate,” Lu said.

Lu also believes the increased sensitivity to conspicuous luxury labels will be less of a concern for international luxury brands in the Chinese market whose aesthetic waxes less ostentatious.

“In China, people have to think about brand choices, design choices and products. For high-end men’s wear there are a lot of discreet models which aren’t conspicuous at all,” he added.

Brands such as Salvatore Ferragamo and Bottega Veneta have already invested heavily in the rising personal consumption of Chinese men on the lookout for stylish substance over excess bling by expanding their product ranges and setting up specialty gents stores in the Greater China region.

“I can say that for Ferragamo, the men’s categories [in China] are significantly important,” said Michele Norsa, ceo of Salvatore Ferragamo. “All together worldwide, we do approximately 40 percent in men’s, and in China it’s 45 percent, so China is a particularly strong market for men’s. I’m also positive in terms of business development because I see larger numbers of men’s consumers getting more elegant and more focused on appearance.”

Norsa believes his brand will be cushioned by the impact of any softening in the gift giving market because the belts, ties and wallets often given as gifts from Salvatore Ferragamo are “not so ostentatious. We are not talking about items that could be subject to moral judgment.”

In addition, Norsa was confident that, even if there was an impact on business following a slowdown in gift giving, the increase in business from second- and third-tier cities, which are continuing to embrace luxury brands at a rapid pace, will more than make up for it.

“I was in China recently and I saw the mood after the political changes appears to be good, so we are looking forward to 2013 to being a positive year,” Norsa said.  “The lead up to Chinese New Year is always a good time and it’s very visible in Europe to see significant numbers of Chinese shopping here. It’s important to our industry and we are very committed to Chinese nationals both within China and internationally as well.”