PARIS — A trade war may be heating up both sides of the Pacific, but European luxury goods companies are quietly reducing prices of their fashion goods in China, passing lower import duties on to consumers in the all-important market.
Prompted by cuts in Chinese import tariffs earlier this month, part of a government drive to promote consumption on the mainland, Hermès International said Friday it has cut prices in China by around four percent, after logging better-than-expected results in the second quarter.
The leather goods firm joins other European luxury powerhouses in reducing prices in China, including Louis Vuitton, which slashed price tags by three percent to five percent, and Gucci, which is implementing a five percent cut on average across all categories. Burberry, meanwhile, last week decided to reduce prices of ready-to-wear and bags by four percent.
Related Galleries
“Burberry is very supportive of the decision to cut import duties on luxury goods in China. The government’s efforts are a clear positive for consumers,” the company said in a statement.
The price reductions support the Chinese government’s efforts to bring consumption onshore as well as curb the activity of daigous, or personal shoppers buying things abroad for consumers in Mainland China.
“This is good news for luxury goods [groups], but there is an expectation that they cooperate with the government and reduce retail prices accordingly,” said Luca Solca, head luxury equity analyst for Exane BNP Paribas.
Analysts said China’s decision to slash import tariffs will likely hit business in Hong Kong the most, noting the large proportion of spending by visitors from mainland China, while other destinations in Asia — like South Korea or Japan, which has recently grown as an important tourist destination for the region — will likely be less affected.
Chinese nationals accounted for one in three luxury goods purchases worldwide in 2017 and are expected to drive the lion’s share of growth this year, according to Bain & Co.
Local buying by Chinese customers boosted sales in mainland China by 15 percent to a total market size of 20 billion euros last year, it said. “Lower price differentials with the rest of the world also helped push the local market to new highs,” the management consultancy noted.
The rise of digital consumption has increased pressure on luxury houses to ensure that prices are even around the world, with executives like Van Cleef & Arpels chief executive officer Nicolas Bos flagging fluctuating currency rates as complicating the task.
“Price sensitivity has really become more and more an issue in the conversation with clients,” Bos told WWD earlier this month. “It requires more discipline to make sure we have harmonious pricing around the world.”
Hermès slightly beat analyst expectations with a 7.2 percent rise in second-quarter sales, lifted by business in Asia as well as the Americas, where it recently opened new stores. At constant exchange rates, revenues were up 11.6 percent to 1.46 billion euros.
Sales in Asia also rose by 11.6 percent, while the Americas clocked 15.9 percent growth. The silk and leather goods maker opened a new store in Palo Alto, Calif., in May, bringing the total in the U.S. to 34. In March, the house opened a store in Cancun, Mexico.
In Europe, where it rolled out its new web site in March, Hermès posted 8.9 percent sales growth at constant exchange rates.
The company said it has ramped up production capacity, thanks to new sites including the Manufacture de l’Allan, which opened in April.
Sales of leather goods were up 8.4 percent at constant exchange rates, while the ready-to-wear and accessories activity grew 16.4 percent. Perfumes rose 13.5 percent, driven by the Terre d’Hermès and Twilly fragrances.
The division encompassing tableware and jewelry grew the fastest, up 25.2 percent.
Sales beat expectations, said Solca, noting high demand for the Roulis, Lindy and Cinhetic bags.
Healthy organic sales of 11 percent in the first half should help the company achieve first-half margins close to last year’s record level of 34.3 percent, noted Rogerio Fujimori, analyst with RBC.
Hermès repeated its standard medium-term outlook of an “ambitious goal for revenue growth” at constant exchange rates despite growing economic, geopolitical and monetary uncertainties.