HONG KONG — China’s slowing economy and austerity measures have been affecting luxury retailers, but it’s also hurting another group that’s not getting as much attention: distributors.
Distributors face a unique problem in China, where consumers do the bulk of their luxury shopping outside the country. According to Bain & Co., 70 percent of luxury brands bought by Chinese are purchased abroad or through daigou agencies, overseas personal shoppers who buy and send luxury goods to customers in China.
The appeal of shopping overseas is pretty obvious after looking at the numbers. Prices of imported apparel, accessories or other Western branded goods are typically 30 percent to double the price of what they cost in their home markets due to import fees as well as markups. The daigou market has grown to an estimated 55 billion to 75 billion yuan, or $8.78 billion to $11.97 billion, in 2014. To give some context of how big this is, that constitutes nearly 50 percent of store sales in China.
This propensity to shop overseas has made the market particularly difficult for distributors looking to operate in the China market.
“You cannot afford to be opening stores in China and selling product in China and promoting a brand in China when 65 percent of business is being conducted outside China,” said Bluebell chief executive officer Ashley Micklewright. Bluebell, a French family-owned business that distributes luxury goods in Asia, focuses on fragrance and beauty, fashion and accessories, jewelry and watches, homeware, lifestyle and food and beverage. The company distributes brands such as Carven, Jimmy Choo and Paul Smith in various markets in the region.
“If you are the brand owner, it doesn’t matter, it’s like robbing Peter to pay Paul,” he said, “but when you’re a distributor, if you have China rights and don’t make sales in China, you’re basically funding someone else’s business.”
At the same time, retailers and distributors are coming under increased pressure from slowing economic growth in China as well as anticorruption measures that have put a serious dent in luxury sales, particularly of watches and jewelry. According to a recent study by Bain & Co., China’s luxury market shrank by 1 percent, or about 115 billion yuan, in 2014.
“We’ve definitely seen a slowdown in business and in economic growth,” said Micklewright.
Meanwhile, costs in China remain high. Prices of luxury goods are generally higher than other markets due to duties as well as high operating costs — rents and salaries in first-tier cities are almost on par with Hong Kong. But even with this markup, pressure on margins is strong.
That pressure is not likely to lessen anytime soon. Chanel this week moved to “harmonize” global prices on three classic handbags, resulting in a price increase in Europe and price drop in Asia. More companies are expected to follow suit.
Bluebell decided to keep the markups from imported price lower in China for competitive reasons. “The cost structure in China is higher, so if you take a lower markup and have a higher cost structure, it becomes difficult,” said Micklewright.
“I think China has always been a difficult market, but what exists today is more extreme than in the past. Five years ago, companies were happy to suffer losses in anticipation of growth, but now we’re getting to a stage where even the growth is starting to be questioned,” he said.
Given all the difficulties operating in China, distributors are looking more closely at other markets in Asia.
“I think brands should look at places like Thailand and the Philippines, where compared to China, costs are lower, climates are stable and communication methods are clear,” said Aimee Squires-Wills, founder and president of Hong Kong-based distributor Electric Sekki. She noted that the Philippines is growing rapidly, especially in the ready-to-wear fashion world.
“I believe that China still presents lucrative market opportunities compared to other Southeast Asian countries, given its size and the rise of its middle class. However, we definitely have to wait and see. The depreciation pressure on currency for certain Southeast Asian countries will certainly affect traveling and luxury goods consumption patterns,” said David Chung, executive director of Fairton International Group Ltd. in Hong Kong, which distributes brands such as Seven For All Mankind, Kookai, Jean Paul Gaultier, Marina Rinaldi and Max Mara in Greater China.
Bluebell’s Micklewright said while the company’s China operations are not making a profit, its large operations in South Korea and Japan are doing well.
Chinese consumers’ growing international influence has already started to affect Hong Kong, which has long been the favored shopping destination for Chinese consumers. The number of mainland Chinese visitors to Hong Kong over the all-important Chinese New Year shopping season stayed flat this year, the first time in 20 years. Meanwhile, per-capita spending by overnight visitors, consisting primarily of mainland Chinese visitors, declined 1.8 percent in 2014.
Visitor numbers from China have been hit by escalating tensions between Mainland visitors and local Hong Kong residents as well as the pro-democracy demonstrations that paralyzed key shopping districts in the city for two months last year. Though Hong Kong’s streets are clear now, industry watchers expect lingering impact on tourism and shoppers from the protests.
To keep Chinese customers shopping in China and Hong Kong, distributors are adopting different strategies and emphasizing service and value.
China’s luxury market is seeing much more diversity than five years ago and, according to Bain, exclusivity, quality and value for money without logos are becoming increasingly important. While branded Louis Vuitton or Gucci ruled just a decade ago, well-heeled Chinese customers today are looking for much more subtle and rare goods.
Fairton’s Chung said the company is “focusing strongly on CRM [customer relationship management] activities to strengthen relations with VIPs. Loyal customers tend to support and stay with our brands when the economy slows down. We try to provide them with exclusive collections and unique retail experiences that are hard to replicate online.”
Chung said Fairton is still seeing growth despite the slowdown in luxury sales. Categories such as watches and jewelry have been hardest hit, but Fairton’s brands are focused more on apparel, “which is more for personal, everyday consumption.” That said, sales in Hong Kong have dipped slightly in the past few months due to a drop in mainland Chinese shoppers’ visits and spending.
Distributors are also looking at different market segments. Bain’s report found that though the mainland Chinese luxury market contracted overall, certain categories such as women’s wear and shoes continued to do well. Men’s wear and watches, particularly at premium price points, continue to decline. The drop in those categories perhaps is related to the government’s anticorruption crackdown, since watches in the past were a favored gift for government officials.
ImagineX Group, which distributes brands such as Alice + Olivia, Club Monaco, BCBG Max Azria and 3.1 Phillip Lim, is part of the Lane Crawford Joyce Group. ImagineX started marketing luxury brands to China in 1992, but recently has started focusing more on contemporary brands. Last week alone, for instance, it formed a venture with Marc Jacobs International to distribute the brand’s collections in Hong Kong and Macau.
“For the last five years, [ImagineX has] focused on building a new-generation designer and contemporary fashion business to complement its luxury and lifestyle business to realize the opportunity in the fast-growing affluent middle class that aspires to international fashion,” said Alice Wong, executive director of ImagineX Group.
“Today, the Chinese consumer is more confident, looking to find brands that define their own individuality and style,” she said.
Indeed, Bain’s survey of 1,400 Chinese consumers found that 70 percent of respondents said they like to try different brands and styles and nearly 45 percent plan to buy more emerging luxury brands in the next three years. That’s a challenge, given the high costs and narrow margins in China.
Wong put a positive spin on the growing internationalization of Chinese consumers. “With the increasing number of outbound tourists from China, they have an opportunity to seek brands all over the world. For us to differentiate, we believe that we must exceed our customers’ expectations and that starts with the customer experience at the store, and online,” Wong said.
Squires-Wills said the company has been focusing on “stable brands.”
“When business is slow, you need to focus on the ‘value add’ that your company offers over its competitors. For us, it’s our brands. For categories such as footwear, specifically Havaianas and Superga, we have seen steady and continual growth over the years. It’s almost like these brands are recession-proof. We look for stable brands that we can build in good times and in bad, so a slowing economy doesn’t affect the overall company growth,” she said.