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Business Analysis & Features

Luxury leaps the Great Wall again

High-end goods are starting to recover from the hangover of China’s assault on business ‘gifting’, says Laura Chesters. But the brands can no longer take their cachet for granted

The lobster has been replaced with prawns at the banquet. The wine is no longer vintage. Guests have stopped “gifting” watches and bottles of expensive cognac. And this is for the lucky few still invited to a banquet because there has been a distinct lack of these lavish dinners since the Chinese President Xi Jinping decreed he would put a stop to government extravagance and corruption when he took office in 2012.

Gift giving (what some might describe as bribery) was a huge part of Chinese corporate culture, with business executives offering drinks and dinners, cars and watches, to curry favour with officials.

With such ostentatious spending, the potential for luxury brands in China had seemed limitless. Double-digit growth in the country fuelled the sector through the deepest and darkest moments of the global recession.

But once the crackdown was in place, a number of brands noted a change in shopping behaviour. Louis Vuitton, Gucci and Prada – the super brands – were first to reveal a slowdown in sales growth in China as buyers switched from logo-heavy bags and products to more low-key styles last year. The Hennessy cognac business was hurt too and Rémy Cointreau was forced to issue profit warnings.

Then at the end of last month Diageo reported it had a hangover too. The drinks giant owns a controlling stake in the baijiu brand Shui Jing Fang and its value was written down by £264m after sales fell by 78 per cent.

However, while it might appear that the appetite for luxury goods in the world’s second-largest economy is waning, experts claim that it is just changing.

Erwan Rambourg, a consumer goods analyst at HSBC, says: “Spirits are more accessible than luxury goods in terms of price points and are, by nature, consumed locally. Because of that, spirits are still suffering from the consequences of the anti-corruption campaign that began in China two years ago. However, there are already signs of stabilisation.”

While brands associated with business gifting, such as drinks and watches, are still being hit, Mr Rambourg believes that luxury brands overall are starting to bounce back – and that the trend is at least partly a result of the Chinese authorities lancing a boil. He says: “The Government crackdown has been a healthy way of eliminating ‘expensed’ gifting. Now it has been eliminated from the equation, you’re looking at strong underlying, healthy growth – and growth rates that will be more sustainable as well.”

The market research company Euromonitor International forecasts that China is likely to overtake the US this year to become the world’s largest economy in terms of purchasing power parity, and Mr Rambourg is so confident of the yet to be seen growth in Chinese demand for luxury goods that he has written a book about it.

The Bling Dynasty, to be published next month, reveals details of the sheer scale of the demand for luxury brands among China’s ever-growing and evolving middle classes.

Mr Rambourg explains: “Observers have come to doubt the strength of Chinese consumption as the key driver for luxury. The media has focused on the negatives from the Chinese political administration clamping down on gifting. Doubts about Chinese consumption are ill-founded and Chinese luxury demand is on the cusp of becoming dominant.”

That point seems to be substantiated by research studies carried out by a number of firms, including the management consultancy Bain & Co. These suggest that Chinese consumers will account for  35 per cent of the global luxury market by next year.

In The Bling Dynasty, Mr Rambourg cites interviews with individual Chinese shoppers in which high-end tastes are revealed in everything from their desire for freezing cold air-conditioning in shops, to the allure of queuing up outside a luxury store. Also detailed is an interest in cosmetic surgery and an awareness of the cachet to be enjoyed in buying gadgets from the likes of Apple. 

Angela Ahrendts, who was previously chief executive of Burberry, is well aware of this trend. Ms Ahrendts recently joined the US giant to run its retail arm and she knows that growth for Apple will come from becoming a more exclusive brand – one that appeals to the luxury consumers who she understands so well.

Chinese buyers want the status that owning an item from a luxury brand brings. But an even bigger status symbol is to be able to say they have travelled to Europe or America to buy their goods.

What better way to show off than a picture on Sina Weibo, China’s answer to Twitter, of your new purchase outside a store on Bond Street or Avenue Montaigne in Paris?

Euromonitor notes the huge size and potential of the country in terms of tourists spending abroad. It predicts China will overtake the US this year in terms of international travel and knock Germany off the top spot by 2017 to become the largest outbound market, with 105 million journeys from the country. Mr Rambourg adds: “China’s big spenders are increasingly mobile, and this is affecting key markets in addition to the one at home.”

Between two thirds and three quarters of luxury sales to Chinese consumers take place outside the country, he continues. Around 40 per cent of luxury sales worldwide are made with tourists, and so “with 25 per cent of sales to the travelling Chinese, they represent around 60 per cent of sales to all travellers.”

Gregor Jackson, a partner at the retail design consultancy gpstudio – which works with global brands – says: “Chinese consumers have been driving global luxury sales over the last decade, but we’ve seen a recent slowdown as logo fatigue sets in and government anti-corruption crackdowns continue to impact the gifting economy.

“Over-saturation of the luxury market has led to the trend of more sophisticated and subtle branding as international brands focus on creating more localised nuances – with an emphasis on culture, community, lifestyle and provenance to appeal to the increasingly sophisticated Chinese luxury consumer.”

The brands have their work cut out to keep the increasingly knowledgeable Chinese luxury shopper interested. Mr Rambourg explains. “Chinese shoppers don’t want to buy Chinese brands, but this becomes a paradox: you need to have a minimum of Chinese style and appeal to tap into superior growth in the country, but not too much lest the appeal wanes.”

Brands want to ensure that China remains a key market, but they don’t want to be over-reliant. A recent survey in Korea found some of the established names were classed as “old fashioned and common” – the biggest fashion faux pas of all for luxury brands.