What happened in 2015? What are the prospects for 2016?
2015 was an eventful year for the multibillion-dollar luxury market in China. With a stock market in decline, fewer foreign luxury goods being imported and the arrest of several senior industry figures under the anti-corruption campaign led by Xi Jinping; the luxury market in China has inevitably been affected. Large luxury brands must develop new strategies to limit the damage and be able to protect themselves against these challenges in China.
The luxury market is evolving and Chinese consumers are following new trends according to a new report by Bain & Company.
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The luxury market in China is declining
Overall, the purchasing of luxury goods in mainland China decreased by 2%, to about 113 billion RMB in 2015. The most affected areas are the men’s ready-to-wear items, watches, suitcases and handbags. In 2014, for luxury brands ready-to-wear for men fell by 13% from 2013 to the end of 2015.
This decline is caused by several factors including the anti-corruption campaign of Chinese President Xi Jinping, who discouraged lavish luxury gifts that were being used as bribes. Last April, former security chief Zhou Yongkang joined the growing group of people in the Chinese government to have been arrested for corruption.
In addition, last year, China has experienced for the first time a drop in its stock market which contributed to the luxury market downturn. In conjunction with this, there has been a crackdown on the “Daigou” market by Chinese customs. Daigou is a Chinese term for the Chinese who buy luxury goods abroad and sells them to relatives or through other illegal methods when they return to China. Between 2014 and 2015, the size of the Daigou market fell by RMB 55-75 billion to nearly 34 to 50 billion RMB.
Some sectors maintain a strong growth
Luxury brands in the ready-to-wear for women, in jewelry, cosmetics and perfume continued to rise in 2015.
Since 2012, these sectors have always had stable growth. For example, the luxury branded apparel retained a CAGR (compound annual growth rate) of 10% and in terms of cosmetics, and perfumes, the CAGR is about 5 to 10%.
Among the brands that have kept steady growth, are Armani, Burberry and Chanel in women’s clothes; Bvlgari, Cartier and Chow Tai Fook in jewelry and Chanel, Dior, Estée Lauder in cosmetics.
LVMH relies on brands like Fendi and Celine to continue to boost its sales in China. Indeed, the Fendi brand was the most successful brand of the year thanks to its strong online presence. Fendi is one of the most well-established brands on Chinese social media. Many fashion bloggers fuel the popularity of the brand on Weibo and the brand is trying to communicate as much as possible with its clients on WeChat. The Peekaboo collection was a sensation with Chinese affluent women but also of note was the trend in “kawaii” Fendi bags.
Céline and Loewe also had great success with a new generation of wealthy Chinese who are more open and looking for original and highly creative products.
Hong Kong is no longer the top destination for Chinese luxury goods
The Chinese are not going to Hong Kong to shop anymore but instead, they choose to go to Japan, South Korea and Europe. Japan is a popular destination for Chinese, their luxury goods sales increased by 251% since 2014. In second place we find South Korea with 33% then there is Europe with 31 %.
While sales in Hong Kong and Macau have fallen by about 25%.
This sharp increase in the purchasing of luxury goods in Japan was due to a more open visa policy and which also explains the larger number of Chinese tourists in Japan.
Cross-border e-commerce explodes
According to the report by Bain & Company, the cross-border E-commerce and internet sites abroad contribute 12% of the total value of the Chinese luxury goods market.
Consumers are not buying in store, and now no longer pass through the Daigou. They prefer to make their own purchases through various e-commerce sites such as JD, Tmall, Net-A-Porter.com, ShopBop (purchased by Amazon in 2006) or Harrods.
Startups also want to meet the needs of Chinese consumers through cross-border e-commerce websites: Kaola.com (网易 考 拉海 购) and Mihaibao (觅 海 宝) are two such examples. To attract more Chinese consumers concerned about lower prices, startups like SECOO (寺 库) and Share2 (只 二) offer luxury products which are second hand.
The Chinese government also helped brands to spread online. For example, in January 2015, limits on online payments between countries increased from $ 10,000 to $ 50,000. The government also encourages companies to conduct more cross-border e-commerce by offering tax advantages.
New strategies to boost economic growth in 2016
In order to encourage purchases in mainland China, brands have begun to align their prices internationally. Brands like Chanel and Cartier began to give fewer profit margins to Daigou merchants and gradually reduce the price gap between Europe and Asia. Last March, Chanel was the first luxury brand to have dropped the prices of handbags in China. Chanel has influenced other brands with this approach as Cartier and Gucci followed suit and also reduced prices.
These strategies are a response to the depreciation of currencies such as the euro and the RMB, aligning prices internationally. Brands contribute significantly to the reduction of the illegal Daigou market and will help to increase consumption in China and the economic growth of China in 2016.
Luxury brands must constantly work on new collections develop a Chinese tailored image to better satisfy Chinese customers. The new generation of wealthy Chinese are looking for a new style to distinguish themselves and this is why luxury brands should communicate more with Chinese consumers and target their needs.