International luxury brands abandoning China as economy slows
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After enjoying a decade of aggressive expansion in China, international luxury brands have begun to curtail their operations as the world’s second-largest economy is beset by a slowdown, a massive government crackdown on graft and a Chinese preference to buy expensive goods abroad.
French retailer Louis Vuitton closed its store in the sprawling port city of Guangzhou. That was followed by two more shutdowns by the firm in Harbin and Urumqi in Xinjiang.
The company, however, said the closures were part of a marketing strategy adjustment by headquarters.
During the past two years, Britain’s Burberry has closed four stores in China, Coach shut two, Hermes one, Armani five, and Prada went from 49 to 33.
Following 10 years of aggressive expansion, the luxury brands have been shrinking their physical presence in China to adapt to a cooling market plagued by a slowing economy, an ongoing anti-corruption campaign and Chinese buyers’ increasing overseas purchases, Hong Kong-based South China Morning Post reported today.
Fortune Character Institute (FCI), a Shanghai-based market research unit, forecasts mainland luxury sales to grow 3 per cent to USD 25.8 billion this year, much slower than the 11 per cent in the recovering global market.
The institute in a study found that although Chinese shoppers consumed 46 per cent of luxury goods around the world, their purchases in their home market accounted for only 10 per cent of global sales, falling from 11 per cent in 2012 and 13 per cent in 2013.
The sluggish growth is reflected in the expansion plans of luxury brands. They are opening fewer new stores and closing more, the report said.
“During the past two years, Britain’s Burberry has closed four stores in China, Coach shut two, Hermes one, Armani five, and Prada went from 49 to 33.”
“Store openings are no longer a major way for international luxury brands to expand in the China market. Over the next two years we expect these brands to close even more stores than before,” said Zhou Ting, director of FCI.
“But if you think luxury brands are taking a totally defensive strategy in China, you would be wrong. The closures are only a small part of a thorough strategy adjustment they are undertaking in China,” he was quoted in the report.
The first batch of luxury brands entered China in the 1990s. Most of them set up stores in five-star hotels and high-end department stores in big cities, targeting foreign businessmen, overseas Chinese and government officials.
The “golden era” came around 2009 and 2010 when affluent Chinese began spending on high-end goods and jewellery, making China the fastest-growing luxury market in the world.
Encouraged by this, luxury retailers rushed to China.
Global consultancy Bain & Co estimated that the 15 top brands it surveyed had opened more than 80 new shops during the first eight months of 2010.
A watershed for China’s luxury market came in 2013 when President Xi Jinping launched a massive anti-corruption and austerity campaign. It had a big impact on the luxury market as government officials were banned from receiving gifts.
Such expenditure had been a major driver of domestic luxury consumption, the report said.
Questions & Answers
Q.What is causing the international luxury brands to change their operations in China?
What is causing the international luxury brands to change their operations in China?
Luxury brands are curtailing operations due to China's slowing economy, a government crackdown on graft, and a growing preference among Chinese consumers to purchase expensive goods while abroad. These factors are leading to a cooling market.
Q.Which luxury brands have reduced their physical presence in China and by how much?
Which luxury brands have reduced their physical presence in China and by how much?
Burberry has closed four stores, Coach two, and Hermes one. Armani shut down five outlets, while Prada significantly reduced its presence from 49 stores to 33 in the Chinese market.
Q.How much of the global luxury market do Chinese shoppers represent, and how much of that is spent within China?
How much of the global luxury market do Chinese shoppers represent, and how much of that is spent within China?
Chinese shoppers account for 46 per cent of global luxury goods consumption. However, purchases made within their home market represent only 10 per cent of global sales, a decline from previous years.
Q.When did the Chinese luxury market experience significant growth, and what led to its subsequent shift?
When did the Chinese luxury market experience significant growth, and what led to its subsequent shift?
The luxury market saw a 'golden era' around 2009-2010 with affluent Chinese spending on high-end goods. A watershed moment came in 2013 when an anti-corruption campaign banned officials from receiving gifts, impacting domestic consumption.
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