Luxury buying has by far outpaced China's growth over the past decade. The country's consumption of luxury goods rose at an average of 27 percent between 2007 and 2012, nearly three times the country’s average economic growth during that period.
But an aggressive anti-corruption drive and China’s broader economic slowdown has created challenges for luxury goods makers. Last year, China's luxury market descended into negative territory for the first time.
In its recent survey of Chinese consumers, the 2014 China Luxury Market Study, consulting firm Bain & Company said market growth slipped one percent to $18.7 billion.
"What drove the Chinese luxury market for many years is the practice of giving gifts. Buying for making gifts has drastically slowed down in the past two years owing to the anti-corruption drive," said Michel Phan, associate professor of luxury marketing at Emlyon Business School in Shanghai.
Still, Chinese buying accounts for a third of luxury purchases globally.
Tiger, Flies and Ferraris
China’s President Xi Jinping has been working hard to crack down on official graft since coming into office in 2012. The campaign to catch both high and ranking officials, or tigers and flies, has had a noticeable impact on the long-standing practice of gift giving and that has hurt luxury brands.
China’s anti-graft inspectors have already uncovered a treasure of cash and luxury goods.
An investigation into Yang Dacai, director of the Shaanxi Administration of Work Safety, began after netizens published pictures of him on social media wearing a range of several different expensive watches, each of which was believed to be worth more than $16,000. Internet photographs also showed him wearing a pair of glasses from Roters, a German brand, worth over $20,000.
According to reports, raids in the premises of Zhou Yongkang, China’s former security chief who is being investigated for corruption, found 62 foreign and locally made cars, 55 paintings worth $129 million and many bottles of expensive wines.
Liu Han, a mining tycoon whose links to Zhou Yongkang have been widely reported, owned hundreds of cars including Rolls-Royces, Bentleys and Ferraris. Inspectors also found in his possession a Franck Muller Conquistador 8005 K CC DCD watch, which according to prices posted online costs more than $110,000. Liu was executed last month after being convicted on charges of “organizing and leading mafia-style crime and murder.”
Industry analysts say government officials and mistresses are among the major beneficiaries of luxury goods because businessmen give them gifts in return for favors.
Underground and Overseas
But with anti-graft inspectors keeping a close watch on the industry and thousands of enthusiastic Internet users routinely posting pictures of officials and their family members flaunting their fancy cars, purses, watches, suits and cigarette lighters, behaviors are changing.
As a result, the rich in China are now busy keeping themselves away from the eyes of government inspectors both on and offline. And because of that, analysts say that in addition to lower consumption taxes overseas, a growing number prefer to buy luxury goods during foreign trips instead of being seen in outlets in major Chinese cities.
Last year, several major product brands had to close their stores as a result of the slowdown, while others saw sharp sales reductions. Hugo Boss shut seven outlets, Ermenegildo Zegna six and Burberry four shops in mainland China last year, Xinhua reported.
The Shanghai Diamond Exchange has reported that the sale of polished diamonds fell for the fourth consecutive month in January. Swiss luxury giant Richemont saw its sales slip four percent in the third quarter (Q3) of 2014.
In its report, however, Bain reassures makers of luxury goods that there is still hope.
"The Chinese make up 30 percent of global luxury spending. It was invisible 10 years ago, maybe a few percent," said Bruno Lannes, Bain partner and the head of Luxury practice for Greater China. “Given the economic development in China and the wealth creation there, global brands have been looking at China as the new Japan."
Jing Daily, an online luxury magazine, recently noted that there is growing interest in buying from so-called HENRYs (High-earners, not rich yet) that is offering the market hope as well.
Unlike traditional luxury buyers, HENRYs look to more affordable labels such as Tony Burch, Michael Kors and Longines. The report said pricier brands, on the other hand, such as Cartier, Louis Vuitton and Gucci have been hit by a “cold front.”
Bain also seemed to be highlighting this trend in its survey, which found that brand loyalty in China is shrinking. Bain reported that 70 percent of respondents said they are ready to try different brands and styles, and 45 percent of them plan to buy more emerging luxury brands in the next three years.
In addition to the anti-graft campaign, China’s slowing economy is also having an impact. The Chinese government has reduced its growth target to 7 percent in 2015, making the possibility of improvement in the luxury market thin.
"With the 7 percent GDP growth for 2015, the luxury market in mainland China will remain difficult for this year. With the gift giving market almost disappeared, the only consumers who would buy luxury goods in mainland China would be those who buy on impulse, or for an urgent need," professor Phan said. "Luxury brands need to work harder to maintain their sales in China over the coming months".
Bain’s Bruno Lannes said the market is going through a fundamental shift. That shift not only involves the slowdown, but includes the impact of the evolving buying preferences by customers and the rise of new luxury labels. In a statement released with the report, he said luxury brands will need to step up their game in 2015.
“In this age of brand redefinition, luxury brands in China must shed traditional concepts and channels and follow where their customers lead, or risk losing them,” said Lannes. “This may be a challenge for many, but those that understand how to change with the consumer will reap the rewards.”