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Oct
2015

Government intervention in a market economy

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The Chinese consumer is a fickle thing at the best of times; sometimes cautious, yet with a herd instinct that overrides individual considerations if it is strong enough. This unpredictability has been the challenge for senior staff of luxury brands operating in China over the past few years and it has led to many changes in strategy and a need for more flexible operations than previously established.

So the latest actions of the Chinese government to devalue the RMB and lower interest rates as a means to counter slower than expected economic growth which then set the worlds stock markets into a shallow nose dive for a while, will have caused the same senior executives to feel that their troubles had gone from bad to worse in a country that at one time was proffered as ‘the holy grail of luxury’. Will Chinese consumers stop buying luxury products completely? Will products sold in Europe or the USA lose the price advantage they have and therefore sales will be hit, and will this mean that the Chinese luxury consumer now buys at home? All these questions will be asked, but how will they be clearly answered?

If we consider the devaluation of the RMB, which on the face of it gives an impression of a major loss but was in fact relatively small percentage in real terms to a consumer they may not see any immediate effect on typical product pricing. However, the psychological affect on the Chinese people that may well cause the actual decrease in value to be mentally inflated and perceived as a big issue. The ‘group think’ effect presents what might be major challenges or opportunities, if it can be harnessed correctly, so will luxury brands see it as just another painful issue or spin it in their favour?

Taking a big picture view from the perspective of the Chinese consumer initially, we know that they are very aware that the economy has been slowing for the past 18 months, but contrary to the views of the foreign media, this hasn’t meant that they have closed their wallets completely and have not been spending; on the contrary, they have spent wisely and in high volumes overseas because they can combine a luxury lifestyle experience with savings on purchases. Their experience does then raise the question “if they cannot make as much of a saving will they stop buying overseas?”

Unfortunately there is not a single answer to this straightforward question, because we are talking about China. The upper middle class, affluent and wealthy Chinese consumer travel for pleasure and business regularly and this isn’t going to stop. Their purchasing is related to both emotion and personal status; some will less sensitive to spending money than others, but all love a bargain as much as anyone else. These people are relatively knowledgeable about luxury from the classic brands to those that are now on their radar, they also know that their choice of luxury is greater outside of China than within, so it is unlikely that sales to this group will be dramatically affected.

If we consider the middle class consumer, those who can afford to spend a relatively small amount on luxury will now be considering their choices; can they afford to travel overseas and if so, can they afford luxury items if they do? For them is may be necessary to priorities; to travel and not buy luxury or to stay in China and buy a luxury item locally now that price differences may be smaller. This mass-market thinking could reduce the luxury sales internationally and increase them domestically, but and this is the unpredictable element of the question, these consumers may chose to do neither and just save their money until the economy picks up.

Chloe: female from the financial industry, 30,000-50,000 RMB monthly income, single, 30 years old,

The currency depreciation has had great impact on my own industry, the reduction of interest rates, reserve requirement ratios and the stock market do to. Now my decision whether and where to purchase luxury products depends on my expected income and commision.

4S car store owner: male aged 42,income 50,000-100,000 RMB per month

My friends and I share the same feeling that the economy now is quite bad, not until the end of the year or 1st quarter of next year will it recover. In addition to the stock market conditions recently, we lack confidence and a desire to consume. These greatly influence us and we are very cautious when making purchases now.

The challenge for every luxury brand at this moment is to try and second-guess the Chinese consumer. They have been spooked by the governments actions and in typical form, we can expect them to all over-react for a while until they feel things are OK. Creating price parity between China and the rest of the world may help increase domestic sales and compensate for lower international sales, but the majority of consumers will just take a cautious view on purchases, so brands take notice. It is just another example that playing in this market will be full of highs and lows, but will never be boring!


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