19
Feb
2013

The tipping point of the Chinese luxury market

I have read many articles in the media bemoaning the slowing Chinese economic growth and similar performance figures for the luxury sector, and it appears to me that they are trying to make 8% growth sound like a very poor performance and a disaster for all concerned. Lets face it, if the country achieves 8%, it has done well, and if the luxury sector continues to grow at a high single digit rate, it too is performing as well, if not better than most other territories in the world.

What they seem to miss and what, through observation and experience would appear to me is that the luxury market in China is at a tipping point. A number of factors have coincided to create an environment that will force a long lasting change in its nature, the market as we knew it pre 2013 will no longer exist, the landscape is changing significantly.

In 2012, we saw the economy slow as a result of global economic forces that had in some part a knock on effect on the willingness of consumers to spend as they had done in previous years. The result was that Chinese luxury consumers started to take time to look around the market as they might not have done previously, and noticed a wider range of brands that as a result became more knowledgeable and more selective. Although this was a process that had already started, the political and economic circumstances dramatically increased the learning process.

In the lead up to new leadership appointments, spending on luxury items traditionally given as gifts declined driven by the concern that key recipients might change post after the appointments, and therefore they would be wasted. The new leadership has provided a feeling of stability, but with it the knowledge that they must implement new policies to improve the general economic situation of the country in the coming years.

A drive to reduce the money spent on gift giving by and to government officials and departments began to take effect, and no doubt, sometime in the near future a decision will be taken in terms of tax rates applied to imported luxury products in order to reduce their price and hopefully increase domestic consumption. While in the mean time 4 million Chinese left the country over Chinese New Year to travel overseas, no doubt many bought luxury goods when away, a trend that had through 2012 impacted domestic luxury sales.

Although some, if not all these effects could possibly have been to some degree been anticipated, luxury brands now face the challenge of handling a new operational and consumer landscape and not the relatively simplistic one of the past. The rules are changing, and new approaches must be adopted.

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