Wed, September 19, 2012
Business > Economy

Chinese's appetite for top brands may be waning

2012-09-19 01:39:10 GMT2012-09-19 09:39:10(Beijing Time)  Global Times

(Photo/Agencies)

There are signs that Chinese people's appetite for top brands may be waning.

Burberry Group issued an unexpected profit warning on September 12, triggering a drop in its shares and those of its rivals as well. The British luxury clothing and accessories maker said its full-year profits would be "around the lower end of market expectations."

The company posted an 18 percent year-on-year revenue increase to 146 million pounds ($237 million) during its first financial quarter in the Asia-Pacific region, led by China. But the figure was much lower than last year's surge of 67 percent year-on-year.

The profit warning caused a slump in Burberry's shares of 21 percent in London, and French luxury brand LVMH also saw its shares fall by 3.84 percent.

According to Burberry, the slowdown in China's economy has been a "significant contributor" to the company's slowing profit growth. And it is not the only luxury product maker facing a business downturn in China, which is seemingly no longer immune to the weak global economic conditions.

Is the boom over?

According to statistics from Bain & Company, a Boston-based consulting firm, annual sales in the luxury market in the Chinese mainland surged from 7.1 billion euros ($8.88 billion) in 2009 to 12.9 billion euros in 2011. If the consumption of individuals from Hong Kong, Macao and Taiwan is included, total sales in the Chinese market last year would have been 23.5 billion euros, not counting the 15 billion euros spent annually on luxury goods by Chinese customers abroad.

Many luxury brands have been eyeing the mainland market, and have announced plans to open new stores across the country. But statistics indicate that the market has become less welcoming.

Hong Kong-based Chow Tai Fook Jewellery Co disclosed in July that the company's year-on-year sales growth reached 16 percent in the first financial quarter, much slower than the 61 percent sales increase registered by the jeweler in 2011.

According to the China Luxury Forecast 2012 released in July by public relations agency Ruder Finn and market research firm Ipsos, 54 percent of respondents said they intended to spend less on luxury-brand watches in the coming year, and hand bags and jewelry are no longer on their buying priority list.

"In the past 12 months the luxury market was going strong, but consumers are cautiously planning for the next year because of the economic news they're reading, and this could lead to a relative slowdown," Simon Tye, executive director of Ipsos, said in a statement.

Zhou Ting, director at the Fortune Character Institute, a consulting firm specializing in luxury products, told the Global Times that there were various reasons why luxury brands have seen a drop in sales, including the current economic slowdown and the government's greater efforts to curb corruption.

More cautious

China's economic growth slowed to a three-year low of 7.6 percent in the second quarter of 2012.

And during the past two weeks, foreign banks have downgraded their full-year growth forecasts for the world's second largest economy: UBS Securities cut its economic growth outlook for China by half a percentage point to 7.5 percent; Goldman Sachs lowered it to 7.6 percent from an earlier estimate of 7.9 percent; and Barclays lowered its forecast to 7.5 percent from the previous 7.9 percent.

"Amid the economic slowdown, luxury consumers naturally would rather save their cash instead of spending it," said Zhou.

Zhou also noted that a recent scandal over fake Hermes bags had gained a lot of attention and increased people's concerns about the prevalence of counterfeit goods in the market.

French police disclosed in June that they had broken up a sophisticated counterfeit Hermes handbag syndicate, and that 12 suspects had been arrested in Paris and Lyon. According to a statement from Hermes, some of the counterfeit bags were about to be sold in China, one of its largest markets.

Zhou also noted that government officials currently do not dare to buy luxuries or accept luxury gifts, due to recent public criticism of officials seen wearing top brand clothes or watches.

Moreover, the Standing Committee of the Political Bureau of the Central Committee of the Communist Party of China (CPC) announced last month that the country will implement a five-year plan for eliminating corruption after the upcoming 18th CPC Congress.

Lin Zhe, an anti-corruption professor at the Party School of the Central Committee of the CPC, told the Global Times that the increasing efforts to fight against corruption are also curbing the purchasing of luxuries in the country.

Fight against corruption

After being photographed smiling at the scene of a fatal bus crash in Shaanxi Province in late August, Yang Dacai, director of the local safety supervision bureau, was found by Internet users to have worn 11 different luxury-brand watches on various occasions, which raised people's suspicions over Yang's financial background.

The Shaanxi provincial disciplinary office later launched an official probe into possible violations by Yang.

"Luxury sales have a close relationship with corruption, because people sometimes give luxury gifts to bribe officials," Lin said.

Lin said that calls for more detailed and transparent government budgets, as well as restrictions on "three public expenses" - which refers to spending on official receptions, vehicles and overseas travel - have also put officials under more pressure to curb their spending on luxuries.

The price of Feitian Moutai, a high-end Chinese liquor, fell to as low as 1,519 yuan ($240) per bottle in August, from a high of 2,600 yuan last December. Some have said that the sharp rise in Moutai's price in recent years has been due to its role as a gift and dining necessity at official banquets.

However, luxury expert Zhou Ting said that the number of suspected corrupt officials was relatively small compared to the entire Chinese luxury market, so their hesitation in buying or accepting gifts "will not influence the sales of the luxury sector as a whole."

Cai Sujian, head of the China Luxury Institute, told the Global Times that he is still optimistic about the development of the luxury industry in the country.

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