Any Luxe Left for China?

 
 

China’s anti-corruption campaign has dented consumers’ purchases of luxury goods for more than three years, and now restrictions on cross-border online purchases of luxury goods may further adversely impact the industry. What will become of the luxury goods industry in China?

According to Bain and Co., Chinese consumers spent 2 percent less on luxury goods in 2015. Luxury goods for social gifting, particularly men’s wear, watches, and leather goods, took a hit during the corruption crackdown. Qian and Wen (2015) estimate that the corruption campaign negatively impacted luxury imports by 13.3 percent.

New tax measures on luxury items purchased online may further dampen the industry. Cross-border e-commerce, which includes luxury goods from abroad, will be taxed at levels of over 2,000 RMB for single purchases, and at over 20,000 RMB per person per year starting on April 8. Taxes on luxury goods in particular will be increased to 60 percent. Purchase of luxury goods online in China is often less expensive than in brick and mortar stores, but this may change as taxes rise.

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Many shoppers have already been traveling abroad to Europe or Asia to purchase luxury goods due to large price differentials between brick and mortar stores on the mainland and overseas. Shoppers who are unable to travel abroad often use daigou, or overseas personal shoppers who purchase goods for them. Daigou will also be subject to an increase in penalties in false declarations. Using daigou has already been on the decline following a crackdown on the illegal practice by customs officials, which view the practice as a means of tax evasion. Reductions in import tariffs that were carried out in January of this year have sought to reduce the price differential between luxury goods purchased at home and abroad, although tax differences continue to drive consumers to purchases of luxury goods from overseas sellers.

Still, online purchases (in particular) of luxury goods remain popular, mainly because of price differences between online and offline purchases, but also because online consumers are interested in finding unique products. Online shoppers have become bolder, showing a willingness to purchase items online that they previously preferred to purchase offline. For example, luxury services such as hotel stays, restaurants reservations, and domestic and overseas trips have become increasingly popular purchases online.

And while luxury goods have taken a hit due to the corruption crackdown, luxury producers have shifted their marketing practices to appeal to China’s wealthy and upper middle class, particularly the young and fashionable. High-end brands have attempted to create personal connections to shoppers by holding special events to interact with consumers and customizing products to reflect Chinese culture. The goal of the personal connection is increasingly to bring consumers into an offline store to purchase products. Luxury producers have also sought to reprice products in stores with Chinese shoppers in mind.

In recent months, luxury women’s wear and personal products have experienced growth. Chinese luxury shoppers are looking less to purchase heavily branded goods and have turned toward more subtly branded goods of high quality. Analysts now view China’s demand for luxury goods as a potential growth area, though not across the board. Some companies, like Louis Vuitton and Giorgio Armani, have already been forced to close stores in China.

China’s growth slowdown has not helped matters, and it may take some time for the luxury goods industry to fully rebound. For now, despite ongoing swipes to the industry, luxury goods and services are persevering and adapting to new demands and regulations. So for now, there is still some luxe left for China.

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