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Price cut signals market readjustment

Popularity 3Viewed 3043 times 2015-3-30 08:59 |System category:News| market

CHINA is becoming the biggest luxury market in the world. In past years, prices on the Chinese market for luxury goods have been rising so drastically that nobody could imagine they would ever be reduced.

 

However, on March 19, French luxury brand Chanel suddenly disclosed its price rearrangement plan by lowering its prices on the Chinese market by 20 percent and raising prices in the European market by 20 percent, which will bring the long-existing price gap between the two regions to within 5 percent.

 

Long dissatisfied with prohibitive prices for luxury goods on the domestic market — which are, on average, 40 to 100 percent higher than in Europe — Chinese buyers are surprised by this abrupt price cut. With five years of raising prices by 15 percent annually, Chanel is now lowering prices for the first time since entering China in the late 1990s. This presents their viewpoint clearly: the Chinese market is important.

 

Although Chanel reiterates that the price cut is a normal action for cracking down on the chaotic purchasing agency business, through which Chinese buyers get cheaper luxuries from Europe after paying commissions, the company’s flowery rhetoric can’t hide one truth: Significant changes to the Chinese market have forced Chanel to readjust its pricing strategy.

 

Over 10 years ago, when large numbers of luxury brands like Chanel, Louis Vuitton, Gucci and Coach came to open branches one after another in China’s Tier-1 cities like Beijing, Shanghai, Guangzhou and Shenzhen, luxuries were prohibitively expensive, rationed, levied with high tax rates and exclusively tailored for the super-rich, who don’t care about money at all, and voracious officials, who can get luxury goods given to them for free. Back then, luxury goods sold very well and the companies hardly worried about their sales goals falling short of expectations. Lots of buyers couldn’t buy their favorite luxury brands even if they had the money.

 

But in the past two or three years, China’s luxury goods market has been changing gradually. Although luxury goods companies have invested in Tier-2 and Tier-3 cities like Tianjin, Changsha, Dongguan and Suzhou to seek more buyers, many of these stores all year round have either experienced sporadic patronage, or become exhibition centers for customers to just observe. Worse still, lots of stores in the Tier-1 cities have been closed because of sluggish sales.

 

As the Chinese economy slows down, the demand for luxuries from the rich is gradually being saturated, and their motivation to keep buying luxuries is being changed from “for showing off” to “recognizing brand culture,” so that many luxury brands can’t satisfy their needs any more. Meanwhile, with the kick-start of a large-scale anti-graft campaign, officials are keeping such a low profile that corruption-related luxury consumption is shrinking rapidly.

 

While luxury goods consumption fueled by the rich and corrupt has weakened — domestic luxury goods consumption in 2014 shrank by 11 percent — the emerging middle-class is buying more luxury goods. But they are comparatively rational and price sensitive. Given that the price of luxury goods in China is much higher than in Europe and the yuan has much appreciated against the euro, they would rather make their purchases in Europe, and with the popularity of convenient e-commerce websites, they would rather shop for them online.

 

The latest data by the Ministry of Commerce shows that in 2014 more than 100 million Chinese traveled overseas, and Chinese buyers spent 380 billion yuan (US$61 billion) purchasing 46 percent of the world’s luxury goods, with 76 percent of that consumption taking place outside China. Another report by China International E-commerce Center says that China’s online luxury goods sales in 2013 reached 21 billion yuan, an annual growth rate of 34.8 percent. The figure rose to 27 billion yuan in 2014.

 

Nowadays, luxury goods buyers are different and so marketing strategies have also changed. These changes have taught Chanel the lesson that negligence of customers’ needs will cause them to desert a brand. Luckily it is never too late to take precautions after suffering a loss. Chanel’s price cut has gained support from Chinese buyers, and the brand says it is ready to develop its own e-commerce platform to lower the cost of luxury goods and better serve Chinese buyers.

 

HSBC predicts that more luxury goods companies will join in cutting prices to make themselves stand out in the Chinese market. In a time of luxury goods market reshuffling, those who can adjust will succeed.

(Opinions of the writer in this blog don't represent those of China Daily.)


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Comment Comment (3 comments)

Reply Report ColinSpeakman 2015-3-30 11:54
After Chanel, we can smell change in the air!
Reply Report voice_cd 2015-3-31 09:50
Thanks for sharing your opinion here. We have highlighted your blog.
Reply Report eddieturkson 2015-3-31 16:35
Great analysis

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