China may be cracking down on conspicuous consumption but discreet displays of wealth continue unabated. It would be easy to see this as a consequence of the anti-corruption drive in China that has been focused on certain types of luxury. But that is only half the story of the evolving market for luxury goods in China, already the world’s largest.
Results today from two of the Western luxury brands seeking to profit from China’s ever-more-affluent shoppers underline the first point. Tiffany & Co, the New York jeweler, attributed the lion’s share of its global rise in third-quarter sales to Chinese jewelry shoppers turning out in big numbers. In contrast, Remy Cointreau, the French spirits group, warned that its full-year operating profit would fall by at least 20% because of the Chinese government’s crackdown on ostentatious spending.
Remy is undergoing a sobering (so to speak) experience similar to the one that befell global rivals Diageo and Pernod Ricard. All three have been adversely affected by the discouragement from on high on government and party officials’ entertaining and gift-giving — premium spirits being a particular favorite on both scores. Sales of high-end watches, too, particularly those made in Switzerland and by Cartier, have fallen off for the same reason.
The challenge for Western luxury brands is to sustain their public standing with the government and prop up their image in the marketplace while navigating the seam between the suppression of ostentation and the campaign against corruption. The former is intended to diffuse popular frustration with corrupt government officials living high on the hog and the nation’s growing uneasiness over the increasing wealth gap between rich and poor. The latter has a different agenda, one set by power struggles at the highest level of the Party.
Most luxury brands expect these straitened times to pass — as previous similar campaigns have done. But the smarter ones don’t expect the market to return to its former heights. The slowing growth and changing nature of luxury retailing in China was in train before the campaign to impose frugality on public officials was launched in October last year. The luxury market grew by only 7% in 2012, against 30% growth the previous year, and the consumer preference in the trend-setting big cities, at least, was for “stealth wealth.” The purchase of luxury goods with prominent logos and brandished as wanton displays of status was mostly prevalent in second- and third-tier cities.
Middle-class Chinese, in their late 20s and early-to-mid 30s in the big cities — a “me”-centric cohort that has only known a rising and richer China — are more attuned to buying in accordance with their personal preferences and tastes. They are showing themselves to be less enthusiastic about overexposed, heavily logo-ed products and more keen on trendy, niche brands. This move towards discernment is a common pattern among more sophisticated shoppers in most emerging markets.
Hermes new logo-less line of products and Louis Vuitton’s de-emphasis of its logo on some new bags are a nod to this trend. The availability of subtler gifts dovetails with the anti-ostentation drive, too. In the same vein, France’s upscale retailer Galeries Lafayette bills its new department store in Beijing as a purveyor of fashion, not luxury, and edgy fashion at that (see above). Cartier, Louis Vuitton and Chanel are conspicuous by their absence, but not the Paris labels known to the fashion cognoscenti.
If China’s luxury market follows the traditional pattern of development, the longer-term trend will see spending veer towards big-ticket items perceived to have high intrinsic value: real estate, art, gems and well-engineered cars. There will come to a move towards luxury as an experience, rather than ownership of a product, with high-end shopping tourism leading the way. The crackdown on conspicuous consumption may hurry forward both trends. Overseas luxury tourism is difficult for authorities to monitor. For the luxury brands most at risk of losing sales inside China it will be an opportunity to make up for it with spending by Chinese outside China.
What will not happen is the death, via government crackdown, of the luxury market in China. There is simply too much wealth being generated in the country for people not to want to spend it richly.