Luxury Brands’ Value Shrinks $7 Billion as China’s middle class spend less

STC event pic 2Luxury isn’t what it used to be. The value of the top 10 luxury-goods brands fell 6 percent, or $7.1 billion, to $105 billion as companies from Prada SpA to Cartier grappled with slowing sales in China and Russia, research company Millward Brown said in the 2015 BrandZ study.

Only Louis Vuitton and Chanel saw an increase over last year. Vuitton gained 6 percent to $27.4 billion, placing LVMH Moet Hennessy Louis Vuitton SE’s biggest brand atop the luxury ranking for the 10th straight year. Chanel’s value rose 15 percent to $9 billion, propelling it to fourth in the list behind second-place Hermes and Kering SA’s Gucci.

Spending on gifts has fallen in China as the government clamps down on corruption, while Russia’s shoppers are suffering from the ruble’s depreciation and sanctions tied to the conflict in Ukraine, Millward Brown said. At the same time, efforts to appear more exclusive have created opportunities for cheaper brands such as Michael Kors and Tiffany, which finished in the top ten for the first time, the researcher said.

But this does not reflect the trends of High Net Worth Chinese, who still consume luxury goods overseas, during their business/leisure trips.

The brands who suffer the most are brands with low brand equity, in the eyes of Chinese consumers, as the most prestigious brands (in particular watches brands) continue to thrive with Chinese  affluent collectors.

Chanel, the maker of No. 5 perfume, and handbag purveyor Vuitton fared better than their peers thanks to their unique approach, according to Elspeth Cheung, Millward Brown’s Global Brandz Valuation Director.

Chanel has harmonized prices across regions, encouraging more in-store consumption, Cheung said. And Vuitton has successfully revitalized its brand with a fresh take on its original LV monogram.

The worst performers were Cartier, whose value decreased 15 percent to $7.6 billion, placing it sixth, while Prada slumped 35 percent to $6.5 billion, according to the study. An overly expensive product mix and lack of novelty at Prada have led shoppers to spend elsewhere, analysts at Exane BNP Paribas have said.

Gervois magazine - The new travel magazine for millennials travelers in the United StatesHermes’s value fell 13 percent to $18.9 billion and Gucci declined 14 percent to $13.8 billion, according to the study. Rolex fell 6 percent to $8.5 billion, placing it fifth. Rounding out the top 10 most valuable luxury brands were Burberry in eighth, Michael Kors and Tiffany.

The luxury ranking is part of a broader study commissioned by WPP Plc, the advertising-company parent of Millward Brown. The study is based on interviews with more than three million consumers and an analysis of companies’ performance.

In conclusion, Luxury brands should open less stores in Mainland China (and certainly close some of them), and focus their marketing efforts on Chinese outbound travelers who prefer now to buy overseas, to enjoy better prices, better service, and the social status which comes with a product bought in New York, London or Paris. “Bought in Beijing” is not cool anymore.

Source: Business of Fashion

 

Luxury brands in a quandary as China’s wealthy young develop resistance to bling

Hainan Airlines - Chinese touristsThere was no shortage of frocks and handbags in Milan last week as representatives of the $1.5 trillion global fashion industry gathered for the spring 2015 trade shows. Behind the glamour and gloss, however, there was discernible anxiety that the mighty Chinese consumer, responsible for one third of luxury goods and fashion sales, is not living up to expectation as a consumer of fashion and bling – and could even be developing a resistance to ostentatious western brands. Leading luxury conglomerates, including LVMH (Moët Hennessy Louis Vuitton) and Kering, owner of Gucci, as well as brands like Prada – which sent models down the catwalk wearing its spring/summer 2015 collection in Milan on Thursday – are reporting disappointing financial results, and have pointed their collective finger at China, where growth in the luxury goods market has slowed to 2% after rising 30% in 2011.
Analysts warn that after years of chasing Chinese consumers, domestically and as voracious luxury shoppers in foreign capitals, the big brands may be no closer to understanding the market. With analysts warning that shares in luxury brands could fall as prominent investors dump stock, the fashion industry is seeking answers to the riddle of China’s luxury consumer.
“China was everyone’s dream but it’s proved a lot more difficult than anyone expected,” says HSBC analyst Erwan Rambourg and author of The Bling Dynasty: Why the Reign of Chinese Luxury Shoppers Has Only Just Begun.

In response to a government corruption crackdown that has curbed the practice of “gifting”, wealthy Chinese consumers are reported to be wary of wearing visibly branded clothes.
Resistance to bling, says Rambourg, has harmed brands including Gucci, which showed in Milan on Wednesday, and Louis Vuitton – labels young consumers associate with their mothers. Without a radical shift in perception, changing patterns of consumption are unlikely to improve the outlook. In less than a decade, Chinese luxury consumers will be on average 10 years younger than their European counterparts and more than 15 years younger than consumers in the US. If projections hold, Chinese shoppers will account for more than half of all luxury sales by 2025.
Chinese consumers have developed sophisticated sensibilities more rapidly than western brand managers anticipated. “It’s what I call the French paradox, says Rambourg. “If you are a niche brand, everyone wants you. If you are a big brand, then by selling more you compromise a sense of exclusivity and the notion of luxury itself.”
Nor are Chinese consumers necessarily impressed by a luxury label alone. Raw material quality can be seen as a more important attribute than branding or fancy designs, Rambourg notes.
“They’re not only much younger and super-demanding, they’re also extremely well informed. If you’re complacent and don’t communicate the way they communicate, it’s going to be difficult.”
In the early years of China’s love affair with luxury, Chinese visitors to foreign capitals could be relied on to shop without restraint. Shoppers, often male, bought for their friends and relatives. Steep markups for products sold in China led to the growth of “haiwai daigou”, or overseas personal shoppers, estimated to be worth $12bn annually.
Now, even as more Chinese travel abroad, they’re spending less or choosing different destinations. Tax-refund claims by Chinese tourists in Europe grew 18% last year, compared with 57% in 2012.
“Hong Kong was cool. Western Europe was cool. But neither are true any more. The Chinese travelling abroad ditched Japan two years ago. So now they’re discovering the US and US brands.”
At home, Chinese shoppers – now more likely to be female – are balking at paying inflated prices, often 50% higher than abroad. Retailers have begun to discount but analysts warn of the risk of training consumers to wait for price cuts before buying, often impulsively, items they don’t want.

“We see a major shift in the behavior of affluent Chinese travelers”, says Pierre Gervois, Publisher of Luxury Hotels of America, a luxury travel publication for affluent Chinese tourists. “They now clearly consider that Western Europe is a little bit out of fashion, and want to experience U.S. brands”
Brands benefiting from the shift in perceptions include Burberry. “They’re the only legitimate global British brand competing against a sea of French and Italian brands. Its phenomenal appeal is linked to an association with Britishness and rock and roll rebelliousness,” says Rambourg.
The industry is taking corrective measures to rekindle the love of Chinese consumers. Last week, the Costume Institute at the Metropolitan Museum of Art in New York announced that next May’s fundraising ball at its new Anna Wintour Costume Centre will celebrate the influence of China on fashion, film and art.
The chosen theme of the party, sometimes called the Oscars of fashion, offers a clear signal to designers to direct their research toward Chinese history and design. With the Chinese actress Gong Li and Wendi Deng, the ex-wife of Rupert Murdoch, selected as co-hosts, and Wong Kar-Wai, director of the epic In The Mood For Love as artistic director, fashion could be about to have a Chinese moment. Luxury-brand managers will no doubt be hoping Chinese consumers will reciprocate the love.
“If they only try to mimic, consumers will know it’s not genuine,” warns Rambourg.
As last week’s $160bn public offering of Chinese e-commerce giant Alibaba shows, faith in Chinese consumerism remains strong. When the French brand Hermès opened a substantial new store in Shanghai this month, chief executive Axel Dumas said the brand was still doing well. “We are very, very confident about the Chinese market. People are now buying for themselves, there is also a refinement, a knowledge of what is luxury.”

Source: The guardian, Edward Helmore

Mandarin speaking sales associates are not enough to attract Chinese affluent shoppers: A good digital strategy is more efficient.

Chinese shoppers- China Elite FocusOver two-thirds of luxury spending by mainland Chinese was made overseas in 2013, an increase from 2012, according to the China Luxury Market Study from consultancy firm Bain & Company released on Monday.
Chinese shoppers often wait for trips abroad, plan shopping sprees to Hong Kong or get friends or specialist “daigou” agencies to bring back luxury items from overseas because they are often cheaper due to China’s high import taxes.
“Sometimes I’ll go to a China store and look online for details about things I’ve liked, or try something on for size I’ve seen online. But when it comes to actually buying it I’ll always get a friend to bring it back from abroad,” said Fang.
China is the number one luxury spender worldwide, making up 29 percent of total global luxury spend this year, according to the Bain report. So Chinese consumers – wherever they may be – are a key battleground for firms from LVMH Moet Hennessy Louis Vuitton SA and Gucci owner Kering Holland NV to trench coat maker Burberry Group PLC , cosmetics giant L’Oreal SA and Cartier watchmaker Compagnie Financiere Richemont SA .
Chinese luxury spending slowed at home in the wake of a crackdown on corruption and shows of wealth, prompting warnings of a sales slowdown from liquor maker Pernod Ricard SA and Volkswagen-owned Bentley Motors and Lamborghini.
Luxury brand store openings dropped significantly in 2013, according to Bain, which estimated China’s luxury market will grow two percent this year versus seven percent a year earlier.

On London’s Bond Street and Fifth Avenue in New York, luxury stores have been getting ready to welcome Chinese shoppers, boosting China know-how ahead of peak seasons such as the week-long Lunar New Year beginning January 31, 2014.
London’s Harrods department store is planning a themed display for the festival, with special products and menus designed for the occasion, it said.
Chinese visitors spent 300 million pounds ($488.34 million) in Britain in 2012, while the British government has relaxed visa rules to attract more people from the world’s second-largest economy.
“Having a strategy for Chinese visitors makes a massive difference. Chinese spending in the UK was up 132 percent in the first half of 2013,” said Jeremy Gordon, London-based director of China Business Services, which helps UK firms target Chinese shoppers.
“That’s obviously going to have a massive impact on your bottom line at a time when overall retail sales are not growing at anything like that rate.”
On Fifth Avenue, jeweler Tiffany & Co said it employs Mandarin-speaking staff. Tiffany has seen strong growth in the China market as the allure of diamonds grows, and said last month that sales at its flagship New York store were driven by Chinese and European tourists.
Around 1.5 million Chinese travelers visited the United States in 2012, a more than five-fold increase from 2005, according to the U.S. Department of Commerce.

“Western luxury brands have now fully understood the necessity to have Mandarin speaking sales associates in their New York and London stores, but it’s not enough. The purchase decision is made well before the trip, when future Chinese travelers are checking their luxury travel magazines on their iPad and luxury lifestyle Weibo pages. The irony of this is even if the sales associates do not speak Mandarin, Chinese shoppers will still buy”  said Pierre Gervois, author of “How U.S. Retail, Travel and Hospitality Industries can attract affluent Chinese tourists”
Saks Fifth Avenue, the department store unit of Hudson’s Bay Co , has a Lunar New Year strategy to focus on beauty products, while the flagship store of Macy’s Inc has a visitor centre with Chinese-language material.
Barneys, meanwhile, is launching its first Lunar New Year-themed marketing campaign in 2014. The department store has increased adverts in Chinese magazines and is testing campaigns around Chinese payment system Union Pay, it said.

Luxury firms are also going online to woo Chinese shoppers. Tiffany has a Chinese engagement ring app while Chanel offers an online make-up “classroom”. Italian fashion house Fendi has held talks on China’s Twitter-like Weibo, while Prada SpA and Christian Dior SA have Chinese videos online.
Luxury travel clubs for wealthy Chinese travelers have also their iPad App: The Shanghai Travelers’ Club has its own App, entirely in Chinese Mandarin, and features articles about US$50M private jets, gold plated hand made laptops, or entire private islands for rent for discerning (and rich) Chinese tourists.
Luxury leather goods firm Coach Inc has a U.S.-focused campaign in Mandarin using popular Chinese social media app WeChat. The app, developed by Tencent Holdings Ltd , has 272 million users worldwide.
Coach tailors some of its U.S. products for Chinese shoppers, a spokeswoman said. Chinese are the fast-growing segment of the firm’s North American tourist sales, which make up a fifth of total sales in the region.
“This trend is going to continue because the Chinese are a lot more integrated in the global economy and really informed, especially about price,” said Bruno Lannes, Shanghai-based partner with Bain and lead author of the luxury market report.
“At the end of the day it comes to the same thing: shoppers will either travel or go online to buy abroad.”

Is Louis Vuitton too popular in China?

Being popular is proving to be a bad thing for luxury retailer Louis Vuitton in China. The brand sells so well there, which is its second-largest market in the world, that it is becoming too common.
Lately, instead of China’s wealthy, the middle class has been fueling sales at Louis Vuitton.
There are tens of millions of Chinese women who aspire to buy a Louis Vuitton handbag and millions are actually buying it.
Their desire to save up to buy a Louis Vuitton is becoming a double-edge sword for the brand. It means it will have years of growth there as incomes rise but its mass appeal also risks undermining its exclusive positioning.
The truth is that Chinese High Net Worth Individuals no longer wanted to buy Louis Vuitton. As a woman in Beijing, who is worth billions, said, “Louis Vuitton has become too ordinary. Everyone has it. You see it in every restaurant in Beijing. I prefer Chanel or Bottega Veneta now. They are more exclusive.”
Soaring wealth and obsession with luxury products provides huge opportunities for luxury retailers. The number of Chinese millionaires are estimated to more than double in the next five years. According to the Shanghai Travelers’ Club, a luxury travel club for Chinese billionaires, 200,000 Chinese travelers in 2010 had the ability to spend more than $150,000 in shopping abroad during their leisure trip.
These super rich Chinese consumers are causing challenges for Louis Vuitton and other historically dominant players like Zegna and Omega to maintain market share because the truly wealthy no longer want to buy the same fashion brands everyone else has.
Wealthy consumers looking to differentiate from the masses provide an opportunity for luxury brands like Chloe, Hermes, and Patek Philippe that target the ultra rich. They are moving more towards inconspicuous consumption in handbags and apparel while becoming more flamboyant in auto purchases and jewelry to show status, which is why sales there of Ferraris and Lamborghinis are soaring.
One wealthy man in Beijing told me, “Everyone can buy Louis Vuitton now, but not many can buy a Bentley.”
To stave off competition from very exclusive brands, and premium brands like Coach , Louis Vuitton is going to have to spend more on marketing to maintain its exclusivity. So far it has kept ahead of the curve, launching multi-story flagship stores in key shopping areas and marketing initiatives in conjunction with the Beijing National Museum.
Celebrity endorsers like Angelina Jolie also help add luster. These initiatives are key to maintaining status but will become increasingly costly, squeezing margins, as rent and labor costs go up.
Louis Vuitton’s parent group, LVMH , should consider more acquisitions at the higher end to capture wealthy consumers tiring of its flagship brand. It has bought stakes in Hermes but should try buying high-end brands outright to capture the truly wealthy segment.
China is the market to win for luxury brands. Despite the rocky global economy the demand for luxury products continues to soar. Brands need to understand that China’s ultra wealthy are becoming more sophisticated and not just looking for flashy logos and brands that everyone has. Brands also need to understand that buying abroad in New York City, London or Paris is a true sign of social status for Chinese consumers: Buying in Shanghai or in Beijing shopping malls is not “cool” anymore for Chinese: It just show that you can’t afford to travel.  At the uber rich level, there exists the opportunity to capture market share by differentiating the brand. Three years ago, everyone wanted Louis Vuitton. That is no longer the case.

Louis Vuitton, official brand of affluent Chinese outbound tourists

Louis Vuitton is making a pitch to consumers in a spot no Western brand has ventured before: the National Museum of China.

The French luxury giant, celebrating its 20th year in China, is unveiling special summer exhibit titled “Voyages,” which features the brand’s historical luggage and handbags, in one of the country’s most renowned museums. Having just opened its doors after an epic-long three-year renovation, the museum is one of the most highly-sought spots for the country’s tourists.

That makes it a perfect place for Louis Vuitton, which is playing off the current travel craze hitting China.

China’s consumers are set to catapult the country’s tourism market past Japan’s by 2020, according to Boston Consulting Group. Last year, China’s outbound tourism market alone was worth 1.5 trillion yuan of revenues, filling the pockets of airline and hotel industries. According to a  March 2011 confidential survey made by the prestigious Shanghai Travelers’ Club, the average wealthy Chinese outbound traveler (with an annual income > US$350,000) is the happy owner of an average of nine Louis Vuitton items for a total value of US$32,000…

The upscale brand, owned by luxury house LVMH Moet Hennessey Louis Vuitton, is eager to tap into the travel boom. China, where the taste for luxury goods has driven sales for countless high-end labels, is one of Louis Vuitton’s key growth markets. Travelers, who likely have higher disposable incomes than the average stationary low-income worker, are the brand’s target audience.

LV’s museum partnership also fits into China’s recent art rage. According to a report commissioned by the European Fine Art Foundation, China is now the world’s second-largest market for art and antiques. The global art market was estimated at around $60 billion in 2010, of which China accounted for 23%.

Other luxury brands are trying out the artistic pitch in China too. Christian Dior launched a multimedia photo exhibit in Shanghai in mid-May, showing off its Lady Dior line of handbags. Earlier this year, U.S. designer Diane von Furstenberg rolled out her “Journey of a Dress” exhibit in Beijing’s 798 art district.

Many question whether luxury brands have the credibility to position themselves as art. Louis Vuitton took a little heat, when it opened an art gallery in its Champs Elysees flagship store, showing off an exhibit of nude black and white women spelling out and “L” and a “V” with their bodies.

The French company also hit a rocky patch in China earlier in May, when Shanghai’s city government required the company to demolish one of its advertisements—a 65-foot-tall suitcase—that violated the city’s outdoor ad regulations.

Louis Vuitton hopes this new suitcase endeavor will result in a little less baggage.

Are “Luxury shopping tours” the future of luxury retail in China?

Chinese customers seem to have (relatively) deserted luxury flagship stores in Shanghai, but they are at the same time rushing into the same flagship stores in Paris, London, or New York. Is that a new trend? Who will be the winner?  Luxury industry or Travel industry?

I would like to thank all contributors for their participation to this collective article. This discussion has been started on May 17, 2010, and ended on June 4, 2010, on the professional blog “Luxury Society”.
Pierre Gervois  / 
CEO, China Elite Focus

Pierre Gervois Living in Shanghai I can see nearly every month a new flagship store bigger than the previous shops for brands such as Cartier, Louis Vuitton, Piaget, Chanel…
The problem is these shops are nearly empty. Between my home and my office, I can see directly a dozen of these flagship stores every day when I’m in the taxi. And I rarely see a Chinese customer inside… Most of the time, I can witness the staff looked really bored in these luxury, empty shops.
Obviously, the big groups (Richemont, LVMH, PPR…) have seen too big. The demand is very far to be what they have expected, probably based on false statistics on the consumption capacity of the Chinese consumers.
What is your opinion, specially if you live in China ?

Timothee Semelin Actually, I would say I was thinking the same thing a couple of years ago about the Beijing flasgship store scene. 
Then after I get to know more and more people in the luxury retail and working directly with some brands, what we can say is that the huge amount of money those brands make are not coming from the outstanding number of clients they have but more on the few BIG clients that they have .
On a one shot shopping that could spend hunderd of thousands of RMB and thus, those shops do not need many clients for now.
Plus those BIG clients may spend their time in the VIP area of the shops that you won’t see from outside the shop and I am not talking about the private sales… A flagship store is not always the key shopping place.
The question is how long this will last, because the BIG clients will have more and more brands to choose from and at some point, brands will also need more casual shopping people. when will they reach their turning point?
You should read this:http://thechinaobserver.com/2010/05/what-are-chinas-luxury-consumers-buying/

Pierre Gervois Many thanks for your very interesting comment. Yes, there are some private and discreet sales, but not that many. The biggest Chinese spenders will go directly to Paris, Geneva of NYC to buy the most expensive pieces. This is actually a big isue for luxury brands. They have not anticipated that Chinese consumers wuld travel abroad so easily for luxury shopping. 
In my opinion, the future of luxury retail for Chinese consumers is in “Luxury shopping travel”…

Timothy Coghlan Another two reasons for the big (albeit empty) flagship stores are as follows:
Prime real estate for luxury stores is running out fast in Shanghai, as it is in Beijing and already has run out in Hong Kong. Therefore brands are snatching up locations now before they run out even if it means operating at a loss for a few years.
The other reason is that they are simply acting as a ‘flagship’ that looks big and very pretty and gets noticed and lots of press. In this case the stores are more for show and prime streetside advertising space than as a revenue earner. Its essential for the brands to have presence in the big cities, but they often make most of their revenue from 2nd and 3rd tier cities, where the consumers are wealthy but not so sophisticated and prone to overseas travel.

Mireille Weber I have noticed that in Shanghai : luxury stores in beautiful malls , always empty, and staff yawning all day long.It is the other way round in Hong Kong!  We also know that the leases are quite expensive : between 150 000 and 180 000 RMB. per month if not more…. 
I guess it is part of the luxury brand’s strategy, they all have to be in Shanghai nowadays for obvious reasons. I do not agree with you : the demand is there, but most of the Chinese fly to Hong Kong to buy those items ( I am talking about luxury perfumes, my field), 
the import taxes in mainland China are too high + in Hong Kong, they are pretty sure to buy the real thing.

Ahn’na Hargrove Just finished our most triumphant supercar show in Monaco. We had partnership with The Hurun Report who brought one of their listed clients. He said that they preferred luxury travel and are the number 1 spenders in Paris at the great luxury stores. Buying in China for the richest doesn’t provide the international clout they have when travelling abroad.
Everyone at the show loved them and sought them. They loved the publicity and the cameras on them as they shot from one supercar to the next. It’s about time!

Felice Jiang I would agree that luxury travel is a major reason why those storefronts may be empty, and that it is not an issue with demand. We’ve covered outbound Chinese tourists extensively, with most predictions showing that they will be on the rise. As much as 75% of Chinese Businessmen are planning to travel even more this year. 
We also reported recently about the results of a survey, that 50% of luxury purchases were intended as gifts, likely a result of the loosening of travel restrictions and an increase in “shopping tourism.”
For the complete article: 
http://www.jingdaily.com/en/luxury/50-of-luxury-purchases-by-chinese-in-2009-were-gifts-survey/

Emilyn Lee Having store front = brand visibility and presence.
Brands that want to make an impact, giving an impression of having strong fundamentals and brand heritage, often go with a large store presence in key locations.
Besides, out of sight = out of mind.

Pierre Gervois Thank you for all these very interesting comments and analysis. Luxury travel is maybe the future of luxury retail for wealthy Chinese consumers…

Timothy Coghlan There is another reason I forgot to mention which is the malls will agree to a percentage of revenue (usually 5% or less) only as rental fee. For the top 10 or so luxury brands, developers will also pay 3000-4000 Euros per square metre fit out fee for the stores. Therefore the the top luxury brands get the store built for them and only have to pay a percentage of what they make.

Amalia Agathou What a great thread! Thanks everyone for the insights, I find the Asian market fascinating!

Jerome Mackay Yes, a great thread indeed! 
I must add that hearing about all these huge flagship stores does put off smaller brands who somehow get the impression that these big empty shops are the only way to do business in China and that it’s extremely costly. 
Surely there must be some smaller and successful operations too?

Alexandre Niepce Yes what an interesting subject and constructive insights! 
Living in Shanghai too for two months now, my point of view is that biggest Luxury Brands may have entered the game to easily and have omitted to elaborate a deep strategy to reach a maximum of customers. The Chinese market is much more complex than it first seems and even if the potential is there, huge and customers ready to buy, some key elements have to be taken into account: time, trust, culture understanding… Chinese market is also not waiting for us to undertake it but already shows signs of self development.

Pierre Gervois Yes, Alexandre, you have perfectly understood the core issue : Culture understanding. Major Foreign luxury brands have still a lot to do…