Has the luxury market begun to collapse?

In March of this year, when Chanel announced a significant price cut in China, many people thought that only industry leaders were determined to crack down on purchasing. In the next few weeks, the industry was noisy discussing who would follow up on this approach.

The development of the situation quickly exceeded people's imagination. Cartier and Patek Philippe quickly announced price cuts. In May, the price tag in Mainland China has been replaced.

The giants of the cosmetics industry have recently joined the ranks of price cuts. L'Oréal, Estee Lauder, Shiseido, Sephora...

This long-planned move finally waited for a good time.

On the morning of May 27, it was unusual for Gucci to have a long line in front of the main store in China. In the past, such queuing purchases appeared overseas. The purchase of “cheap” luxury goods was an important purpose for many Chinese tourists.

Luxury goods are truly "luxury" goods in China. Taking Chanel Le Boy handbags as an example, the price in China before the price adjustment is about RMB 32,700***. In Europe, the price is about 3,100 Euros (about 20,514 RMB), a difference of about 12,000 RMB. After the price adjustment, the price of LeBoy handbags in China fell to 26,000 yuan***, rose to 3720 euros (about 24,617 yuan) in Europe, and the difference narrowed to 1,300 yuan.

Bruno Pavlovsky, president of the Chanel brand division, said in an interview that after the price cut, all products except perfume will not exceed 5% of the European equivalent in the Chinese market. Through internal adjustments, luxury brands have brought prices in the Chinese market closer to the normal level of global retail prices.

One argument is that luxury goods are unstoppable in the Chinese market, and the decline in performance has led luxury brands to make up their minds and resolve the ills of the past years.

Kaiyun Group's financial report shows that Gucci's global sales in the first quarter of this year fell by 7.9%. Prada's net profit for the first time also declined in 2014. In the largest market, sales in the Asia Pacific region fell by 3.1% from the previous year to 1.253 billion euros, of which sales in Mainland China fell by 6.8%. L'Oreal’s sales growth in China in 2014 did not reach double digits for the first time in 14 years.

However, the actual situation is not a bottleneck in spending power. While the Mainland's luxury goods market was down for the first time by about 1%, the scale of the overseas purchasing service market in 2014 has reached about RMB 55-75 billion, and the number of tourists visiting Japan and South Korea for tourism consumption has increased by about 60% (according to Bain Consulting). 2014 Study of China's Luxury Goods Market).

This is an excellent market. Although anti-corruption has affected the consumption of luxury goods in some categories, overall, the purchasing power of Chinese consumers also supports global consumption. According to Goldman Sachs, the international market share of luxury goods consumption in China in 2011 was 18%.

Everyone can see the potential of this market, but prices make this market distorted. For brands, Purchasing eroded the brand's potential profit margins and disrupted distribution channels. The fakes that appeared during the purchasing process also brought uncontrollable risks to the brand image. More and more people began to go overseas to buy. China's stores became an experience store, and same-store sales fell. Since the end of last year, major brands have gradually included the percentage of overseas purchasing services as part of their financial reports.

Wang Hao, an associate professor of marketing at China Europe International Business School, believes that for the brand, Chinese customers shopping overseas have a huge impact on the brand customer management system (CRM). Because the brand's CRM systems in various markets are not connected, the long-term impact of losing customer data on the brand is very serious. She believes that exchange rate fluctuations and tax cuts are just the trigger points for price cuts by luxury brands. The brands that decided to cut prices were deliberately considered.

This is why, in the past year or two, luxury brands have begun to change their store strategies in China. In the past, those brands that promoted sales by increasing the number of stores have mostly delayed the opening of stores or closed down smaller stores and consolidate existing stores. They will focus on larger flagship stores, trying to increase the store's image and increase single-store sales.

This market could have reached the level of the Japanese market that year, especially the Chinese market is so huge. In the early 1990s, Japanese society had also raised the luxury of purchasing luxury goods. Goldman Sachs’ global survey of luxury goods shows that in 1995, Japan’s 49 million consumer groups (almost half of all citizens) had a global share of 68% of the luxury market, and only LVMH’s group had more than 5,000 stores. Japan. Before that, it was Europe that promoted the luxury goods industry. Today, developed countries have gone through a period of enthusiasm for luxury goods. This is the stage that luxury goods have to go through in almost every market. It is now China's turn.

On May 26th, L'Oreal, the world's largest cosmetics group, announced that it would lower the prices of most imported products in the Chinese market, and mentioned in the statement “actively responding to national policies”. The previous day, the Ministry of Finance had just announced an adjustment of the tax rate. Since June 1st, the import tariff rate on some consumer goods has been reduced by an average of more than 50%.

This is related to the Chinese government’s changing attitude towards luxury goods consumption. An economics professor at a professional financial university in China believes that from the perspective of the Chinese government, with the increase in income of residents and the rapid expansion of middle- and high-income groups, the demand for high-end cosmetics is growing. The deep meaning of policy adjustment is also that Promoting positive changes and upgrades in national consumption will have far-reaching significance in enhancing domestic industrial conditions, increasing employment, expanding domestic demand and ensuring growth.

China's economic growth is mainly driven by domestic demand, while foreign domestic demand contributes only 35% to economic growth, compared with 68% in the United States during the same period. The growth of China's domestic demand can't find new growth points, and the country’s exuberant demand for fashion and luxury goods is undoubtedly a new breakthrough.

In the short-term, only some cosmetic tax revenues are lost, but in the medium and long term, with the continuous increase in imports, according to the “Rafi curve” principle, it will inevitably bring about the continuous growth of tax revenues of such tariffs and Economic and social benefits in all aspects.

Wang Hao believes that both the Chinese government and the brand want to spend on the local market, and overseas consumption remains high. The government also looks at it and hopes to promote domestic sales. This is a major trend. At present, cosmetics are a pilot for tax reduction and will be extended to other categories in the future.

A few years ago, Armada Branchici, secretary-general of the Italian luxury goods association (Altagamma), suggested that the Chinese government reduce tariffs to reduce the spread of luxury goods both at home and abroad. He believes that this will encourage European companies to invest in China, invest directly in production and opening stores, provide jobs, carry out more public relations campaigns, and bring more contributions to China's economy.

Although the reduction of tariffs is a signal for promotion, its influence is still limited. At least, unlike many brands, it is the direct cause of price cuts. In fact, the prices of imported cosmetics in the Chinese market include 17% VAT, 5-6.5% import duty, and 30% excise duty. The tariff is only a small percentage of the final price of luxury goods. The big "decrease more than 50%" is also reduced from 5% to 2%. The consumption tax and VAT, which have a greater impact on the selling price, have not changed for the time being. In short, the impact of tariffs on prices is too small, because the idea of ​​discounting tariffs is less convincing.

"Once L'Oreal cuts prices, we become very anxious internally. In fact, we discussed prices for a matter of years," said an insider of a luxury cosmetics brand owned by LVMH Group.

Actually, regardless of whether they are listed, these large corporations have already set a good budget for fiscal year 2015. Sudden adjustments will completely shake up the budget. Your family will tell investors how much money they expect to earn at the beginning of the year. Although it is only expected, investors will also consider It is an informal commitment; if suddenly a sharp turnaround occurs in the middle of the year and the world’s major price adjustments, the financial results at the end of the year will be difficult to predict.

"Tax reduction, exchange rate fluctuations... These incidents are just pressing the button for luxury goods to cut prices in China," said Emmanuel Hemmerle, a luxury industry consulting expert. If it is not a long-term plan, after careful preparation, the price reduction cannot be decided and implemented within a few days.

The “BrandZ Global Brand of Most Valuable Brands” released by Millward Brown, a global market consultancy, shows that the overall value of luxury brands fell by 6% in 2015, which was a positive growth of 16% in 2014. In addition to LV and Chanel, the valuation of other luxury goods this year has dropped significantly. The total valuation of the top ten luxury brands has shrunk by 7.6 billion U.S. dollars. Among them, Prada declined the most, and the brand value dropped by 35%.

For luxury goods whose value has shrunk, the Chinese market is a key to saving the crisis. “Some brands have long been discounted abroad, never discounted in China, and the Chinese are able to discover more if they go abroad. Brands must now give the same treatment to the Chinese market,” said a luxury brand insider.

The price of fashion luxury brands in China has been higher than that in Europe and the United States for a long time, which has spawned a large number of purchasing groups and disrupted the distribution channels. Chinese tourists have been sweeping goods abroad and are sometimes ridiculous; China’s domestic consumption has been largely lost to foreign countries, and domestic investment attraction is limited. Employment that should have been created in the luxury industry has not emerged...

In today's China, with the growth of national income, the proportion of luxury consumption in personal consumption has rapidly expanded - the original industry rules have become more and more deformed, and it is time to collapse and reshape.

“On the surface, the price reduction seems to be because it does not sell well in China, so it needs to be promoted. But in the long run, the luxury brands have just caught up with China’s “show off” mentality during the past two decades. Earned a lot of money. But that era is over. Now it is only to return these overdrafted money back to let the industry return to normal." A senior luxury industry practitioner told reporters.

Therefore, the team that appeared on the doorstep of major Gucci stores in China on May 27th should be a unique scene in this period of market transformation. When the price system of luxury goods in China tends to be consistent with that in foreign countries, and the policy level is fully “normalized” to the attitude of luxury goods, the operation of luxury companies, and the mentality of consumers, the market will return to normal, just like other countries. .

After a few years, people remember that China, which has just become wealthy and willing to consume luxury goods, will be surprised at the behaviors of “buying,” “haitao,” “going abroad, buying” and the like—these words full of “shortage of economy” and vibrant purchasing power. Contradictions with consumer enthusiasm are full of contradictions with the desire of luxury companies to desperately enter this market. This is not a phenomenon that a rich society should have. Then, people will remember that in 2015, this market has undergone revolutionary changes. Became a normal market.

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