Influence of political factors on business: China’s action to restrict purchase of luxury brands results in greater demand for more affordable brands

WARC, 3 March 2014

HONG KONG: In a further sign of the impact of the Chinese government's crackdown on luxury gift-giving, there is increasing evidence that consumers in China are shifting their attention to more affordable brands.

According to analysis of 43 retailers by Knight Frank and Woods Bagot, the development and design consultants, two-thirds of upmarket retailers missed their targets for new store openings in China last year.

At the same time, Swedish chain H&M and Spanish retailer Zara – both value-for-money operators – succeeded in beating their expansion targets, Reuters reported.

While luxury brands have felt the pinch from the Chinese authorities' decision to impose limitations on official gift-giving for at least a year, the trend also points to growth in the number of Chinese willing to travel overseas to do their shopping.

Up to 100m Chinese consumers travelled abroad last year, up 20% since 2012, and investment group CLSA forecasts that this total will rise to 200m by 2020.

In response to this and other developments, LVMH, the world's largest luxury group, plans to scale back its annual expansion in China to no more than 5%, about half the rate it recorded in 2013.

"I can confirm that the idea is not to develop in the second-rate or fourth-rate cities in China," LVMH chief executive and chairman Bernard Arnault told analysts last month, adding that the company still wants to maintain its presence in "iconic areas".

Elsewhere, Prada, the luxury retailer, is also concerned about expanding too far while Gucci, the Italian fashion brand, says it will concentrate instead on renovating its existing stores.

Unsettling as the trend may be for the luxury sector, other brands are more bullish about their prospects.

Samonsite, the US luggage brand, opened 200 new outlets in China last year and the trend towards more downmarket retailing means its target for this year stands at 500 outlets.

Ramesh Tainwala, president of Asia Pacific and Middle East at Samsonite, said "the equation is changing" and that the company is now securing prime spots in various department stores that previously would not have been made available.

Data sourced from Reuters; additional content by Warc staff

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