Feb 26, 2013 07:26 PM

China's Frills and Posh Market Springs a Leak


(Beijing) -- Imagine a luxury goods shopper so confident and flush with cash that one day he walks into a Shanghai handbag shop, flashes 300,000 yuan, and waltzes out with almost every bag in stock.

That's what happened last year at a Prada store where Benny Lu worked as a clerk. The customer "entered the shop and pointed to the shelves," he recalls. "Then he said, 'Except this one and that one, pack all the others.'"

This kind of price-is-no-object customer, however, is becoming increasingly rare at luxury retailers in Shanghai and across China.

Sales of high-end jewelry, watches and handbags have been slowing lately, some five years after the world's luxury goods makers embraced wealthy Chinese consumers as important drivers for global business growth.

Market analyst Bain & Co. said luxury consumer product sales on the mainland rose to 260 billion yuan in 2011 from 140 billion yuan in 2008. Those heady days were marked by a dramatic 12 percent increase in upscale sales between 2008 and 2009 and a 30 percent jump between 2010 and 2011, Bain said, even while the rest of the world struggled through the global financial crisis.

The growth momentum first showed signs of weakening in October 2011, said Cliff Xie, a veteran who has worked for many years in China's luxury market. "It started with jewelry and luxury watches," he said.

And the slowdown could get worse in the wake of a July decision by the State Council aimed at fighting official corruption. The council imposed a new regulation, in effect since October, that bans luxury good purchases by all government agencies nationwide

In the past, officials had routinely tapped public treasuries for money to buy all sorts of bejeweled and leather gifts for various associates in exchange for favors. Now that the practice is banned, said Bain partner Bruno Lannes, sales of many kinds of high-end jewelry, watches, handbags and briefcases in China have fallen.

Chow Tai Fook Jewellery, the world's largest retail jeweler, said its same-store sales on the mainland declined 8 percent year-on-year in the fourth quarter 2012. Mainland sales account for 80 percent of the company's revenue.

Italian fashion house Gucci saw sales grow 2 percent during the first three quarters of 2012 in the Asia-Pacific region, compared to 7 percent globally. French luxury giant LVMH reported a slight decline in first-half 2012 sales in China, while the company's other market areas reported growth.

Kent Wong, Chow Tai Fook's managing director, blamed falling investment on the mainland for the decline in jewelry sales. Changing market conditions, he said, had forced the company to start focusing on low-end jewelry for younger customers.

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