Western luxury brands in China have experienced significant decreases in sales and profitability over the last 2-3 years. In this article, we want to find out the real reasons behind this slow but steady decline.
Economical and political reasons
China’s economy has drastically changed over the last 5 years. Since coming into office, Xi Jiping (習近平) has started a widespread anti-corruption campaign, cracking down on excessive government spending, gift giving, and bribing. Even though some critics of his politics suggest that it has been used to solidify his hold on the central committee (the most powerful organ in the party), it can be said that the fear of punishment has driven down excessive spending significantly.
On a wider scale, the Chinese economy is going through important changes as well. Although a majority of Chinese still live in very poor circumstances, the urbanization of certain provinces has created a new, relatively stable middle class, which in turn is slowing down GDP growth. That forces the Yuan to rise in value and turns the People’s Republic slowly but steadily into a service and consumption-focused society. This, in turn, affects the demand for high luxury goods: less economic growth means less new businesses and thus less new millionaires with a hunger for western luxury brands.
On the surface, these points all seem like good explanations for the decline of western luxury brands in China, and in mainstream fashion and business media, as well as annual reports of big luxury investment groups, that is usually the common narrative you will find. But in our opinion (and for somebody who has lived and worked in China, speaks Chinese and understands their culture at least a bit) it is a very superficial and over-simplified explanation.
The short-sighted business strategy of western luxury brands in China
Blaming your problem on external circumstances and lack of resources is always easier than admitting you did a less stellar job or didn’t do enough research before committing to a course of action. I think, the western luxury industry, at least up to a certain degree, has fallen into this trap. Having fantastic products, great designs, creative and successful marketing, and established and efficient corporate structures invites arrogance, especially when it comes to intercultural business strategies. Having been successful with one strategy means it will work on a larger scale and will continue to do so, right? Sadly, when it comes to developing economies with a rich history and specific culture this is not the case. For the largest amount of time the strategy of large and established luxury brands was the following:
- Open up a large number of points of sale, and expand retail presence rapidly.
- Create luxury hubs in shopping malls, big cities and recruit local sales staff.
- Adopt local social media, and use local influencers and models, but only to a certain degree.
- Maintain a top-down, one-sided communication strategy when it comes to advertising and PR
- Insist on a western viewpoint when it comes to design, trust in the fact that the products and the branding are so superior, that everything will work globally, even in China…
Several parts of this strategy have proven to be hurtful and misguided. Basing an overblown retail expansion and as such a vulgarization of supply on never ending economic growth and corruption fueled gift-buying was a huge mistake. Now we are seeing the closure of multiple boutiques across the whole country, cause demand is simply not what it used to be. Secondly, the success of adopting social media trends, local holidays, upcoming celebrities and culturally relevant pieces has been clunky at best, as seen in one of our former articles. This can only mean that the big luxury brands in China didn’t invest enough into intercultural training, cross-national marketing teams and thorough and open-minded research. The ivory tower has fallen, at least when it comes to operating successfully in that particular market.
Don’t get me wrong, the boom has still produced a lot of profit for many brands, but this locust approach has also led to a loss of brand value and dangerous market saturation (LV is the bag brand for Chinese secretaries…ouch). Its symptoms can be seen all around; for example, in disappointing Golden Week Sales, brands having to lower their prices, and so on and so forth. In typical fashion and luxury style, all the brands can think about is where the next boom is gonna come from. Lots of brands have already toned down their operations in China and are looking for the next developing economy to latch onto, like India or Brazil. This just shows the short-sighted viewpoint of lots of luxury executives in high positions.
The future of the Chinese luxury market
With one of the highest GDP growth ratios in the world, the People’s Republic of China still remains one of the driving forces of luxury consumption and will continue to do so. The difference is, that brands that are locally bred or employ local or cross-cultural talent, and business models which focus on high-end service will have a much easier time capturing the attention of second and third generation Chinese elites in the future. These young Chinese who, by this point, have studied, lived and traveled all over the world are often not very impressed by what western brands have to offer, especially when it comes to in-store VIP treatment.
Some of the luxury brands in China are starting to see the signs and have begun to invest more heavily into customer-focused approaches. In this case, it often includes the cooperation with high profile celebrities in China, the usage of Chinese models, and designs which reflect cultural and historical significance while still preserving the aura and glamor of high-end luxury products. Luxury is not something new in China, it is a culture that has known extreme extravagance, as well as horrible poverty over the centuries; the companies that will survive the future developments in this market are wise to get professional help if they want to succeed. I see a bright future for the East-Asian market, and this most definitely includes China.