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Can Luxury Brands Bounce Back in China?

by Deng Yuanyuan

January 26, 2016

A host of factors including the economic slowdown have hurt luxury brands in China. But all is not lost.

The dragon doesn’t dig Prada anymore. Or Louis Vuitton for that matter. In China luxury sales in general (and not just Louis Vuitton and Prada alone) are hurting. Sales are down due to a variety of factors: from the economic slowdown to the corruption crackdown, and even the changing tastes of the Chinese consumer. Luxury brands that relied on China sales to prop up their numbers are scrambling for solutions even as they are being forced to shut down stores.

What went wrong? And is this the end of luxury’s dream run in China? What strategy should brands deploy to regain lost ground in China’s luxury market? Benoit Garbe, Senior Partner at Millward Brown Vermeer, believes that the crux of the problem lies in the changing behavior of the Chinese consumer. “Chinese consumers are getting a little bit more sophisticated, more informed, so they are definitely interested in something more authentic, they want to stand out and they don’t want to buy the big luxury brand that everyone has,” he says.

Garbe, who heads Africa, Middle East and the Asia Pacific region and leads key global brand strategy assignments and ongoing business development initiatives for Vermeer, spoke to CKGSB Knowledge along with Nicolas Derville, Analyst, Millward Brown Vermeer, to diagnose what’s wrong with China’s luxury market, and offer possible prescriptions.

Excerpts from an interview.

Q. Some brands, like Chanel, have adopted a new pricing strategy in both Europe and China in order to keep prices in China similar to global prices. Do you think other brands will follow suit?

A. Probably. Some other brands will see how Chanel is doing but we wouldn’t expect some brands to align. If you are a luxury buyer, it’s not necessary [that] you [are] going abroad just to get a bargain or discount, it’s really about getting a fair deal. It’s much more emotional than functional. Lots of Chinese consumers feel like they are being cheated or not treated fairly. So the trend might just be more uniform global pricing so Chinese consumers don’t feel like they have been overcharged.

[There’s] a broader challenge more than just price. In China there’s a new demand challenge about change of behaviors. Chinese luxury buyers are less interested in showing off by buying the big flashy brand. It’s something of the past. Chinese consumers are getting a little bit more sophisticated, more informed, so they are definitely interested in something more authentic. They want to stand out and they don’t want to buy the big luxury brand that everyone has. It actually has nothing to do with price. So when we think of the slowdown in luxury, we wouldn’t want to blame international competition or international buying or the devaluation of RMB. Consumers are changing and the brands have to adapt to that. The government’s crackdown on corruption may impact the business, especially watches and spirits are two categories that seem to have been quite impacted. So that’s on the demand side.

On the supply side, maybe [there is] a little bit of over-supply. A lot of luxury companies opened a significant amount of stores in places where the demand was not there. The market is also going through a bit of an adjustment in terms of adjusting supply and actual demand of the market.

It’s been an easy ride for many luxury brands over the past 5-10 years when there was fast growing demand. It was all about growing [the] distribution footprint, opening new stores. Now the market is a real market with more intense competition, more sophisticated demand. The best brands would think strategically in terms of differentiation and building relevance. [They] will be the brands that win. So in a way it [could be] more of an opportunity around smart strategic thinking, real marketing thinking and the ones that can really manage it, will be successful.

Q. Do you see any companies doing that well?

A. Yes, some are doing better but a lot of companies are adjusting at the moment. The ones that want to do better or are doing better are the ones reacting quickly. We’ve seen Louis Vuitton is closing stores so they realize that their footprint is too wide. They are really rethinking that: ‘How do we make sure that we invest in the places that really matter?’ Cartier is rethinking its merchandising assortment. They [want to] make sure they have the right products in the right places to really adapt to the demand. But we don’t think anyone has the winning strategy in the new market landscape yet. However, a few of them are moving a little bit faster to adapt or just to try a new strategy.

Q. Some emerging luxury brands are doing well, especially the ‘affordable luxury’ brands like Michael Kors. So except for price, how do affordable luxury brands differentiate themselves from traditional luxury brands? And will they compete for the same customers?

benoit. Garbe
Benoit Garbe, Senior Partner at Millward Brown Vermeer

A. We’ll answer it in a broader response. [There are] four big opportunities that we see to win in the new China landscape.

One, there’s still a massive amount of demand coming from very high net worth individuals, who are not price sensitive. The must-win for them is exclusivity, service and privacy. Those high net worth individual who are not shopping in Paris to [get a] 30% discount want those brands to know them: ‘You know me, recognize me, tailor for me.’ We have done quite a bit of work around segmentation of very high net worth individuals or luxury buyers. [We] realized it’s a bit of 80%, 20%: those high net worth individual are 20% of the buyers but they can quickly represent 80% of profits. This has big technology implication or CRM implications: how do you make sure you know the customer very well, and then you deploy strategy and operations that allow you to, in store, instantly recognize them? So they walk in the store, [and] on your iPad you automatically know them, you know what they’ve bought, and you can tailor your offer. It’s really about building more services. We’ve seen a lot of trends around personal shopper advisors, and tailoring to the specific needs of people, we’ve seen more VIP sections within stores.

The second is really rethinking your portfolio, and thinking of lower profile, less bling, more authentic type of brands. So it can be a Michael Kors or Coach or what we’ve seen with the big 3 luxury groups. LVMH is [using] brands like Celine and Loewe. [They] tend to be seen as more emerging, a little bit more low profile, less in-your-face and a little bit more relevant to younger, less flashy type of consumers. One of the fast growing brands [of the Kering Group] is called Pomellato. It’s more affordable jewelry, it really helps them tap into a market that still wants high-end luxury experiences, but the price is a little bit more affordable. We see the same thing with the Richemont Group, where their watch brand Baume & Mercier tends to be more middle range compared to Cartier. [Baume & Mercier] attracts the man who still wants [a] luxury brand but not as high end. Or Lancel which again is more colorful, less in-your-face luxury. The big groups who have a quite diversified portfolio are taking a [look at the] portfolio again and saying, ‘Okay, in this new landscape, how do we position the more middle-range luxury to win in the new market.’ They had done the same thing in the US. In 2008, during the recession, they were like ‘How do we use other brands, a portfolio, to win in the changing landscape?’

The third one is that they decided to tailor to China, inspired by China. We’ve seen that in two different ways. One is groups investing in Chinese luxury brands; and the second one is some of the global luxury brands designing [for] or [taking inspiration] for the collection [from] China. Kering Group acquired Queelin, the Chinese Hong Kong luxury jewelry brand, where it’s really [taking] the craftsmanship of China or Chinese tradition [and] really turning down to very contemporary luxury.

The second trend is if you are a Gucci, Dolce & Gabbana or Louis Vuitton or any global brand, how do you make sure that you tailor your collection to be really inspiring and connect with Chinese consumers? The Tiffany Keys collection, a jewelry collection tailored for China, has been one of their fastest growing items [here]. It’s tapping into that Chinese value of the key representing the possibility [to unlock] which is very relevant to many women who want to wear the keys for what they stand for in the minds of Chinese consumers. Dolce & Gabbana in their 2016 Spring & Summer Collection is completely inspired by Chinese motifs from the 17th century. The whole collection is called Chinoiserie which was this 17th century movement, in architecture, gardening and design, actually very popular in Europe, which was all inspired by Chinese motifs. For their 2016 collection D&G [integrated] all those visual Chinoiserie or Chinese motifs into [their] DNA. In a way it’s a European brand saying how do we win in China but to win in China we actually need to inspire a collection with Chinese motifs. They have more red dresses. We also understand that both Dolce and Gabbana (the designers) are spending quite a lot of time in China just to seek inspiration in the street, in art, in people.

The fourth one is e-commerce and digital. Digital is experimental for luxury brands. But the reality is you have to be where the consumers are, and the reality is Chinese consumers are online, [they] are on their mobiles, and they purchase online. The mindset of many luxury brand owners is changing. For many years there was this belief that digital was not for luxury brands, [that] digital and e-commerce was all about price and discounts, it’s not as experiential as a store experience, so there was a lot of resistance to it. Bain did a big study around luxury behaviors. One interesting fact is that 73% of luxury buyers search online before they purchase. The insight here is we need to really think about how we engage people as they search for brands, and in a way you need to be telling your story in the digital space, because people will be looking for information. How do you tell your story around your collection, how you tell your brands’ story in a meaningful way using mobile technology and digital, how you capture the imagination of consumers, and [how do you use] social media? We’ve seen lot of experimentation around storytelling, around partnerships to make sure that your brand is featured, being talked about in the most compelling way.

The second opportunity there is if you think of Tmall or how consumers actually behave, they really seek peer inducement or they seek recommendations or reviews. In a way e-commerce is very important because consumers now shop based on what is being said of the brand. You need to start those conversations to be able to get positive reviews from people.

The second big point is around the e-commerce platform. We’ve seen many brands moving into this space. If you are in the beauty space, we’ve seen a massive take off of e-commerce. Brands like Lancôme or even Chanel are moving aggressively in e-commerce. It’s still more of a challenge if you are selling watches: there’s a high risk of fakes. Beauty businesses or small accessories are moving more aggressively into e-commerce, and using that as a way to learn, experiment and then they probably will move other parts of the business [to e-commerce]. There’s a trend we are going to see: trying multiple scenarios then you don’t force yourself into just doing price discounts. We think a lot of luxury brands are very worried: ‘If I move to e-commerce, do I need to start doing discounting?’ What Tmall or any online platform allows you to do is try different things: some of it will be added value offers or some of it will be experiential offers, some of it may be about pricing, but again you try multiple ones and you see what works and you adapt and you change. That’s the beauty of an online platform, that you can really learn and experiment.

Q. If luxury brands do well at e-commerce, would it cannibalize their offline sales? And how should brands price the product when they are selling both online and offline?

Nicolas
Nicolas Derville, Analyst at Millward Brown Vermeer

A. Price uniformity would be my recommendation. The issue is if you start training people to behave in a way that gives them an incentive to buy cheaper online, then you are really putting your business at risk. What we are seeing is more integration between offline and online, so one of the trends or one of the opportunities is making your retail [store] as a full experiential center, where consumers get to touch, feel and be transported…. Maybe you don’t need to have as much inventory in the store. You use the store as the brand building platform where people can go and buy online, but it should be at the same price. And vice versa, people could go and buy online, but they still want to touch the product and then they can go and pick it up at a store and make sure it is what they want. We see more integration between the two worlds. It shouldn’t be about price differences, it should be around different roles, different purposes for the touch point and trying to integrate them. Again, one price means that those two are seamlessly integrated and you start a conversation beyond just a price difference.

Q. Prada has Pasticcerie Marchesi (a sweets shop) in Milan and Gucci opened an Italian restaurant in Shanghai. What’s your take on luxury brands tapping into new categories?

A. Our answer as a brand strategist rather than as a brand advisor [is that] it doesn’t matter if you are in the luxury business or in cars or in hotels, you should all start with a brand: what do you stand for as a brand, what is your purpose and why do you exist? Whatever you do should be true to the DNA of the brand or the purpose of the brand. If you think again of Louis Vuitton, the DNA of the company is about discovery, it’s about travelling, it’s about a journey. You may have seen some of the extensions they have done in the past around travel books, or city guides. That makes sense: it’s really part of the DNA. It’s like how do we expand beyond the product we sell and create more services. Luxury brands have permission to move into a more experiential space because it’s a way to create more of a lifestyle.

In the case of the two brands you mentioned, moving into a tea salon or sweets shop or an Italian restaurant [has] a couple of risks. One is [that] we are not seeing the connection between the brand and what the brand stands for in those restaurants. [So] you start bringing in people who are not necessarily your brand buyers, and you may end up with an experience that’s not true to the brand, and in a way a lot of people access the brand experience in a way [that] could dilute what the brand stands for in the mind of your real shoppers. So we see more of a downside than an upside on that one.

Q. If online shops can be one option for bolstering luxury sales in China, would outlets shops be another?

A. Yes. They play a different role [though]. In the largest [luxury] market in the world, the US in particular, [outlets] give [brands] a channel to sell any extra inventory. It creates a new demand, a new market. So there is an opportunity but again [it’s] about possibly different shoppers: the high net worth individual is not going to spend a weekend bargain shopping. So it’s an additional market, we’ve seen the same thing online, right? Mei.com in China [has] been one of the most successful luxury online retail platforms, so you’ve got lots of bargain hunters who want to get the end-of-collection products, they are okay to be off one season. It’s a very different market than the person who wants to be on season, buying the latest fashion. So very different buyers, very different roles.

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