The Wave of Luxury Price Cuts in China

The news that French luxury Chanel lowered its product prices by 20% in China’s stores made a big splash， sparking a buying spree for a few days. In megacities such as Bejing and Shanghai， consumers， mostly women of all ages， rushed to Chanel stores immediately after hearing the news， leading to a very long queue outside the stores.

By contrast， the luxury brands hiked prices in its European stores. According to Chanel， the price shift is aiming at reducing price differentials across countries.

It is noteworthy that Chanel’s move came after e recent depreciation of the euro that experienced a 24% decline against the dollar over the last 12 months.

For luxury brands， harmonizing their global pricing is inevitable. According to industry experts， Chanel’s move to cut prices in the mainland China signals that there will be a large number of luxury brands to be involved in the wave of price cuts.

Expectedly， following the benchmark brand’s price cuts， other luxury brands， such as Patek Philippe and Tag Heuer， also slashed their prices in China. Recently， Versac and Prada announced that they would adjust prices this year.

Moschino said that prices of its new collections， including handbags and accessories， would be lowered by 20% starting from April 13.

Overseas Purchasing Agent Business Collapses

China benefits from the wave of price cuts. Take Chanel for example， after the price shift， the price spread of its products between China and Europe is narrowing from about 60 percent to around 5 percent.

“Buying a luxury brand is much cheaper in China now，”says a customer. “A Le Boy Chanel handbag is sold at a price of 26，000 yuan in China now， much below the previous price of 32，700 yuan， while buying a same handbag in Europe costs 3，720 euros， or 24，672 yuan， 620 euros higher from previous 3，100 euros.”

According to the customer， she used to buy bags herself during her business trips to Europe， or from overseas purchasing agents through the Internet. Now， she can save a lot of the cost with the quality of the bag guaranteed

Therefore， overseas purchasing agents are hard hit by the wave of luxury brand price cuts. In the future， once all luxury brands achieve the same pricing across the countries， the profits of overseas purchasing agents will vanish.

Many consumers said they prefer to buy a Chanel handbag in its China stores than from overseas purchasing agents through the Internet， which requires a commission of 10%-15%， as the price gap is narrowed and the quality is guaranteed. Besides， consumers can enjoy the after-service. Miss Wang， who is engaged in the overseas purchasing agent business， expressed her concern about the future. According to Wang， before Chanel cut the prices， the gap between prices in China and Europe reached 10，000 yuan and she can earn 3，000 yuan per bag. Now， the gap is narrowed to 1，000 yuan， leaving little profit room for overseas purchasing agents.

Besides， the overseas purchasing agent business is in a grey area， as the agents evade customs duties and impair brands’ profits. In addition， there are too many counterfeits in the market due to the absence of legal regulation on the overseas purchasing agent business. The narrowing price gap of luxury brands across countries will help fight against those unscrupulous agents.

The Plight of Luxury Brands

Among luxury brands， Chanel， LV and Hermes are standing at the top of the pyramid， never providing discounts but hiking prices year after year. However， while maintaining their high-profile presence with high prices， they find them in a dilemma.

According to the 2014 Research Report on China’s Luxury Market Report released by famous consulting company Bain and Co， sales of luxury goods in mainland China totaled 115 billion yuan with a year-on-year decline of 1%. It is the first time for the brand to record a negative growth， due to the economic slowdown.

Some insiders attribute the slump in luxury goods sales to the ongoing anti-corruption and frugality campaigns.

According to the manager， except for some flagship stores and iconic stores， sales in other stores were very poor in 2014. In some stores， the consumer flow reduced by 50%-60%.

On the other side， with rapid market expansion in China， luxury brands have too many stores across the country， leading to a substantial growth in operation cost. In addition， a raft of luxury brands’ Chinese stores reduced to show stores that don not generate a profit in 2014.

“During their first foray into the Chinese market， those luxury brands were provided with priorities to open a store in shopping plazas. However， after a decade of expansion， many stores became show stores， not generating a profit but causing a rising cost，” said the manager.

Moreover， after the two-year-long reckless market expansion caused a soaring cost， many luxury brands reported a poor performance and some of them even decided to close the stores last year. Over the last years， Armani and D&G shut down their flagship stores in Shanghai.

According to Lu Xiao， luxury brands should realize that the buying power of Chinese consumers is not falling with data showing that they bought 46% of global luxury goods in 2014. They must take effective measures to gain consumers back to the Chinese market.