China's economic slowdown is casting a long shadow over the glittering world of global luxury brands. Volatile stock markets in the world's second-largest economy and the poorer economic outlook are forcing firms in the high-end goods segment to lower sales estimates for the rest of the year. Topping this list are firms such as luxury-car maker Audi and its parent, Volkswagen, which cited slowing China sales when trimming forecasts last week. Spirits company Diageo reported stagnant revenue for the first half. Fashion houses LVMH and Kering, two of the world's leading luxury goods groups, attributed their positive second-quarter performance to sales in markets excluding China, Hong Kong and Macau. China's factory gauge, released last Saturday, showed a five-month low of 50.2 for last month. A US$3.5 trillion (S$4.8 trillion) rout in equity markets last month has also dampened consumer and business sentiment. Growth in China's economy slowed to 7 per cent in each of the first two quarters of this year. All these figures come as a sharp reality check for many foreign companies doing business there. "There is a shift of business to other geographies," LVMH finance director Jean-Jacques Guiony said about Chinese clients, the world's top buyers of luxury goods. LVMH (whose brands include Louis Vuitton, Celine and Fendi) and Kering (which has Alexander McQueen and Gucci in its stable) said first-half profits came from Japan and Europe, although they noted that Chinese tourists shopping abroad contributed to sales there. Audi has abandoned its target of selling 600,000 cars this year in China, while Peugeot Citroen has slashed its growth forecast in China from 7 per cent to 3 per cent. Last year, Chanel became the first big luxury brand to slash prices there, followed by watchmakers Patek Philippe and Tag Heuer. No one used the word "discount". "Companies thought China was the land of opportunity, but it's not living up to that promise," Euler Hermes chief economist Ludovic Subran told FT.com. "They realise that the business environment is changing for the worse." Chinese consumers' penchant for luxury goods sent sales up 16 per cent to 64 billion yuan (S$14 billion) in 2009 while the rest of the world was reeling under a recession. In 2011, researchers at McKinsey and Co predicted that Chinese consumers would account for 20 per cent of global luxury sales by this year. However, with economic growth stalling, the country's luxury market actually contracted by 1 per cent last year. "The lower China's gross domestic product falls, the lower retail sales will fall at all levels - from luxury goods to staple items," Trends Journal publisher Gerald Celente told The Straits Times. Austerity measures and an anti-corruption drive under President Xi Jinping have also curbed spending. Restrictions in terms of spending on lavish gifts and conspicuous consumption within the country prompted a shift in shopping attitudes - consumers became more price-sensitive and made their purchases overseas. Counterfeit goods also made mainland tourists feel more secure about brands bought abroad. "With the yen and the euro having declined against the yuan, Chinese consumers feel they are getting better value abroad," Mr Celente observed. Mainland tourists abandoned luxury stores in their backyards in Hong Kong and Macau - two major destinations where travellers spent a lot of cash on luxury goods - and flocked to outlets in Europe, South Korea and Japan. Hong Kong retail sales, which were also affected by political unrest in the city, fell for the fourth straight month in June. The city's main retail management association expects the decline in sales to continue in the third quarter. The slump affected sales of jewellery and watches, which fell 10.4 per cent by value, after a 14.9 per cent drop in May. Last week, luxury retailer Emperor Watch warned it could turn in a loss for the first half. The world's largest jewellery retailer, Chow Tai Fook, saw its retail sales fall in the April-to-June quarter. The downturn prompted Kering, LVMH and Burberry to call for rents to be slashed in Hong Kong. "Many landlords have not necessarily understood that the markets have changed," said Kering chief financial officer Jean-Marc Duplaix. He noted that Gucci could close some of its shops there if costs do not come down. "The luxury market has to change," says Macau-based retailer Patricia Cheong. "Prices have to be marked down. There are fewer customers now, and everyone is fighting for them." E-commerce is quickly drawing clients away from stores as well. Still, there is a silver lining. Statistics show that China's wealthy will have financial assets worth US$53 trillion, compared with US$27 trillion for the United States. Analysts suggest that companies have to shed old models of sales, like pricing and distribution, and embrace innovative new ways to attract young affluent customers who do not show brand loyalty. "In this new environment, brands must undergo a fundamental paradigm shift if they want to win in the years to come," Bain & Co partner Claudia D'Arpizio said. This article was first published on Aug 03, 2015. Get a copy of The Straits Times or go to straitstimes.com for more stories.
Luxury brands, which have been hit by weakening demand in China, are turning to other markets for sales growth. Falling GDP and crackdowns on luxury gifts have all contributed to the declining luxury market. The Chinese government has also stepped up efforts to curb pollution from its massive car industry, with a new law requiring automakers to install air filters that can be easily replaced after just one year.