Luxury brands hot in China, but stores get the cold shoulder

Ministry announces tax cuts on selected goods to boost imports

Interior designer Sun Yansi walked into Shanghai's luxurious Celine store in April and asked to try on a dress. It fit perfectly, but instead of going to the cash register to pay, she used her smartphone to take a picture in the fitting room to send to a friend in Paris.

Ten minutes later, the 31-year-old left the store, confident that her friend would buy her the same dress at Celine's outlet in the French capital. This way, Sun says, she can save about 30 percent on the price, including the cost of shipping the dress to China and wiring money to her Parisian pal.

With the potential for such savings, it is unsurprising that Chinese consumers use this method to buy luxury goods. Others stock up on high-end brands on overseas vacations, or shop in online sales, and use the brick-and-mortar stores in China only as fitting rooms.

The Ministry of Finance said on May 25 that it will lower import taxes on products, such as Western-style suits and fur garments, boots, disposable diapers and skin care products, starting on June 1. The measure is intended to boost imports, promote domestic consumption and satisfy strong consumer demand for certain imported products.

"This is obviously good news for international companies who are already selling imported products in China, as it means higher profit margins," says Laurel Gu, a senior lifestyle analyst at Mintel China, a market research agency.

Chinese consumption of luxury brands reached 380 billion yuan ($61.3 billion; 55.5 billion euros) last year, an increase of 4 percent year-on-year and accounting for 46 percent of the global total, data from market consultancy Bain & Co show. Yet more than half of these purchases were made outside of China, with another 15 percent being online transactions. Just 30 percent of sales were conducted in stores.

Consumers who prefer to buy abroad say they enjoy lower prices, a wide selection and nicer shopping experiences.

"I found the same handbag that would have cost 30,000 yuan in Shanghai for only 22,000 yuan at a store in the Champs Elysees when my husband and I went on honeymoon in Paris," Wang Xiaofan says. "It's not only the fact it was cheaper, but it was also more meaningful because I associate it with romantic memories."

The 26-year-old hairstylist says she has also traveled to Japan and South Korea for holidays and bought luxury brands there, too, including a Hermes silk scarf and a Burberry trenchcoat.

"Some hotels (in those countries) offer vouchers for discounts at duty-free shops, and the tax refund programs are widely advertised. Sometimes the price is even lower than in Europe," she says.

Bain & Co's research shows that luxury products in China can be as much as 75 percent more expensive than in a brand's home country or in other Asian countries.

There is a reason behind the price disparity. Rising rental and operational costs, and high comprehensive taxes, have led to luxury brands setting higher prices in China than in overseas outlets.

To rent a prime location in Shanghai, for example, can cost 110 yuan per square meter a day, which means the annual cost for a store covering 200 sq m - the minimum space for a typical luxury brand - would run to more than 8 million yuan.

Commercial rents have been rising annually at a rate of about 4 percent for the past five years. Industry insiders predict the opening of more malls and department stores should help reduce overall rental prices over the next two years, but popular spots in major cities such as Beijing and Shanghai are expected to remain high.

The explosion in online shopping has had a major effect on sales at luxury stores, and is less expensive - and arguably less troublesome - than having to travel overseas or have friends ship goods to China from abroad.

Luxury brands are now available to purchase on many e-commerce websites, with consumers able to complete transactions using credit cards or third-party payment services, such as Alipay.

Brick-and-mortar stores in China are feeling only the pinch of rising costs, not the growth in revenue and profits.

Henry Tang manages a store in China for a European luxury brand. He says high-end companies have been changing in-store strategies to expand their presence in the country and attract footfall.

"One thing is that staff members are trained to be more focused on closing a deal," he says on condition his employer was not revealed. "We used to be told to provide a relaxed shopping environment, to let consumers decide what they want to take a closer look at. If the store was crowded, we focused on identifying those people who were most likely to make a purchase, such as couples, or men shopping alone for a gift idea.

"Now, shop assistants take a more proactive approach. They take the initiative to introduce items that may be interesting to a customer - even if a handbag is not what he or she is looking at, we may attempt to sell them leather goods or cufflinks," he says.

Brands such as Chanel, Cartier and Patek Phillippe have taken a more direct approach, choosing to reduce prices in the Chinese mainland and Hong Kong to narrow the gap between the Chinese and European markets after the rise of the US dollar and renminbi against the euro and the surge in the Swiss franc.

Market insiders say the price adjustment may draw Chinese shoppers back to stores in China, but more measures will likely be needed to keep them coming back and to attract new customers.

"It (the tax cut) can be encouraging for overseas brands who are looking to enter the Chinese market. Mintel's consumer research shows that, in categories such as baby food, personal care, household appliances and digital products, Chinese consumers show a clear preference toward international brands over domestic brands," says Gu with Mintel China.

Brands must improve the in-store experience to offer consumers care and rewards, which allow them to associate buying luxury products with a lifestyle rather than just making a purchase, says Bruno Lannes, a partner at Bain & Co. This way, he says, buyers may become less sensitive to price and attach more to the cultural heritage of the brand, to establish an emotional connection and loyalty.

Chinese shoppers have welcomed the increase in events organized at luxury stores, such as pop-up exhibitions, as well as value-added services such as free after-care for leather goods or free embroidering on scarves and handkerchiefs.

"Things like this make you feel that visiting a store is a nice way to spend a weekend afternoon," says Xu Limin, a financial officer with a trading company. "Extra services add a personal touch and remind consumers that the brand goes beyond just a purchase."

The 52-year-old says she now enjoys buying luxury brands in Shanghai and Hangzhou because she feels the in-store atmosphere has become more artistic, tasteful and warm.

"If every luxury brand store in China was maintained in the same way as their overseas counterparts, who would bother to travel tens of thousands miles to just get a cheaper price?" she says.

wuyiyao@chinadaily.com.cn