Luxury sellers adapt to changing market

Early last year, eyebrows were raised when 500 grams of high-quality Longjing tea was sold for 180,000 yuan ($29,196) at an auction in China.

The record price for the tea brand made it much more expensive than gold at that time.

However, this spring the situation has changed completely. The price of the same high-quality Longjing has reportedly fallen to around 2,500 to 2,800 yuan for 500 grams, compared with the average price of 3,200 yuan in 2012.

Tea industry experts say that this year's prices are the lowest since 2009.

It is not high-end tea alone that is feeling the pinch.

Expensive luxury watches from Swiss watchmaker Rolex and fancy dinners at top restaurants are all losing sheen as choice gifts among the well heeled.

Frugality has arrived, or rather, been imposed.

High-end demand has tapered off this year due to recent government measures aimed at checking extravagant spending and reining in corruption.

Though it is still early to estimate the actual numbers, some experts maintain that the trend augurs well for the future, as it will lead to a more broad-based and healthy demand.

Others feel that slower high-end product sales will only lead to lower overall consumption.

According to data provided by the National Bureau of Statistics, retail sales in China during the first quarter reached 5.55 trillion yuan, year-on-year growth of 12.4 percent, compared to 14.8 percent for the same period last year.

Though there are indications that demand is likely to fall further, there are also signs that the demand for high-end goods in China is becoming broader and more sophisticated.

Zhao Ping, deputy director of the department of consumer economics at the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce, said that the government crackdown on lavish spending is good for China's consumption market in the long run.

"Less government expenditure on official receptions, vehicle purchases and overseas trips means that more money can be put into the pockets of ordinary people," she said.

Zhao insisted that the curbs on conspicuous consumption are good for sustainable growth as they will cater to a broader spectrum of people.

Despite the promising future, the austerity campaign has already hurt many high-end sectors.

The luxury watch trade had enjoyed a banner year in 2011, with a growth rate of more than 40 percent, largely due to the strong demand from China.

But due to the recent austerity, watch exports to China recorded the weakest growth of 0.6 percent, according to data provided by the Federation of the Swiss Watch Industry.

While experts admit the recent measures have had an impact on overall luxury watch sales, data from the Hurun Chinese Luxury Consumer Survey 2013 indicate that luxury watches are slowly losing their appeal as business or personal gifts among China's millionaires.

The latest report, based on a survey of 551 Chinese mainland millionaires with a personal net worth in excess of 10 million yuan, shows Longines is the only Swiss luxury watch brand on the list, ranked 15th, ahead of the more expensive Rolex, which fell out of top 10 for the first time in nine years.

Rupert Hoogewerf, founder and chief researcher of the Hurun Report, the leading luxury publishing and events group in Shanghai, said there is a very strong gift culture in China, predominately in business, because offering expensive gifts makes people feel that they are special in your eyes.

"But with the new government regulation on corruption, people are more careful about what kind of gift they want to give.

"The gift market in China has become more normalized and now that people are aware of that, it is inappropriate to give expensive gifts," said Hoogewerf, adding there is a clear trend toward giving more modestly priced luxury goods this year.

Apart from the government crackdown, increasing scrutiny among Chinese people, who go to social media to check the actions of government officials, has also played a big role in the reduced demand.

The much-publicized case of Yang Dacai, the former head of the work safety administration in Shaanxi province, is a case in point.

Netizens had discovered through online photos that Yang had in his possession several expensive watches costing much more than his earnings. He was later investigated and removed from office.

Hoogewerf said the anti-graft campaign is only part of the reason that people are shifting to modestly-priced luxury goods, such as a 10,000 yuan Longines watch, rather than a 60,000 yuan Rolex watch.

He said he believes the slowing Chinese economy is also partially responsible for the sluggish luxury consumption.

"The economic downturn and the lack of confidence in recovery has also triggered doubts," Hoogewerf added.

Though there are no official consumption numbers yet, data within the 2012 China Luxury Market Study conducted by consulting firm Bain & Company show the overall year-on-year growth of the luxury market in China fell to 7 percent in 2012, compared with 30 percent in 2011.

Recent economic indicators have pointed to further gloom ahead, with the National Bureau of Statistics indicating the economy grew by just 7.7 percent in the first quarter of the year, compared with 7.9 percent in the previous quarter.

Global luxury giants, such as Kering (previously known as Pinault-Printemps-Redoute, or PPR) which owns Gucci, Saint Laurent, Puma and others, and LVMH from France, and Richemont from Switzerland, earlier this year indicated that they will stop expansion in China.

David Lee, the China director for luxury consumption research at Ipsos, the Paris-based market research firm, said the overall robust luxury market in China will neither be affected by the government crackdown on lavish spending nor the slowing of the economy.

Lee said the fact that Chinese are the largest consumers of luxury goods, accounting for more than a quarter of global purchases, is not going to change, because China's economy, even with its slight slowdown, still has the best credentials.

"The crackdown is targeted at high-end gifts for civil servants and not at high-end luxury consumption," he said.

"The overall desire for luxury goods is still strong and will continue to grow in China", with buyers becoming more sophisticated and understanding about luxury.

According to the Bain report in December, about 30 percent of the luxury goods bought by Chinese people are for gifts, with the rest being for self-consumption, which constitutes "rigid demand", Lee said.

However, unlike those who simply buy big luxury brand items as gifts, there is a growing taste for exclusivity among increasingly sophisticated Chinese customers, especially those in first-tier cities such as Beijing and Shanghai.

Lee said the changing landscape means that high-end goods producers need to do more to attract Chinese consumers, as many of them are no longer interested in conspicuous consumption, but keener on better options and better shopping experiences.

While it is still unclear as to what companies are doing to keep the luxury brand pipeline flowing in China, it is clear they have a major challenge in reaching more consumers.

Bian Jiang, assistant director of the China Cuisine Association, said most of the high-end restaurants have reworked their business strategy, and are now targeting a broader population, after recording the slowest growth in more than a decade.

The industry's year-on-year growth of 8.4 percent in the first two months was the first single-digit growth since 2001, Bian added.

Beijing Xiangeqing Co Ltd, a high-end restaurant chain, said earlier this year it will change its target from high-end to middle-end business receptions and family gatherings.

It also plans to stop selling meals costing more than 200 yuan per person, and introduce more choices suitable for "mass consumers".

The company indicated that its first quarter financial loss might be 55 million to 70 million yuan, compared with a net profit of 46.23 million yuan during the same period last year.

Many other high-end restaurants are expected to follow suit, including China Quanjude Group, which owns the renowned Peking duck chain of restaurants, where the average cost per person is around 160 yuan.

Bian from the China Cuisine Association said targeting ordinary consumers does not necessarily mean that the company is becoming cheap and low-end.

"With the ongoing urbanization and industrialization, an increasing number of Chinese are willing to spend more on dining out.

"The average spending for each person per meal in Beijing has increased to 60 to 80 yuan from 40 to 60 yuan two years ago," he said.

"There is a rosy future for the high-end catering industry in China as long as it understands the needs of increasingly sophisticated consumers."