And Finally

Forsaking luxuries

Why is Gucci freezing its China’s expansion?

Forsaking luxuries

Li Bingbing: Gucci ambassador

February and March are normally the busiest months for luxury goods sales in China – Chinese New Year is followed by the annual meeting of China’s parliament in Beijing. That means you have not only a boom in buying gifts for loved ones but also the more serious business of purchasing items for delegates whose favour you need.

So it was a surprise that PPR, the French company that owns Gucci, chose this period to announce its intention to halt the store expansion of the Italian brand in China.

The plan for 2013 is to consolidate its position by making sure its shops are in the right neighborhoods. However, the Florence-based firm will freeze the opening of shops in new cities, Jean-Francois Palus, the group managing director of PPR told the Jing Daily.

“We will be staying in the same cities, but we are moving a lot of stores. There are times when a neighbourhood is really hot and there is a lot of footfall, and three or four years later the footfall has moved to another spot.”

Gucci’s announcement comes after similar statements from the world’s two other luxury giants LVMH and the Richemont Group in the last few weeks.

But why the change? Two years ago most luxury companies were investing heavily in China in the belief it would form the natural epicentre of future growth.

Well, in many ways they weren’t wrong. Chinese shoppers still make up a disproportionate percentage of sales – only increasingly, they prefer to shop outside of China.

According to data from management consultancy Bain & Company, 60% of Chinese luxury consumption now takes place overseas because of the huge mark-up on high-end items inside China (a result of a luxury goods tax).

The halt on Gucci stores in new cities mirrors a decision taken by another PPR brand, the handbag maker Bottega Veneta. Earlier this month it said it would focus investment on shops in Western Europe so as to maintain the brand image.

“I am convinced that consumers from emerging markets will buy at home if they see that the brand is well positioned in Europe,” CEO Marco Bizzarri told Reuters, adding that tourists usually make up half if not more of all luxury goods buyers in Europe.

But analysts and netizens point to another reason why luxury brands may have hit a temporary wall within China – the government’s new anti-corruption drive. In the past it was estimated that up to a quarter of all luxury sales in China were “gifts” for people of influence (hence stores operated  a very flexible invoice policy so swaps could be made). Since October of last year officials have been banned from spending public money on luxury items and a wider directive to shun extravagant living has seen sales of everything from expensive pottery to seafood drop (see WiC182).

As one netizen mused: “If there are no corrupt officials, do these companies really have a future here?”

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