China Consumer

Paying a premium

Tax cuts unlikely to spark local shopping frenzy

An employee holds an Hermes diamond and Himalayan Nilo Crocodile Birkin handbag at Heritage Auctions offices in Beverly Hills

A Birkin made with 242 diamonds

If the latest Christie’s auction in Hong Kong is indicative, it is hard to tell that luxury sales have slowed across the border in mainland China. This week a Hermès Birkin studded with diamonds set a new record as the most expensive handbag ever sold at auction, fetching $221,846.

But the milestone comes at a time when luxury labels like Chanel and Patek Philippe have been cutting prices to combat some of the middlemen who ferry the same goods back to China from cheaper Europe. Just last week, Italian fashion house Gucci, owned by Kering, followed suit by announcing price reductions of as much as 50%, triggering queues outside its stores around the country. Diehard shoppers in Chengdu lined up overnight to get first dibs on the discounted goods, says Beijing Youth Daily.

The foreign brands usually blame China’s high import tariffs for much of the price differential with their stores in Europe. That helps to explain why so many luxury consumers choose to visit lower-tax Hong Kong to make their purchases, with data from China’s Ministry of Commerce estimating that Chinese spending abroad exceeded Rmb1 trillion ($161 billion) in the past year.

But a recent research report published by HSBC has suggested that international luxury brands are also taking advantage of stronger demand in China to charge much higher premiums. HSBC found that prices are – on aggregate – 38% higher than in the Eurozone (and that the percentage is closer to 50% if Chinese tourists reclaim their VAT on departing the European Union).

Most companies will argue that prices in different markets are always going to be shaped by differences in costbase, as well as differences in the nature of local customer demand.

But the internet is also making it harder for foreign luxury brands to charge radically different prices for the same product.

“Blogs, forums, word-of-mouth and travel are spreading knowledge of brands and what consumers should pay for them. This will likely force brand managers out of what has been a somewhat complacent by-default thought process of thinking Asian consumers could be charged more for the same product,” HSBC has warned.

To encourage consumers to do more of their shopping at home – at a time when the economy has been growing at the slowest pace in years – the authorities have also announced reductions in import taxes on 14 categories of consumer goods, starting this week.

Duties on imported clothing, for instance, have fallen to 8.5% from 18.5%, on shoes from 23% to 12% and skincare products from 5% to 2%. Even imported nappies have become more affordable, with rates cut from 7.5% to 2%.

French cosmetics giant L’Oréal and Korean brand AmorePacific Group responded to the move by promising to cut prices of most of their imported products. But industry observers say the move won’t have as much impact on retail demand as many hope.

For a start, the reductions apply to less than 10% of China’s imports. Also, much of the mark-up in local prices comes from distribution and department store costs, according to a price breakdown compiled for Reuters by consultancy SmithStreet.

Much of China’s pricing premium also stems from the general VAT rate of 17%, which hasn’t been altered.

Hence Beijing Daily reckons that the price decrease for most products will be no more than 10%.

“The tariffs accounted for a very small percentage in the cost of an item. Ultimately, the retail price is still based on a simple supply and demand principle, as well as our operational costs. In the current business climate with operational costs continuing to climb, it is likely that our costs will only go up and not down,” a manager of a Guangzhou-based sportswear importer told Nanfang Daily.

Some consumers say that the tax cuts probably wouldn’t be enough to motivate them to buy more of the most-desired overseas brands in local shops. “The prices of imported goods vary from region to region. So even with the tax cuts and discounts, it’s still not as good value as buying abroad,” a white-collar worker from Nanjing told Modern Express.

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