Chinese luxury goods prices start to close gap with Europe

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French luxury group Hermès says a rise in mainland Chinese sales helped lift Asia revenues in its second quarter © Bloomberg

Renminbi depreciation, ecommerce and overseas travel put pressure on prices

The price premium of luxury goods in China over those in Europe has shrunk by a quarter in the past year — a trend that is driving up domestic luxury spending on the mainland.

Chinese consumers are responsible for about a third of all luxury sales worldwide, making them a crucial target of high-end brands. But they have historically made most of their purchases outside the Chinese mainland, with Paris their most popular European destination, because of high import taxes and price premiums charged by brands in the country.

Those premiums have eroded over the past year, according to a survey of the prices of nearly 2,000 luxury goods by consultancy Deloitte. Luxury goods on average are now 32 per cent more expensive than identical items in France — the largest market in the $225bn global luxury sector and a good baseline for European prices, says Deloitte — compared with 41 per cent a year ago.

The price harmonisation has shifted the dynamics of the luxury market by prompting “reshoring” of purchases by Chinese consumers, which has contributed to a global revival in the sector. French luxury house Hermès said last month that an acceleration in mainland Chinese sales in the second quarter helped total Asia revenues rise 10.5 per cent.

The change was most pronounced for clothing and footwear, which were almost 50 per cent more expensive in China a year ago but now carry a premium of about one-third, the Deloitte survey showed.

The analysis for the Financial Times by Deloitte’s BenchMarque service found that the decline was driven primarily by the depreciation of the Chinese renminbi against the euro. If exchange rates had been unchanged during the year, China would still be 40.5 per cent more expensive than France, according to the analysis.

“Retailers have so far been content to let changing forex erode the Chinese price premium,” said David Tite, analyst at Deloitte.

Part of the pressure on prices of luxury items in China comes from the rise of ecommerce as a channel for luxury retail in the country, as it allows for easier price comparison.

“As ecommerce and increased international mobility make it easier to compare prices and transport goods, the rapid convergence for these categories is to be expected,” said Mr Tite.

Though Chinese luxury sales have recovered in the past year, few expect a return to the heady days of double-digit growth enjoyed before a slowdown in China’s economy and a crackdown on corruption beginning around 2012.

“Luxury is not an industry which has historically been especially adept at pivoting fast to changes in consumer demand, since it has been more supply-led in its nature. I would expect successful luxury brands to . . . move faster to pivot pricing and product decisions around these trends as they happen,” said Deloitte analyst Nick Pope.

By Courtesy FT.com

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