June 24, 2014
BEIJING — Are China's days of deluxe already over? In the aftermath of the carnival-like consumption on the Chinese market between 2010 and 2012, luxury brands can't help but ask themselves that question.
That stratospheric growth rate should now be considered part of the past, according to an analysis of both global and regional earnings reports from several major luxury brands. Take the Hong Kong operations for Italy's Prada group, for instance. It made almost no profit in 2013, its latest financial report shows, and its sales were declining overall. Its share price fell by no less than 12%.
Even Hugo Boss, a particularly beloved brand of Chinese officials — its more discrete style and generous cuts tend to suit them better — registered an unexpected 2% drop in global sales last year. With more than 100 stores in China, the company indeed ranks first among major luxury brands in the country.
Meanwhile, the world's largest luxury goods group LVMH saw its growth fall to 4% in the first quarter — compared with 6% in 2013 and 25% in 2012.
Many attribute the decline of luxury brands' sales to a weakening Chinese market. The Asian market, Japan included, has always been what some major luxury brands count on most. The Swiss watchmaker and jeweler Piaget owns twice as many stores in China than in the United States.
The corruption effect
Chinese authorities' strict anti-corruption campaign, launched at the end of 2012, has also brought a serious blow to officials' gift-giving habits, harming luxury goods sales. LVMH claims that the campaign has not only affected its watch sales in China, but its alcohol and spirits growth as well.
As one spirit brand employee told the Economic Observer, cognac sales are so gloomy this year that the company is now focusing its efforts on champagne, which attracts a growing number of middle-class Chinese consumers.
No data shows exactly how China's anti-bribery efforts have impacted luxury goods' declining sales. Yet the brands' downturn on the Chinese market does coincide with the start of the anti-corruption campaign. Nowhere else in the world is consumption by public officials so clearly distinct from private consumption, said Louis Ferla, President of Cartier China.
Counting on — and blaming — China
China's importance in the sector cannot be overstated. Prada's financial report shows that approximately one-fourth of the group's global sales are taking place in China. According to the luxury goods report published by Bain & Company in 2013, the country accounts for 29% of the global luxury goods' sales. The U.S. and Europe are far behind, sharing respectively 22% and 21% of this 217-billion euros market.
Watches in Shanghai (Photo: Gisling)
Yet last year, Chinese consumers' spending on luxury goods fell by 15%. When all other major Asian markets grew, the Chinese one declined in comparison with 2012, a recent earnings report from the Swiss luxury conglomerate Richemont Group shows.
But China isn't the only one to blame.
The country's anti-bribery efforts don't explain all luxury brands' falling sales. Last year, as Gucci registered a first-time decline of its sales in China since 2009, U.S. media attributed this trend to China's economic slowdown. Yet the company acknowledged another explanation — a change in its production patterns. The brand was reducing its entry-level items in favor of more high-end goods.
At the same time, some are convinced that Chinese consumers are growing more conscious and picky with the luxury goods they buy. Brands with ostentatious logos are becoming less and less popular.
Another explanation is the fact that Chinese consumers now prefer to shop abroad. Even if sales on China's market are slowing down, its citizens remain strong buyers overseas, Patrizio Bertelli, CEO of Prada, pointed out.
In a recent poll, 92% of Chinese consumers said they were unhappy with local stores' services and prefer to shop abroad, Ruder Finn's 2014 Chinse Luxury Goods Report shows. They go to Hong Kong for jewelery, leather goods, handbags and cosmetics, and fly to Europe for watches and spirits. In 2013 only, close to 100 million Chinese people traveled overseas, spending a total of $102 billion, data from China's Outbound Tourism Research Institute shows. The country now ranks first in terms of trips and purchasing power overseas.
New, more affordable brands
Can we really talk about decline? Gao Ming, the senior vice-president of Ruder Finn, a public relations agency counting more than 20 luxury brands' Chinese branches as clients, doesn't believe so. Sales, he said, aren't as bad as the press claims them to be.
"It's just that growth is no longer a double-digit figure," Gao said. "Strictly speaking, this is only a growth slowdown. Some luxury brands may have cut down a bit on advertising expenses because they want to spend money more wisely given the current situation."
"Lighter" luxury brands are meanwhile catching up, confirming the growing diversification of the sector. Many watchmakers have introduced items worth between 10,000 and 30,000 RMB ($1,600 to $4,800) at this year's watch and jewelry fair Baselword, offering new options for middle-class consumers.
A newer and less expensive group, Michael Kors, has become China's most envied brand in recent years. The company's affordable handbags — with pricetags around a few hundred dollars — have helped the brand reach its 31st consecutive quarter of growth. With a current market value of $19.2 billion, Michael Kors now ranks fifth in the luxury sector, just behind Prada.
Brands relying on the few but loyal ultra rich, such as the jeweler Van Cleef & Arpels, also have a clear advantage in this market.
Celine, the French apparel brand, is doing well too in China. The group wasn't affected by the ongoing anti-corruption policy in the country. "We are not a brand born to become gift items," said Marco Gobbetti, Celine's CEO. "China is one of our top five markets and it will become even more important in the near future."
Top companies can breathe
Still, many top brands can still take comfort when it comes to China's future. Hermès' Chinese market growth was at 18% over this year's first quarter. The watch brand Patek Philippe is increasing its investments in China. It redecorated and reopened its flagship store in Beijing and is now focusing on providing more quality services.
"Real top brands won't worry about their businesses," said Jean-claude Biver, CEO of the Swiss luxury watchmaker Hublot. "We sell in over 100 countries in the world, and we only need to sell 400 watches per year in China. Do you think we would have trouble finding 400 clients?"
The Economic Observer is a weekly Chinese-language newspaper founded in April 2001. It is one of the top business publications in China. The main editorial office is based in Beijing, China. Inspired by the Financial Times of Britain, the newspaper is printed on peach-colored paper.
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The Saudis may be awaiting the outcome of Iran's nuclear talks with the West, to see whether Tehran will moderate its regional policies, or lash out like never before.
October 21, 2021
LONDON — The Iranian Foreign Ministry spokesman Saeed Khatibzadeh said earlier this month that Iranian and Saudi negotiators had so far had four rounds of "continuous" talks, though both sides had agreed to keep them private. The talks are to ease fraught relations between Iran's radical Shia regime and the Saudi kingdom, a key Western ally in the Middle East.
Iran's Foreign Minister Hossein Amirabdollahian has said that the talks were going in the right direction, while an Iranian trade official was recently hopeful these might even allow trade opportunities for Iranian businessmen in Saudi Arabia. As the broadcaster France 24 observed separately, it will take more than positive signals to heal a five-year-rift and decades of mutual suspicions.
Agence France-Presse news agency, meanwhile, has cited an unnamed French diplomat as saying that Saudi Arabia wants to end its costly discord with Tehran. The sides may already have agreed to reopen consular offices. For Saudi Arabia, the costs include its war on Iran-backed Houthis rebels fighting an UN-recognized government in next-door Yemen.
The role of the nuclear pact
Bilateral relations were severed in January 2016, after regime militiamen stormed the Saudi embassy in Tehran. Amirabdollahian was then the deputy foreign minister for Arab affairs. In 2019, he told the website Iranian Diplomacy that Saudi Arabia had taken measures vis-a-vis Iran's nuclear pact with the world powers.
It's unlikely Ali Khamenei will tolerate the Saudi kingdom's rising power in the region.
He said "the Saudis' insane conduct toward [the pact] led them to conclude that they must prevent [its implementation] in a peaceful environment ... I think the Saudis are quite deluded, and their delusion consists in thinking that Trump is an opportunity for them to place themselves on the path of conflict with the Islamic Republic while relying on Trump." He meant the administration led by the U.S. President Donald J.Trump, which was hostile to Iran's regime. This, he said, "is not how we view Saudi Arabia. I think Yemen should have been a big lesson for the Saudis."
The minister was effectively admitting the Houthis were the Islamic Republic's tool for getting back at Saudi Arabia.
Yet in the past two years, both sides have taken steps to improve relations, without firm results as yet. Nor is the situation likely to change this time.
Iranian Supreme Leader Ali Khamenei in 2020commons.wikimedia.org
Riyadh's warming relations with Israel
Iran's former ambassador in Lebanon, Ahmad Dastmalchian, told the ILNA news agency in Tehran that Saudi Arabia is doing Israel's bidding in the region, and has "entrusted its national security, and life and death to Tel Aviv." Riyadh, he said, had been financing a good many "security and political projects in the region," or acting as a "logistical supplier."
The United States, said Dastmalchian, has "in turn tried to provide intelligence and security backing, while Israel has simply followed its own interests in all this."
Furthermore, it seems unlikely Iran's Supreme Leader Ali Khamenei will tolerate, even in this weak period of his leadership, the kingdom's rising power in the region and beyond, and especially its financial clout. He is usually disparaging when he speaks of Riyadh's princely rulers. In 2017, he compared them to "dairy cows," saying, "the idiots think that by giving money and aid, they can attract the goodwill of Islam's enemies."
Iranian regime officials are hopeful of moving toward better diplomatic ties and a reopening of embassies. Yet the balance of power between the sides began to change in Riyadh's favor years ago. For the kingdom's power has shifted from relying mostly on arms, to economic and political clout. The countries might have had peaceful relations before in considerably quieter, and more equitable, conditions than today's acute clash of interests.
For if nuclear talks break down, Iran's regime may become more aggressive.
Beyond this, the Abraham Accord or reconciliation of Arab states and Israel has been possible thanks to the green light that the Saudis gave their regional partners, and it is a considerable political and ideological defeat for the Islamic Republic.
Assuming all Houthis follow Tehran's instructions — and they may not — improved ties may curb attacks on Saudi interests and aid its economy. Tehran will also benefit from no longer having to support them. Unlike Iran's regime, the Saudis are not pressed for cash or resources and could even offer the Houthis a better deal. Presently, they may consider it more convenient to keep the softer approach toward Tehran.
For if nuclear talks with the West break down, Iran's regime may become more aggressive, and as experience has shown, tensions often prompt a renewal of missile or drone attacks on the Saudis, on tankers and on foreign shipping. Riyadh must have a way of keeping the Tehran regime quiet, in a distinctly unquiet time.
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Kayhan is a Persian-language, London-based spinoff of the conservative daily of the same name headquartered in Tehran. It was founded in 1984 by Mostafa Mesbahzadeh, the owner of the Iranian paper. Unlike its Tehran sister paper, considered "the most conservative Iranian newspaper," the London-based version is mostly run by exiled journalists and is very critical of the Iranian regime.
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