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China

Is Luxury Losing China?

As China expands its anti-bribery crackdown, targeting ritzy gifts to officials, luxury brands are seeing drops in Chinese sales. The hope now is in the rising middle class moving up.

So fashion in Shanghai
So fashion in Shanghai
Sa Ke

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.

[rebelmouse-image 27088061 alt="""" original_size="640x427" expand=1]

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?"

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Green

Forest Networks? Revisiting The Science Of Trees And Funghi "Reaching Out"

A compelling story about how forest fungal networks communicate has garnered much public interest. Is any of it true?

Thomas Brail films the roots of a cut tree with his smartphone.

Arborist and conservationist Thomas Brail at a clearcutting near his hometown of Mazamet in the Tarn, France.

Melanie Jones, Jason Hoeksema, & Justine Karst

Over the past few years, a fascinating narrative about forests and fungi has captured the public imagination. It holds that the roots of neighboring trees can be connected by fungal filaments, forming massive underground networks that can span entire forests — a so-called wood-wide web. Through this web, the story goes, trees share carbon, water, and other nutrients, and even send chemical warnings of dangers such as insect attacks. The narrative — recounted in books, podcasts, TV series, documentaries, and news articles — has prompted some experts to rethink not only forest management but the relationships between self-interest and altruism in human society.

But is any of it true?

The three of us have studied forest fungi for our whole careers, and even we were surprised by some of the more extraordinary claims surfacing in the media about the wood-wide web. Thinking we had missed something, we thoroughly reviewed 26 field studies, including several of our own, that looked at the role fungal networks play in resource transfer in forests. What we found shows how easily confirmation bias, unchecked claims, and credulous news reporting can, over time, distort research findings beyond recognition. It should serve as a cautionary tale for scientists and journalists alike.

First, let’s be clear: Fungi do grow inside and on tree roots, forming a symbiosis called a mycorrhiza, or fungus-root. Mycorrhizae are essential for the normal growth of trees. Among other things, the fungi can take up from the soil, and transfer to the tree, nutrients that roots could not otherwise access. In return, fungi receive from the roots sugars they need to grow.

As fungal filaments spread out through forest soil, they will often, at least temporarily, physically connect the roots of two neighboring trees. The resulting system of interconnected tree roots is called a common mycorrhizal network, or CMN.

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