Strategy

China’s Gifting Crackdown Hurts Luxury Accessories Firms

Plus, some luxury brands are losing their luster in the country.
Katie Kuehner-HebertApril 7, 2015
China’s Gifting Crackdown Hurts Luxury Accessories Firms

The luxury accessories market is experiencing rough headwinds in China that are taking a bite out of revenues. In part, the business falloff is stemming from China’s crackdown on the long-popular practice of “gifting” items to public officials and company executives in exchange for favors.

Moreover, Chinese tastes are changing, and some luxury brands have over time become perceived as ordinary — “any premium fashion brand’s worst nightmare,” according to a Business Insider article last week.

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Prada products have become less popular with China's "gifters."

Prada products have become less popular with China’s “gifters.”

Prada, LVMH Moët Hennessy, Louis Vuitton, and Gucci are all hurting because of the trends, Business Insider said. While the brands performed well in China several years ago, sales started to slide in 2013 when Chinese President Xi Jinping instituted the gifting crackdown. Prada, which is suffering the most, blamed China sales for a 1% decline in sales in 2014.

“These well-known luxury brands have grown too fast in the recent years, eager to cash in on the rise of the Chinese new wealth, without a sufficient understanding of the market, which has now resulted in their exclusive image becoming somewhat tarnished in that market,” Qing Wang, professor of marketing and innovation at Warwick Business School, told Business Insider.

Chinese people are becoming “more sophisticated and discerning,” the professor added, noting that such brands as Hermes and Burberry better understand Chinese consumers and therefore are doing well in the country.

Along with the revenue decline, Prada last week reported a 28% plunge in net income, to $489.51 million, for its fiscal 2014 that ended Jan. 31, missing the analyst consensus estimate of $508.55 million.

An Economist article last week said that Prada’s executives have committed to cutting costs, particularly those associated with opening new stores.

“But a bolder move may be necessary,” The Economist wrote. “In a report on China’s luxury industry released earlier this year, Bain & Company, a consultancy, argued that the ‘new normal’ will be slower revenue growth for the big labels, due to a tendency for consumers to shop around for less well-known ones. To hold consumers’ attention, bigger brands will therefore need to innovate. Prada had better take note.”

Photo: Puramyun 3, Prada Phone by LG, CC BY 2.0. The image is unaltered from the original.