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Catering to the Chinese shopper’s grand tour

Nicola Clark
Monday, 3 Feb 2014 | 9:44 PM ET
A Chinese woman walks past the Chanel store on June 11, 2012 in Beijing, China.
Getty Images
A Chinese woman walks past the Chanel store on June 11, 2012 in Beijing, China.

Xiaoyan Mao had not yet collected her luggage after landing at Charles de Gaulle Airport from Shanghai recently. But she and a friend were already mapping out a game plan for the three days they would spend in Paris before continuing a 10-day European blitz with additional stops in Switzerland, Italy and Germany.

Their to-do list included visiting the Louvre and the Eiffel Tower. But what were they looking forward to most on their first trip to the region?

(Read more: Hear that? Sounds like a Chinese luxury implosion)

Ms. Mao, 28, a sales manager, smiled broadly. "Chanel," she said. "Prada."

Tourists like Ms. Mao are part of a growing wave of newly affluent Chinese taking advantage of more direct flights to the shopping capitals of Europe. The Lunar New Year holiday is now underway, a time when a big part of the 110 million Chinese expected to travel abroad this year will be packing their bags — and their wallets — for luxury expeditions.

And purveyors of European luxury brands, anticipating the arrival of this important clientele, stand ready to embrace it, whether by offering guided tours, in Mandarin, of flagship showrooms; providing backstage access to couture runway shows; or engaging in a variety of other flourishes tailored for the Chinese tourist-shopper. American companies have been slower to attract the Chinese shopper, but some retailers, like Tiffany, have Mandarin-speaking staff or hold special events.

Storied European brands like Burberry, Hermès and Dior can be bought in high-end shops and shopping malls of major Chinese cities, of course. But for reasons including higher taxes in China and lower prices in Europe, Chinese consumers, who buy more luxury products than shoppers of any other nationality, prefer to do their buying abroad. Of the more than $80 billion in Chinese purchases of personal luxury goods last year, two-thirds were made outside China.

Flagging demand in China itself was a factor cited last week by the Paris-based LVMH Moët Hennessy Louis Vuitton, the world's largest luxury goods group, for the company's flat profit last year. That is all the more reason the company and many of its peers are starting to plow more money into European showcases and shift investments away from the Chinese mainland.

(Read more: Logo fatigue? Chinese now want understated luxury)

Last year, for example, Louis Vuitton opened a three-store, 10,000-square-foot "townhouse," complete with spinning glass elevator, atop a Selfridges department store on Oxford Street in London.

"There is a major shift happening now with brands," said Manelik Sfez, head of marketing for Global Blue, a tax-refund company in Geneva that tracks luxury purchases. "They are starting to reconsider their whole structure and the ways they market themselves."

In catering to the Chinese shopper, some European makers of luxury goods seek to leverage their brands' heritage and savoir-faire by conducting tours of their landmark European stores — or even setting up museums in them, as Vuitton has done with its "Espace Culturel" on the Champs-Élysées in Paris. Others organize invitation-only demonstrations of the craftsmanship that goes into the products, which companies and analysts say holds a particular appeal for Chinese visitors.

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Gieves & Hawkes, the 240-year-old London tailor, for example, lures Chinese groups away from the bustle of Bond Street to its store at 1 Savile Row, which houses an extensive archive of royal and military regalia dating to the 18th century. The visit, which is translated by a Mandarin-speaking guide, includes a stop in the store's bespoke workshop, where the company still hand-sews 1,000 suits a year.

"In terms of seeing all the components of a luxury brand, it is very immersive," said Simon Baker, marketing director for the company, which has more than 100 stores in China. "Our Chinese guests are looking to learn what being dressed by a Savile Row tailor is all about, and why it is more luxurious and prestigious."

The Italian design house Ermenegildo Zegna works with boutique travel agencies, and hotels favored by affluent Chinese, to offer V.I.P. tickets and backstage passes to its European fashion shows.

(Read more: China's millionaires continue to flee the country)

Zegna has also followed brands like Louis Vuitton and Burberry, already active on the social media platform Sina Weibo, in creating an official account on the wildly popular mobile messaging service Weixin — known outside China as WeChat — to which the Chinese are turning more and more during their overseas travels. So has Harrods, the London department store, which counts Chinese visitors as its largest foreign customer group.

Such efforts are part of the image burnishing that analysts say is as important in marketing to these visiting consumers as selling individual wares.

A Chinese tourist who returns home with a memorable experience to share can be a powerful ambassador for a brand, said Philip Guarino, co-founder of the consulting firm Emerging Market Luxury Advisors.

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"You are dealing with a demographic, not a geography, so you need to think in nongeographic terms," Mr. Guarino said. "Some brands have 150 store locations in China alone," he said. "But their cash registers are in Europe and the United States."

Just how dependent the European luxury sector has become on Chinese visitors became starkly evident late last year. In October, China passed a consumer-protection law prohibiting travel agencies from subsidizing group tours to Europe by including mandatory stops at high-end department stores like Galeries Lafayette in Paris or La Rinascente in Milan.

Beijing considered the practice — whereby mass-market agencies used commissions from retailers to offset deeply discounted package tours — to be misleading. Mr. Sfez, of Global Blue, estimated that before the law changed, such captive buying represented roughly 40 percent of all Chinese luxury purchases in Europe.

The law had a striking effect on Chinese tourists' luxury spending in the fourth quarter, halving sales growth across the European Union to 9.5 percent compared with growth rates of 20 percent or more in the preceding three quarters of last year.

(Read more: China has a word for its crass new rich)

But analysts do not expect a reversal of the broader trend, because higher prices in China compel so many Chinese to prefer shopping overseas. Luxury handbags, which might sell for $1,000 to $5,000, cost on average nearly a third less in Europe than in mainland China, according to Renaissance Capital, a Russian investment bank. Markups by Western brands are common in China, where foreign companies must navigate a thicket of red tape to do business and pay high rents for premium retailing space.

The price gap is further widened by China's high taxes on consumers. On top of an import duty of 10 percent, Beijing levies a value-added tax of 17 percent and sales taxes that can range from 5 percent to 20 percent, depending on the item. Some other Chinese cities add taxes as well.

Foreign visitors to the European Union who spend more than 175 euros, or $236, in the same store on the same day, meanwhile, are entitled to a rebate on the value-added tax, which in most member states hovers around 20 percent.

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Chinese consumers' embrace of the Internet and social media platforms like Sina Weibo has also increased access to information about luxury goods abroad, allowing them to comparison shop before they even board a plane. Applications like Weixin let people share their foreign shopping experiences in real time, check prices and send photos as they weigh their purchases — or even take orders on behalf of friends back home.

Armed with these digital tools, a growing number of Chinese travelers, particularly younger ones, are forgoing the classic group tours and venturing abroad independently. That trend, with the ban on commission-subsidized tours, is driving more tourists to explore beyond the big European flagship stores in the fanciest districts, analysts said.

It also exposes entrenched legacy brands to intense competition in China from increasingly popular rivals like Bottega Veneta of Italy or Mulberry of Britain.

That means the bigger design and fashion houses will need to be more nimble than ever in adapting to the changing habits of their Chinese clientele, according to Federica Levato, a luxury analyst in Milan at the management consultants Bain & Company.

(Read more: Top 2% of Chinese account for third of global luxury sales)

"If they don't catch up quickly, they will become less competitive," Ms. Levato said. "Just as they anticipate fashion trends, they now have to anticipate changes in consumer behavior."

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