Investors may not fully be embracing the extent of the recent slowdown in luxury sales on mainland China. While the likes of Tiffany, Prada, LVMH and Hermes have talked about a slowdown during recent quarters, we heard even more comments regarding current trends in China at the FT conference. For example, one industry expert pointed out that traffic is so slow at stores, fewer salespeople are needed.To drive traffic, discounts of 50 percent are starting to appear at full-price flagships. While the discounts are encouraging sales, watch out for margins.
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American-style discounts have become the new reality for the younger consumer and retailers need to adjust, particularly as average prices in Asia can be higher than those in Europe or the U.S. by 30 percent or more. If Chinese consumers don't see more discounts at home (and not just the last-minute 50-percent off deals) they will continue to shop abroad, leaving stores on the mainland increasingly empty. That raises the question: Is there too much luxury brick-and- mortar capacity on the mainland?
The young, emerging Chinese consumer is losing interest in big-name international brands and increasingly turning to local brands (think Hermes Shang Xia, or Kering's Qeelin). A little brand fatigue should not be underestimated. While Chinese brands are not that easy to find at big shopping plazas, Chinese consumers are increasingly seeking them out.
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Moderation of spending habits is not exclusive to luxury goods. Changes in behavior are showing up in gambling habits (types of wagers and level of bets). Jewelers are also reporting more demand for semi-precious stones, which are priced lower than their precious counterparts.