Why luxury goods are so expensive in China

Why is Louis Vuitton so expensive?
Why is Louis Vuitton so expensive?

Luxury brands are finding success with streetwear among Chinese consumers — a move that has enabled them to charge higher prices.

Louis Vuitton, Chanel, Hermès and Dior were among the top five brands listed under the "sneaker" hashtag on popular Chinese shopping app RED, according to Gartner L2's "Luxury China: Streetwear Insight" report last month. The only other brand among the top five was Nike.

"Luxury brands have supported their development of youth-oriented product categories like sneakers and streetwear items with innovative e-commerce models and celebrity-driven activations on relevant digital platforms," said Danielle Bailey, managing vice president for APAC Research and Advisory at Gartner L2, in a press release.

"The 'it sneaker' has emerged as a status symbol used for self-expression and is the key gateway luxury purchase for young shoppers in China."

Luxury brands have also borrowed a pricing and distribution strategy from the streetwear culture: the drop model. This means they release a limited number of items over a short time period, which creates scarcity and allows them to charge high prices.

"The drop model in streetwear is similar to what luxury does. It creates a sense of urgency to purchase," Elizabeth Flora from Gartner L2 told CNBC.

For example, luxury brand Rimowa collaborated with perhaps the most relevant streetwear brand, Off-White, in 2018 and "dropped" limited edition transparent suitcases. The collaboration had the most engagement on Weibo — China's Twitter-like platform — among all luxury collaborations, even though suitcases were selling for close to $1,700.

The streetwear culture — popularized by designers such as Virgil Abloh and Kanye West — gained popularity in 2017 and has been seeping into the luxury industry. China is a crucial market for both luxury and streetwear and in 2018, Chinese consumers — enticed by streetwear — at home and abroad spent $115 billion on luxury items, according to a report from McKinsey and Company.

However, the high prices and scarcity of these luxury items have created opportunities for counterfeits to appear on the market. Louis Vuitton has been one of the luxury brands employing the drop model as a distribution strategy. In 2018, the French fashion house was the most counterfeited luxury brand in the world and its products made up over half of the fake luxury products found on the market, according to Entrupy's "State of the Fake Report."

"Because streetwear and luxury drive demand and are scarce, they are more likely to be counterfeited," Flora said. "The most successful brands get counterfeited the most (so) brands need to be really proactive."

The luxury market in China is still thriving despite high prices and issues with counterfeiting. By 2025, Chinese consumers will account for 40% of global spending on luxury brands, according to McKinsey & Company's China Luxury report.

But as younger consumers begin to make up more of luxury purchases, luxury fashion houses will have to keep evolving to maintain success in this market.

"It's really important to be able to cater to the younger generations," Flora said. "Luxury shoppers skew much younger in China. They're following their own sets of fashion trends and celebrities so brands need to incorporate those into their digital marketing strategies."