Chinese Crackdown on Luxury to Drive Demand


James Lawson | August 06, 2013

James Lawson of Ledbury Research investigates how legislation designed to curb luxury consumption acts as a catalyst for the luxury market

Moutai baijiu

Despite being widely blamed for contributing to the slowdown in luxury sales across the country, the Chinese Government’s curb on graft actually represents an opportunity. In fact, we believe that this type of anti-corruption legislation accelerates emerging market luxury maturity.

On the face of it, the extravagance crackdown does indeed seem all doom and gloom. Latest numbers from the Federation of Swiss Watches show 31% falls in the value of watches exported to both Mainland China and Hong Kong in March.

This adds to a succession of declines in recent months, and contrasts with positive growth in the other main markets – the US, Italy, Germany and the UAE. Luxury brands including Hermes have also reported weaker growth in Asia, which they attribute to slowing Chinese demand across a number of categories.

“ Demand for liquor and high-end tea has been severely depressed ”

For example, demand for liquor and high-end tea has been severely depressed. Just one year ago, Moutai baijiu and Longjing tea sold for record prices at auctions. They were gifts of choice to cultivate ‘guanxi’ or connections, and were the preferred drinks at government and business banquets.

This year however, their association with ’high status’ has pushed the price of Moutai down by over 60% (Sina Finance), and Longjing tea down by 10-30% (SINA English). These negative effects may only be short term, however.

The tradition of gift-giving extends back many years in Chinese culture. In addition, consumers have now been exposed to luxury. This appetite will be hard to reverse. It may be that people just find new ways to make their consumption and gift-giving less visible.

“ It may be that people just find new ways to make their gift-giving less visible ”

This could be done in various ways. Some may simply hide it – People’s Daily reported that some officials had been spotted pouring baijiu into ordinary water bottles in order to continue drinking it at dinners. Alternatively, a more sustainable path is a shift in the type of luxury being consumed altogether.

Anti-corruption laws could fuel a rapid and more widespread move towards less ostentatious luxury items. The consumers become more ‘discerning’ as they look for niche brands. Indeed this is already occurring amongst more sophisticated customers in emerging markets.

The stage of new wealth, where opulent displays of wealth and logos are commonplace, may be replaced quickly with a stage where consumers are less concerned about whether their peers recognise their material possessions, as they become confident with their own knowledge about luxury.

“ There may be a move towards luxury as an experience, rather than ownership of a product ”

Niche brands, even domestic brands, may come to the fore; as would investment items with higher intrinsic value such as art, wine and property.

Finally, there may also be a move towards luxury as an experience, rather than ownership of a product. Consumers’ initial reason for moving into experiential luxury may be because overseas luxury tourism is more difficult to monitor.

However, the move to experiences over ownership is also a phenomenon that comes with luxury maturity. The Chinese Government’s actions may not be such a bad thing after all.

To further investigate the Chinese luxury industry on Luxury Society, we invite your to explore the related materials as follows:

- China’s Luxury Price Growth Stagnates To Seven-Year Low
- Why Your Social Media Strategy Isn’t Working In China
- Tier 1, 2 & 3 Cities in China, Which Comes First for Brands?