Swiss luxury watchmakers are feeling the pinch in China due to the recent crackdown on lavish spending. Provided to China Daily

High-quality tea has gone through a sharp price drop in China this year due to the recent crackdown on extravagance. Provide to China Daily

High-end luxury companies scale down China expectations as austerity measures kick in

Early last year, eyebrows were raised when 500 grams of high-quality Longjing tea was sold for 180,000 yuan ($29,196; 22,320 euros) at an auction in China. The record price for the tea brand made it much more expensive than gold at that time.

However, this spring the situation has changed completely. The price of high-quality Longjing tea has reportedly fallen to around 2,500 to 2,800 yuan for 500 grams, compared with the average price of 3,200 yuan in 2012. Tea industry experts admit that this year's prices are the lowest since 2009.

It is not high-end tea alone that is feeling the pinch. Expensive luxury watches from Swiss watchmaker Rolex and fancy dinners at top restaurants are all losing sheen as choice gifts among the well heeled.

Frugality has arrved - or, rather, been imposed. High-end demand has tapered off this year due to the recent government measures aimed at checking extravagant spending and reining in corruption.

Though it is still early to estimate the actual numbers, some experts maintain that the trend augurs well for the future, as it would lead to a more broad-based and healthy demand. Others feel that slower high-end product sales would lead to lower overall consumption.

According to data provided by the National Bureau of Statistics, retail sales in China during the first quarter reached 5.55 trillion yuan, a year-on-year growth of 12.4 percent, but still a 2.4 percentage point decline from a year ago.

Though there are indications that demand is likely to fall further, there are also signs that the demand for high-end goods in China is becoming broader and more sophisticated.

Zhao Ping, deputy director of the department of consumer economics at the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce, says that the government crackdown on lavish spending is good for China's consumption market in the long run.

"Less government expenditure on official receptions, vehicle purchases and overseas trips, or the so-called 'sangong' expenditure, means that more money can be put into the pockets of ordinary people," she says.

Zhao says that the curbs on conspicuous consumption is good for sustainable growth in the long run as it will cater to a broader spectrum of people.

Despite the promising future, the austerity campaign has hurt many high-end sectors in the short term.

The luxury watch trade had enjoyed a banner year in 2011, with a growth rate of more than 40 percent, largely due to the strong demand from China. But due to the recent austerity measures, watch exports to China recorded the weakest growth of 0.6 percent increase, according to data provided by the Federation of the Swiss Watch Industry.

While experts admit that the recent measures have had an impact on overall luxury watch sales, data gleaned from the Hurun Chinese Luxury Consumer Survey 2013 indicates that luxury watches are slowly losing their appeal as business or personal gifts among China's millionaires.

The latest report, based on a survey of 551 Chinese mainland millionaires with a personal net worth in excess of 10 million yuan, showed that Longines is the only Swiss luxury watch brand in the list, ranked 15th, ahead of the more expensive Rolex, which fell out of top 10 list for the first time in nine years.

Rupert Hoogewerf, founder and chief researcher of the Hurun Report, the leading luxury publishing and events group in Shanghai, says there is a very strong gift culture in China, predominately in business, because offering expensive gifts make people feel that they are special in your eyes.

"But with the new government regulation on corruption, people are more careful about what kind of gifts they want to give. The gift market in China has become more normalized and now that people are aware of that, it is inappropriate to give expensive gifts," says Hoogewerf, adding there is a clear trend toward gifting more modestly priced luxury goods this year.

Apart from the government crackdown, increasing scrutiny among Chinese people, who go to social media to check the actions of government officials, has also played a big role in the lower demand.

The much-publicized case of Yang Dacai, the former head of the work safety administration in Shaanxi province, is a case in point. Netizens had discovered through online photos that Yang had in his possession several expensive watches costing much more than his earnings. He was later investigated for his actions and subsequently removed from office.

Hoogewerf says that the anti-graft campaign is only part of the reason that people are shifting to modestly-priced luxury goods, such as a 10,000 yuan Longines watch, rather than top-priced luxury goods such as the 60,000 yuan Rolex watch.

He believes that the slowing Chinese economy is also partially responsible for the sluggish luxury consumption. "The economic downturn and the lack of confidence in future recovery has also triggered doubts," Hoogewerf says.

Though there are no official consumption numbers yet, data from the 2012 China Luxury Market Study conducted by consulting firm Bain & Company shows that the overall year-on-year growth of luxury market in China fell to 7 percent in 2012, compared to 30 percent in 2011.

Recent economic indicators have pointed to further gloom ahead with the National Bureau of Statistics indicating that the economy grew by just 7.7 percent in the first quarter of the year. The figure is lower than the previous quarter's growth pace of 7.9 percent.

Global luxury giants, such as Kering (formerly PPR) and LVMH from France, and Richemont from Switzerland, had earlier this year indicated that they would stop further expansion in China.

David Lee, the China director for luxury consumption research at Ipsos, the Paris-based market research firm, says the overall robust luxury market in China will neither be affected by the government crackdown on lavish spending nor the slowing of China's economy.

Lee says the fact that the Chinese are the largest consumers of the luxury goods, accounting for more than 25 percent of the global purchases, is not going to change, because China's economy, even with its slight slowdown, still has the best credentials.

"The crackdown is targeted at high-end gifts for civil servants and not at high-end luxury consumption. The overall desire for luxury goods is still strong and will continue to grow in China," he says, adding that Chinese people are becoming more sophisticated and understanding about luxury.

According to a report released by Bain & Company in December, about 30 percent of the luxury goods purchased by the Chinese people are for gifts, with the rest being for self-consumption, something that constitutes "rigid demand", Lee says.

However, unlike those who simply buy big luxury brands as gifts, there is a growing taste for exclusivity among the increasingly sophisticated Chinese customers, especially those in first-tier cities, such as Beijing and Shanghai.

Lee says that the changing landscape means that high-end goods producers need to do more to attract Chinese consumers, as many of them are no longer interested in conspicuous consumption, but more keen on better options and better shopping experiences.

While it is still not clear as to what companies are doing to keep the luxury brand pipeline flowing in China, it is clear that they have a major challenge in reaching more consumers.

Bian Jiang, assistant director of China Cuisine Association, says that most of the high-end restaurants have reworked their business strategy and are now targeting a broader population, after recording the slowest growth in more than a decade. The industry's year-on-year growth of 8.4 percent in the first two months is the first single-digit growth since 2001, Bian says.

Beijing Xiangeqing Co Ltd, a high-end restaurant chain, had earlier this year said it would change its target from high-end to middle-end business receptions and family gatherings. It also plans to stop selling cuisine priced more than 200 yuan per person and seafood that is more than 300 yuan for half a kilogram, and introduce more choices that are suitable for the "mass consumers".

The company indicated that its first quarter financial loss might reach 55 million to 70 million yuan, compared with a net profit of 46.23 million yuan during the same period last year.

Many other high-end restaurants are expected to follow suit, including China Quanjude Group, which owns the renowned Peking duck chain of restaurants, where the average cost per person per meal is around 159 yuan.

Bian from the China Cuisine Association says that going for ordinary consumers does not necessarily mean that the company is becoming cheap and low-end.

"With the ongoing urbanization and industrialization, an increasing number of Chinese are willing to spend more on dining out. The average spending for each person per meal in Beijing has increased to 60 to 80 yuan from 40 to 60 yuan two years ago."

"There is a rosy future for the high-end catering industry in China as long as it understands the needs of the increasingly sophisticated consumers," he says.

mengjing@chinadaily.com.cn

(China Daily 05/03/2013 page12)