Why The Chinese Are Spending Less On Luxury

China may be one of the world’s fastest growing economies, but it certainly isn’t the perfect, carefree strategy for luxury brands looking to expand their market share. In addition to China’s economy being down at the moment, luxury brands are finding themselves losing valuable sales in China.

Luxury sales in China fell 15 percent last year—the biggest drop in five years—and spending on gifts, which made up a good portion of those sales, fell 25 percent. Average annual luxury spending by millionaires made up 1.9 percent of their total wealth, which is a 1 percent decrease from last year. For the super-rich, that percentage was 1.3 percent.

This decline is due to a number of different factors: the exodus of China’s wealthy, the government crackdown on gifts, global spending and the rise in cost-conscious consumers.

Mass Exodus of China’s Wealthy

Hurun, a wealth research firm that focuses on China, recently released its annual report detailing the spending habits and purchase preferences of the wealthy, based on responses from 393 Chinese millionaires. Conducted between May and November 2013, it surveyed China’s wealthy, those worth $1.6 million or more, and the super-rich, those worth $16 million or more.

According to this study, 64 percent of Chinese millionaires have either emigrated or plan to emigrate, and one-third of China’s super-rich have already emigrated. The United States tends to be their favorite destination, though the UK is also high up on the list due to its high-quality education system for secondary schools and below.

Seeking better education for their children is one of the primary reasons that China’s wealthy are leaving the country. Others include escaping pollution and overcrowding in urban China, protecting their fortunes from the Chinese government, and avoiding Chinese consumption taxes on luxury goods, which are as high as 30 to 80 percent of a good’s price tag. For all these reasons, China’s wealthy aren’t just spending less—they’re also leaving the country altogether.

Most of these individuals are looking for permanent residences, but others are looking to maintain homes in both countries. According to Hurun, more of China’s wealthy intend to buy holiday homes than last year, up 5 percent to 60 percent. Few want to renounce their nationality because many believe that China’s outlook is improving. In fact, for the first time in five years, Chinese millionaires’ confidence in China’s economy rose; however, this increase could also be due to the fact that so many of China’s wealthy have already left the country.

Government Crackdown on Gifts

The Chinese government’s crackdown on gifts has also stifled the economy of luxury goods. According to Reuters, “The crackdown on conspicuous spending, which began in 2012, is part of a vow made by Chinese President Xi Jinping to be tougher on graft. He has focused in particular on gifts made to government officials often in exchange for preferential treatment or contracts.”

The 25 percent decrease has been a result of not just the wealthy’s fear of being caught, but also the desire to be more discreet about their spending in general. Now, instead of purchasing expensive gifts en masse, they are leaning more toward buying lower-priced goods and more luxury goods for themselves. This includes a cut down on gift-giving at the upcoming traditional New Year celebrations, with one consumer survey reporting they will not spend more than $826. This has resulted in the steep drop in sales for companies who produce watches, leathers, jewelry and accessories, among other luxury goods.

This crackdown has also contributed to the exodus of the wealthy who are keen on protecting their fortunes from the Chinese government. As some of China’s wealthy have indeed made at least parts of their fortunes from gifts-trading, they fear the government could seize their assets. Thus, they have either moved themselves or at least moved portions of their fortunes to offshore accounts. According to WealthInsight, China’s wealthy now have approximately $658 billion in these offshore accounts, leaving their money in places that are hard for the Chinese government to reach.

China as the World’s Biggest Global Spenders

According to Forbes, almost 60 percent of all Chinese citizens’ luxury purchases are made outside mainland China, and Chinese global consumer purchases top the rest of the world. Because of its prominent spending habits, China became a destination for many brands that set up shop in hopes of gaining a stronger foothold on the market share of their industry. But with the Chinese slowdown in local spending on luxury goods, high-end retailers are being hit hard.

The website Jing Daily poses several reasons for China’s preference for global consumption: to avoid the high tariffs placed on luxury goods, to avoid fake goods, which are still rampant in China, and to assuage their higher expectations for in-store service as part of the luxury shopping experience.

Chinese buyers often seek global purchases to avoid the possibility of frequently counterfeit goods that they may buy locally. The Chinese are also dissatisfied with the quality of service they experience at local stores—92 percent of China’s luxury consumers, in fact, share that sentiment. They hold a firm belief that salespeople overseas are more knowledgeable and helpful, and thus beat out their local Chinese competitors.

Though luxury sales in China have fallen, these numbers are relative, and China’s luxury spending is still strong as compared to other countries. Also, the high potential for nearly 300 to 400 million new luxury buyers in China should be enough to maintain the country’s attractiveness to global companies.

For these reasons, companies should not discredit China’s economy or pull out entirely any time soon. These companies simply need to address a more international sales approach while still keeping one foot firmly planted in China.

China’s More Cost-Conscious Consumer

The Chinese are getting savvier when it comes to their luxury purchases, and this has also contributed to a greater percentage of goods being purchased internationally—either while traveling or over the Internet. Products available in China may be found cheaper in other countries, and thus China’s citizens are looking more globally before making their purchases. This deal-shopping is also in part due to China’s weaker economy.

The slower-growing economy and government crackdown on gifts spending has not weakened the desire for luxury goods in China. Instead of the higher-end items, Chinese consumers are leaning toward what is known as “accessible luxury,” which is more affordable. Like all consumers, the Chinese want value, and quality, authentic products for a price point that they can manage.

To appeal to these buyers, some luxury companies—and others—have taken to offering more of these accessible luxury products. While individual sales might not be as high, this is a way for these companies to not lose too much of their Chinese market as it becomes comprised of more cost-conscious consumers.

Various luxury goods are losing steam in China for now, but the market has not disappeared entirely by any means, and China still remains one of the biggest economies for these types of goods. If China and companies in China can find new ways to entice the Chinese wealthy to stay in the country, brands might have a better chance to survive the current downturn and create a more viable future.

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Why The Chinese Are Spending Less On Luxury