Politics, red-tape, high tariffs and taxation in China have been taking a toll on the performance of major international luxury brands doing business in China. An alarmingly growing number of Chinese are opting to make their shopping abroad, predominantly Europe.
The Wall Street Journal reports that the weak euro and the debt crisis in Europe on the one hand coupled with high Chinese tariffs on luxury goods on the other hand, have combined to create a large gap in the cost of luxury goods inside and outside China.
As a consequence, the investment that luxury houses have placed in China are suffering. World’s largest luxury group, LVMH recently said that their business in China is now slowing down, with the continental price differentials hitting records. The company are yet to confirm if they will raise prices on their home turf. “We will do whatever is in the best interest of Vuitton and LVMH profits,” LVMH finance boss Jean-Jacques Guiony told analysts in a recent phone call.
Whilst LVMH have to confirm what they will do, Prada has confirmed that it will raise prices in Europe as a consequence. “In order to reduce the price gap with China, the company may consider increasing prices as much as 10 per cent in Europe if the euro continues to stay so weak, of course without increasing prices in China.” A Prada spokesperson said.
Luxury companies have spent heavily expanding their operations in China and want the payoff, but Chinese consumers are passing up the stores closest to home in favour of outlets abroad. The disparity has grown in recent months as the euro has slid against the dollar and the yuan. Since last year, the European currency has dropped around 15 per cent compared with the dollar and close to 16 per cent against the yuan.
The luxury houses have reaped the benefits of being in China in the last year with massive profits turned over, but with the signs of slowing growth there, it is becoming harder for the luxury houses to see a return on their investment there.
The push to lower tariffs has gone on for several years, with no decision being reached yet. Advocates of the tariff argue that lowering it would reduce tax revenue that benefits the nation. High-end goods purveyors are in a bind. Lowering prices in China would squeeze margins and risk undermining brands’ reputations; increasing prices in Europe could undermine purchases by domestic consumers as euro-zone gloom already weighs on spending.
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