Sep 24, 2012
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China's corruption crackdown takes shine off luxury boom

Sep 24, 2012

HONG KONG - Luxury brands banking on a China rebound to boost sales may be in for an unpleasant surprise: weak demand in the world's second largest luxury market may last longer than the economic slowdown as Beijing cracks down on conspicuous consumption.

"Luxury products are highly expensive and civil servants, whose salaries are about 5,000 yuan ($790.6) a month, cannot afford them"

China is sensitive to anything that raises suspicions of corruption, especially after the scandal involving Bo Xilai and his emerald-wearing wife Gu Kailai marred this year's once-a-decade leadership transition.

The government imposed a "frugal working style" rule on its civil servants, which goes into effect on October 1, barring them from spending public money on lavish banquets or fancy cars, and from accepting expensive gifts. Gift giving is considered a sign of respect in Chinese culture, and has been a reliable source of demand for the world's top luxury brands.

A string of high-profile incidents, including a high-speed Ferrari crash reportedly involving the son of a senior public official and a local government official photographed flaunting luxury watches beyond the reach of his salary, have enraged many Chinese who have taken to the blogosphere to vent their anger.

Chinese police inspectors are now studying up on how to recognise luxury brands to help them expose corruption, according to local media.

"Luxury products are highly expensive and civil servants, whose salaries are about 5,000 yuan ($790.6) a month, cannot afford them," China Daily reported on Friday. "So officials who possess luxury products should give convincing explanations on how they got them."

Luxury brands were already struggling with a slowing economy and a bit of flashy fashion fatigue as Chinese shoppers shun flamboyance in favour of understated displays of wealth.

Beijing's crackdown suggests that even if economic growth starts to recover later this year, as many economists predict, luxury demand may lag.

"There is definitely a general moving away from the bling and the gold taps. This is a permanent shift," said Rupert Hoogewerf, chairman of the Hurun Report, a Shanghai-based luxury publishing house which compiles China's Rich List.

Hoogewerf said while many Chinese consumers are pulling back on spending because of a weakening economy, there is also a heightened sensitivity surrounding luxury purchases.


British fashion house Burberry Group Plc's warning on September 11 that its sales growth in China was far slower than expected spooked luxury investors and raised concerns that the entire sector was in danger of stumbling.

Its Italian rival, Hong Kong-listed Prada SpA, releases half-year earnings later on Monday and investors are looking to the company to provide a clearer picture of the state of Chinese demand.

Analysts have mostly remained upbeat on Prada's outlook, eyeing strong market share gains and good brand perception, but its shares are down 7.5 percent since Burberry's warning.

There are some signs that Beijing's "frugal" campaign, announced in July, is already hurting luxury demand.

In Hong Kong, a popular luxury shopping destination for mainland Chinese, July sales rose just 3.8 percent from a year earlier, slowing from June's 11 percent year-on-year growth. August figures are scheduled for release on October 4.

Gift giving is a cultural norm in China, seen as a way of showing respect. It is not unusual for civil servants to receive expensive bottles of alcohol, jewellery or lavish meals from business leaders in the community.

Since Beijing's crackdown was announced, demand for typical gift-giving products such as watches and wine has faded.

Jebsen, a distributor for premium brands in China and one of the largest Porsche dealership groups in the world, said its Porsche sales have remained healthy, up 28 percent in August from a year earlier.

But its Hong Kong Bordeaux wine sales are down 25 percent in value and 6 percent in volume. Hong Kong has been a favourite entry point to China for high-end Grand Cru wines.

To be sure, China still has plenty of people willing and able to splash out on fancy goods, and Hong Kong and the gambling enclave of Macau remain shopping paradises.

At U.S. billionaire Steve Wynn's casino in Macau, which houses high-end brands such as Louis Vuitton, Piaget and Dior, retail business is still solid with sales well up over the same period a year ago, said a Wynn spokesperson.

Outlet shopping villages are also becoming popular for Chinese consumers who benefit from hefty tax savings.

Desiree Bollier, chief executive of Value Retail, which has nine outlet villages in Europe, said Chinese customers are increasingly opting for the smaller niche European brands offering unique products they cannot find at home.

"Demand is not diminishing but evolving - the spectrum is becoming broader and more sophisticated," she said.

(Reporting by Farah Master; Editing by Emily Kaiser and Jean Yoon)

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