It may not be as simple as blaming the Chinese, but it also might be, according to analysts studying the global luxury market. Due to several factors, the most significant of which is the sheer number of Asian tourists (mostly Chinese) who travel west to avoid hefty domestic luxury taxes. In January, the month preceding China’s biggest national holiday and arguably the biggest shopping month of the year, the Chinese spent $7.2 billion on luxury goods abroad–a 30 percent increase over the same month last year. This level of spending isn’t only seasonal; Chinese tourists are estimated to spend $6,000 while traveling abroad, a third more than the international average. In Europe, revenue before tax and interest as a percentage of luxury sales is just 25 percent. In China, in large part because retail space isn’t $984 per square foot like it is Paris, that figure jumps up significantly to 40 percent. When you’re dealing with billions of dollars, that 15 percent revenue differential adds up quickly.
With all the money the Chinese are pumping into luxury goods, one would think a group like LVMH would be pleased. The problem though, despite double-digit growth this past quarter, is that LVMH and others have been investing big money into brand expansion in the Chinese market. And not just in the traditional ways with brick and mortar retail stores but also: digital campaigns, big production runway shows, Mandarin-translated magazines and extravagant special events/parties. With the euro falling 13 percent against the yuan in the past year, the flight of Chinese billions to France, London and Italy are causing major concern among luxury executives.
The solution, analysts predict, is an across-the-board price increase. According to Bloomberg, it may take as much as a 3 percent uptick to compensate for Chinese tourists’ luxury spending habits. Better start saving.