Why are luxury goods more expensive in China?

More and more Chinese people are traveling abroad to buy luxury goods. Various luxury stores in the United States and Europe have become must-visit places for outbound Chinese tourists, and it seems that one has not truly been abroad until he or she buys several luxury goods overseas. In fact, most luxury brands have stores in China.

Why do Chinese consumers go all the way to another country to buy products that are also sold in China?

Because international luxury brands have long set much higher prices for their products in China than in many other countries, forcing Chinese luxury consumers to turn their eyes to foreign markets.

Why luxury goods are cheaper overseas

The retail price of a Chanel Timeless Classic Flap bag is 3,100 euros, or 3,839 U.S. dollars, in France, but is marked up 34 percent to 37,000 yuan, or 5,850 U.S. dollars, in China. The price of a Louis Vuitton Speedy 30 bag that sells for only 500 euros, or 619 U.S. dollars, in Europe is marked up 36 percent to 6,100 yuan, or 964 U.S. dollars, in China. The prices of same products vary considerably from country to country.

No wonder Chinese consumers are flocking abroad to buy luxury goods.

In fact, luxury goods in China are not only priced high, but also rarely discounted. By contrast, it is common to see discounted luxury goods in certain foreign countries.

Ms. Lin who lives in France said that major luxury brands such as LV and Gucci often offer discounts of 30 percent to 50 percent on many items during holidays and festivals. Many Gucci bags sell for around 300 euros in Europe, while the price of the same bag is usually marked up about 50 percent to 5,000 yuan in China. In addition, off-season luxury items are often sold a discount in certain foreign countries.

"As the prices of luxury goods are much higher in China than in many other countries, many people are traveling abroad to buy large amounts of luxury goods," said Yi Shaohua, an associate research fellow at the National Academy of Economic Strategy under the Chinese Academy of Social Sciences, adding that the Chinese people have spent the most on luxury goods overseas for several consecutive years.

According to a Bain & Company's report on China's luxury market, Chinese spent 50 billion U.S. dollars on luxury goods overseas in 2010, which was nearly five times more than luxury goods sales in China, making the country the world's largest consumer of luxury goods.

Taxes and marketing costs significantly pushed up the prices of luxury goods

China is gradually replacing the traditional European and American countries to become the main force of luxury consumption. The international luxury brands have also paid more and more attention to Chinese market. Why are the luxury goods more expensive in China than in other countries?

Taxes, distribution costs and marketing costs are the main reasons, said Zhou Ting, expert of luxury goods and dean of Research Institute for Fortune Character. The distribution costs, namely the circulation costs, refer to rents and managing fees. The annual reports of the luxury groups show that the marketing cost accounts for a large proportion of the cost price of luxury goods and even is higher than it.

 "The superposition of various taxes and fees is the root cause to push up the final sales prices," Yi Shaohua said.

China has a higher import tariff, which is between 6.4 percent and 25 percent. Furthermore, the valued-added tax, consumption tax and business tax must be paid for the sales of luxury items in China. Therefore, the final retail prices in China are two-third higher than the CIF value.

For example, the CIF value of Estee Lauder eye cream is 175 yuan, coupled with 10 percent import tariff, 30 percent consumption tax and other import fees, which raised the import duty-paid price to 274.5 yuan, nearly 100 yuan higher than the CIF value. During the circulation in China, there also are 5 percent sales tax, 17 percent value-added tax, as well as the city maintenance and construction taxes and advertising costs. Then, the final retail price of the Estee Lauder eye cream in the chain stores is around 540 yuan.

Adjust the scope of taxation to lower tariffs

With the economic downturn sweeping the globe, the major European and American economies suffered sluggish economy, which resulted in the decline of luxury consumption in Asian region including China. Nevertheless, the international luxury goods companies do not intend to cut prices in China and some even plan to raise the prices in Europe to "narrow the difference."

Zhou Ting said that raising the prices in Europe will make Chinese consumers spend more money on the luxury goods in both China and abroad. It is their marketing strategy. Another high-sounding reason is the issue of exchange rate that the appreciation of the yuan widened the difference between prices at home and abroad. In fact, all these are not real reasons.

How to reduce the costs in luxury goods in China?

Yi Shaohua thinks that the scope of luxury taxation must first be adjusted to appropriately lower the tariffs. Then, reduce the taxation links, implement united excise taxes, exempt from business taxes and reduce the amount of various taxes.

In addition, Chinese enterprises should be encouraged to purchase the foreign luxury brands, so as they can give more consideration to the domestic demand of China in product design. They also can reduce the brand promotion and import-related costs and lower the default profit, making luxury retail prices closing to international prices, Yi said.