High-end brands shift strategy from luxury to quality

As the government austerity drive takes a bite out of sales in China, companies are tweaking their image

International luxury brands are shying away from being associated only with the super rich in an effort to conform to a Chinese market being affected by the central government's austerity drive.

"We are seeing certain watches, some very expensive ones, that are selling at a discount. People are afraid to buy even for themselves in order to stay low-key," said Omega Watches CEO Stephen Urquhart.

Swiss watch exports to China, including those from Richemont and Swatch Group, dropped 14 percent in the first 10 months of 2013, data from the Federation of the Swiss Watch Industry showed.

But as chief executive officer of Omega, which is part of the Swatch Group, Urquhart prefers to call what happened in 2013 a "consolidation" rather than "shrinking".

The austerity drive may even be thought of as an opportunity for "strong brands, good brands and authentic brands", Urquhart said, as some customers will shift to less conspicuous consumption.

Most of the Omega purchases in China are individuals buying for themselves, Urquhart stressed. The brand emphasizes quality rather than mere luxury, he added.

In a bid to avoid the impact of the anti-corruption campaign, almost all the luxury brands being marketed in China are trying to readjust their image.

Juan-Carlos Torres, chief executive officer of high-end watch brand Vacheron Constantin, said in an earlier interview that the brand is "not used in the corruption business".

"To understand our brand, you have to have a certain level of knowledge. Most of our Chinese customers are individuals, and if they are 'gifting', it is to a partner, not as part of a business or political transaction," he stressed.

"It is very hard to calculate the percentage of gift buying in the purchase of luxury items," said Zhou Ting, head of Fortune Character Institute, a luxury market consultancy based in Beijing.

"Meanwhile, not all gift buying is related to graft. But the macroenvironment does affect the revenue of some traditionally high-profile brands," she said.

Watches and fine leather goods saw the biggest drop in sales during the first quarter of this year. And most tellingly, Beijing fell to No 3 from its previous top position for luxury sales in the country. "It suggests that the anti-corruption campaign has substantially affected gift buying in the capital," Zhou said.

Consultant Bain & Co said luxury spending grew by only 2 percent in 2013, compared with a rate of 7 percent in 2012. Reasons include an increasing number of shoppers buying abroad and President Xi Jinping's mandate to officials to cut down on lavish spending and stepped-up probes into graft.

"People who buy Omega are not of the group that looks for ultra luxury," Zhou said. "They are more fashion sensitive and more middle class. This group is emerging in China, and that may explain why the brand still has the confidence of the China market."

"Chinese consumers are much more sophisticated, and much more rational today, as many of them are getting closer to Western cultures through working and studying. Meanwhile, luxury purchases are no longer transacted only by the super rich. The rising middle class has its own tastes and pursuits," said Rebecca Wang, a senior client manager with an Italian bespoke suitmaker.

The Bain research has found that despite the overall slowdown in luxury market growth, women's fashion brands have experienced a sharp rise, indicating a market that used to be driven by male consumers is now shifting to become more female-dominated.

In China, nearly 70 percent of women are working outside the home, much higher than the 53 percent of the global average, encouraging more fashion houses to design for Chinese women.

French luxury fashion house Celine SA has not been too affected by the slowdown. Most of its customers are professional women or women with an active life. "Chinese women have very strong personalities, and normally they buy for themselves, not to give as gifts," said Marco Gobbetti, chief executive officer at Celine SA, which is part of the LVMH Group of international fashion companies.

There is a significant difference between Celine and other luxury brands, he said. Celine's soul category-ready-to-wear-is about personal taste and defines the attitude of a woman. "You buy it for yourself," said Gobbetti, who came to Beijing for the autumn/winter fashion show recently. The show is the first time the Celine collection has been shown on a runway outside Paris, with exclusive silk tops, scarves and an iconic bag designed in special colors for China.

With 20 stores in China so far, Celine is concentrating on improving and expanding existing stores rather than opening new ones. Though it did open one in Chengdu, Sichuan province in western China, in April, and a flagship store will open at Plaza 66 in Shanghai later this year.

Gobbetti is confident in China's market potential as the pace of growth is already picking up. "We are optimistic," he said.

Major fashion brands have been focusing on China's first-tier cities: Beijing, Shanghai, Guangzhou and Shen-zhen. But now many are expanding to China's second-and third-tier cities-which McKinsey Global Institute predicts will be home to 45 percent of China's middle-class and high-income earners by 2022.

Of its 47 stores on the Chinese mainland, Louis Vuitton has already opened 36 in smaller cities.

Zhou said China is entering a new phase of luxury consumption. Consumers are pursuing either super high-end goods or affordable luxury with fashion or customized elements.

"I am now confident in having the brand here, with developing new markets in second-and third-tier cities," Urquhart said.

"China is not just one or two cities. Beijing and Shanghai are important. But other cities are much more mature than people think. I am amazed to see that the retail environment in other cities is not at all backward; on the contrary, it is very advanced," Urquhart said.

Urquhart acknowledged that competition is becoming more fierce. Almost all the international luxury brands have opened stores in China as the country overtook the United States to become the world's biggest buyer of personal luxury items, accounting for 29 percent of global purchases.

"When we first came here 15, 20 years ago, it was our market, and we could do what we want. But now, many more brands have come in, and it is much more competitive. We must keep the growth momentum by staying creative, building up good relationships with the retailers and the landlords, getting the right location, the right distribution," he said.

But customizing the watches' design is not necessary for the China market, according to Urquhart.

"The Chinese want to buy an Omega watch that has an Omega heart, Omega soul, Omega history and Omega design," he said. "They don't want to buy a watch made for Chinese." he said.

If there is any difference in taste, he admitted, Chinese customers do prefer more gold on watches. So watches with gold sell better in China, he added.