Money that doesn't spend the same
For luxury goods companies that have grown dependent on Chinese consumers, the yuan's depreciation is just the latest blow to sales already reeling from China's broader economic slowdown and the government's crackdown on corruption. A weaker yuan will not only lead to lower sales revenue on the Chinese mainland, but also threaten global sales, which are driven largely by Chinese consumers.
The coming week-long National Day holidays in October will test Chinese consumers' loyalty to luxury.
With a weaker yuan, will they still flock to high-end stores in Japan, South Korea and Europe to snap up designer watches and handbags?
Chinese consumers have become the driving force of global luxury sales. Their purchases made up 46 percent of the global luxury market in 2014, with three-quarters of the purchases made overseas, according to data from Shanghai-based Fortune Character Institute.
As the yuan has depreciated nearly 3 percent against the U.S. dollar over the past week, luxury products have become more expensive for Chinese tourists.
Chinese consumers now need to pay about 1,100 yuan ($172) more for a Chanel 2.55 handbag, or 2,500 yuan more for an Omega De Ville watch.
Falling share prices
China's central bank decided on August 11 to improve the yuan's central parity formation mechanism to better reflect the market. By Monday, the central parity rate had fallen 4.6 percent against the U.S. dollar.
Major luxury groups saw their shares slump following the change. Over the week from August 10 to Friday, shares of French luxury goods group LVMH plunged 8.4 percent to 159.6 euros ($177).
Its rival Kering SA, which owns the luxury brands Gucci and Bottega Veneta, saw its shares lose nearly 5.5 percent to close at 170 euros.
Italian fashion house Salvatore Ferragamo also saw its Milan-listed shares shed 8.6 percent over the period to end at 27.59 euros on Friday. In Hong Kong, shares of Italian luxury company Prada fell 4.3 percent to HK$36.05 ($4.65).
"China has become the most important market for some luxury goods companies, and others also rely highly on Chinese consumers' spending at home and abroad," Zhou Ting, a luxury industry expert with Fortune Character Institute, told the Global Times on Sunday.
Price hike unlikely
The yuan's depreciation is a fresh blow to luxury companies that have been struggling with China's economic slowdown and the Chinese government's campaign against corruption.
Sales of the mainland luxury market shrank by 1 percent to $18 billion in 2014 from a year earlier, and are expected to fall by 4 percent this year, according to data from consultancy Bain & Co, which attributed the industry downturn to China's overall economic slowdown and the corruption crackdown.
The yuan's fall will reduce luxury companies' sales revenue in China when converted into the euro or the dollar, but experts believe luxury companies are unlikely to immediately hike their prices on the mainland.
"The yuan's depreciation will not make luxury groups change their pricing strategy in the Chinese market, especially when their sales in the market are still sluggish," Zhou said.
For instance, Prada's sales in the Chinese mainland, Hong Kong and Macao fell 19 percent year-on-year in the first quarter of this year.
"Luxury brands will not embrace the explosive growth on the mainland luxury market, because the government has clamped down on giving luxury items as gifts, and Chinese consumers have also become more rational about their luxury shopping," Yang Dajun, CEO of UTA Brand Inv Management Co, told the Global Times on Monday.
Some luxury brands lowered some of their product prices on the mainland earlier this year to attract consumers.
Chanel cut prices for some of its handbags by around 20 percent in April, and said the move aims to "reduce price differentials across countries."
In May, Gucci offered discounts as high as 50 percent on some of its products sold at its mainland stores.
"The trend of luxury brands unifying their prices on the mainland and overseas will continue," Zhou said.
Concerns about overseas spending
China is the fifth largest luxury market in terms of sales revenue, according to a Deloitte estimates in 2014. But Chinese consumers today make up nearly half of global luxury spending, according to a report by Fortune Character Institute in January this year.
Analysts have concerns that Chinese consumers will cut their spending overseas because of the yuan's depreciation.
A strong yuan earlier this year had boosted Chinese consumers' purchases of luxury goods overseas, making some luxury groups post stronger sales revenues in the first half of this year.
LVMH's revenue jumped by 19 percent year-on-year to 16.7 billion euros in the first half of this year, compared with an increase of 6 percent in 2014.
The company said in its first-half financial report that "solid growth in Europe and the U.S." and a "strong positive exchange rate effect" contributed to strong sales.
Kering also reported a 17 percent growth of revenue in the first half of this year from a year ago, which was driven by buoyant sales growth in Western Europe and Japan.
An increasing number of Chinese consumers have bought luxury products abroad during their overseas trips or through daigou, overseas personal shoppers who buy the goods and then send them to consumers on the mainland.
Swiss tax-refund company Global Blue said in April that the European and Japanese markets had benefited from surging Chinese consumer spending because their currencies had weakened against the yuan.
Spending by Chinese tourists jumped by 67 percent year-on-year in the first quarter of this year, compared with a rise of 32 percent in the fourth quarter of 2014, Global Blue said in a report published in April.
Analysts have concerns that Chinese consumers will reduce spending overseas because of the yuan's depreciation.
Yang said the decline in spending will depend on how much the yuan falls.
An increasing number of Chinese customers who have never bought luxury items become first-time buyers of luxury products when they travel aboard because of the overseas price advantage, Yang noted.
"The yuan's fall will affect this price sensitive group, but won't have much of an effect on the wealthy," he said.
Despite the yuan's depreciation, prices of luxury products sold overseas are still cheaper than those sold on the mainland.
On a Taobao store run by a Germany-based daigou, a Balenciaga Mini City handbag costs 6,980 yuan, while its retail price on the mainland is 12,350 yuan.
"We have not raised product prices so far, but if the yuan continues to depreciate, we will consider an adjustment," a customer service representative from the store told the Global Times on Sunday.
