DEEP DIVE: Global Luxury Goods Pricing Price Differentials Are Narrowing

Transcription

1 DEEP DIVE: Global Luxury Goods Pricing Price Differentials Are Narrowing Deborah Weinswig Managing Director FGRT US: HK: CN: ) The luxury goods sector faces a challenge in the form of price gaps among regions, but those gaps are narrowing. Traditionally, luxury goods were sold at different price levels in different geographic regions, but e-commerce is contributing to more consistent pricing globally, as it provides increased transparency. 2) High-end luxury goods have historically been priced higher in China than in other markets, as they are subject to significant import duties and taxes in the country. Brands typically charged a premium in China, too. The main reason Chinese consumers have been buying luxury items while traveling or using the daigou buying agent service is to take advantage of lower prices offered overseas. 3) The US luxury goods market has seen heavy discounting, especially in the high-end department store channel. Numerous luxury goods brands are now trying to shrink their department store distribution in favor of offering more goods through their own retail stores, as they cannot control the pricing at wholesalers. 4) Pricing strategies vary by brand and some brands have greater pricing power than others due to either brand strength or erosion. 5) The rapid growth of e-commerce and luxury online marketplaces will create even greater pricing transparency going forward. 1

2 Table of Contents Executive Summary... 3 Introduction... 4 A Reshoring of China s Luxury Consumption Spending... 4 Currency... 9 Discounting Activity Pricing Strategies What Does the Future Hold? Key Takeaways

3 Executive Summary Traditionally, luxury goods were sold at different price levels in different geographic regions, notwithstanding currency fluctuations. In particular, luxury goods have historically been priced higher in China than in Europe and North America, due to Chinese import taxes and duties and brands charging a product premium in the country. Our recent research revealed that luxury goods tend to be priced the lowest in Europe (the UK and Italy) and the highest in China. When we conducted price checks on October 6, 2017, we found that: A Burberry tote bag called The Giant was priced 28% higher in China than in the UK. A pair of Vara Salvatore Ferragamo pump shoes was priced 25% higher in China than in Italy and France. Moncler s Albizia women s down jacket was priced 77% higher in Japan and 59% higher in China than in the European market. Chinese consumers have been the drivers of global luxury demand for more than a decade, and many have used daigou buying agents (agents who buy goods overseas on behalf of Chinese consumers) or have traveled to European capitals to take advantage of lower luxury goods prices overseas. Due to currency fluctuations, Chinese consumers are now more inclined to spend domestically on luxury goods..and government efforts to Although there are still significant regional price gaps within the luxury goods market, we have seen a relocalization of luxury trend around the world: the regional price gaps have decreased following tax cuts and global price harmonization by luxury brands. Also, Chinese consumers are now more inclined to spend domestically on luxury goods due to weakness in the Chinese yuan and government efforts to boost domestic consumption. Currency plays a key role in luxury goods pricing globally. Following economic weakness and currency devaluation, luxury goods in certain geographic regions tend to become more affordable. And many luxury goods companies address currency movements to maintain pricing structures between countries. Recently, the euro has appreciated versus the US dollar, Asian currencies and the British pound, and analysts are pondering whether luxury goods houses will increase prices around the world or in certain regions to offset the cost increase. When the euro has appreciated in the past, European luxury brands have raised product prices in non-euro markets in order to maintain a price gap between those markets and Europe and keep prices lowest in their domestic markets. Multiple luxury brands have stated that they will not raise prices outside the eurozone due to uncertain macroeconomic demand prospects. Furthermore, luxury goods prices in Europe, which are usually lower than in other regions, now align better with the higher prices typically seen in Asia, and luxury brands are currently feeling less pressure to lower prices in noneurozone areas. In the US luxury goods market, we have seen heavy discounting, especially in the high-end department store channel. Numerous luxury goods brands are now trying to shrink their department store distribution in favor of 3

4 offering more goods through their own retail stores, as the brands cannot control the pricing at wholesalers. Pricing strategies vary by brand, and some brands have greater pricing power than others due to either brand strength or erosion. Strong and highly covetable and absolute luxury brands have greater ability to raise prices than do struggling and lower-priced brands. The rapid growth of e-commerce and luxury online marketplaces will create even greater pricing transparency going forward. Historically, the luxury goods industry has not been nimble in terms of adapting prices when consumer demand shifts. In the future, luxury brands will likely strive to adjust product prices more quickly. Introduction Traditionally, luxury goods were sold at different price levels in different geographic regions, notwithstanding currency fluctuations. In particular, luxury goods prices have traditionally been higher in China than in Europe and North America, due to Chinese import taxes and duties and brands charging a product premium in the country. Chinese consumers have been the drivers of global luxury goods demand for more than a decade, and many have used daigou buying agents or have traveled to European capitals to take advantage of lower luxury goods prices overseas. However, Chinese consumers are now more inclined to spend domestically on luxury goods, due to both currency fluctuations and government efforts to boost domestic consumption. Currency plays a key role in luxury goods pricing globally. Following economic weakness and currency devaluation, luxury goods in certain geographic regions tend to become more affordable. In the US luxury goods market, we have seen heavy discounting, especially in the high-end department store channel. Numerous luxury goods brands are now trying to shrink their department store distribution in favor of offering more products through their own retail stores, as the brands cannot control wholesalers prices. Pricing strategies vary by brand and some brands have greater pricing power than others due to either brand strength or erosion. The rapid growth of e-commerce and luxury online marketplaces will create even greater pricing transparency going forward. A Reshoring of China s Luxury Consumption Spending Luxury goods prices have traditionally been higher in China than in other geographic markets such as Europe and North America: Luxury goods prices between China and France vary from 20% to more than 70%, depending on the brand. According to data from Deloitte s luxury pricing analytics suite, BenchMarque, US dollar adjusted prices for like-for-like items in 2017 are, on average, more than 50% higher in China than in Italy or France. Many brands charge a premium in all Asian markets, but luxury goods prices vary from 20% to more than 70% between China and France, depending on the brand. 4

5 Watches and jewelry in China are priced at the highest premium 55% higher than in France, on average, while the premium is lowest for bags, at 40% more than in France, on average. In like-for-like US-dollar terms in 2016, luxury goods prices were (in descending order) highest in China, Japan, the US, Russia and the UK, then Italy and France (tied), according to BenchMarque. According to Deloitte, almost half of luxury goods purchases are made by traveling consumers, either in a foreign market (31%) or at an airport (16%). This proportion rises to 60% among tourists from emerging markets, who typically do not have access to the same range of luxury products and brands that can be found in more mature markets. According to Bain & Company, Chinese consumers account for more than 30% of global luxury goods consumption, and that rate will reach 35% by Luxury goods prices have historically been higher in China due to high import taxes and brands charging higher premiums in the country. Previously, luxury goods brands opened too many stores in China and bumped up prices in the market, leading Chinese shoppers to seek lower prices elsewhere. Indeed, the main reason Chinese consumers buy luxury items while traveling is to take advantage of lower prices overseas. According to management consultancy Bain & Company, Chinese consumers account for more than 30% of global luxury goods consumption, and that rate is expected to reach 35% by One illustration of the price differential in China versus other regions can be found in a tote bag from Burberry called The Giant. When we conducted price checks on the bag in selected markets on October 6, 2017, it was priced lowest in the UK and highest in China and Japan, as shown below. The bag was priced 28% higher in China than in the UK. Figure 1. Burberry s The Giant Tote Bag: Prices in Selected Countries (USD) $2,180 $1,706 $1,795 $1,819 $1,819 $1,868 UK US France Italy Japan China As of October 6, 2017 Source: Company websites/oanda/fgrt 5

6 We also checked the price of Salvatore Ferragamo Vara pumps in selected countries, and found that they were priced at a 25% premium in China on October 6 compared with Italy and France, as shown below. Figure 2. Salvatore Ferragamo s Vara Pumps: Prices in Selected Countries (USD) $525 $527 $540 $540 $594 $677 US UK France Italy Japan China As of October 6, 2017 Source: Company websites/oanda/fgrt Our pricing analysis also found that Moncler s Albizia women s down jacket was priced 77% higher in Japan and 59% higher in China than in the European market, as shown below. Figure 3. Moncler s Albizia Down Jacket: Prices in Selected Countries (USD) $2,526 $2,807 $2,050 $1,584 $1,584 $1,679 Italy France UK US China Japan As of October 6, 2017 Source: Company websites/oanda/fgrt 6

7 In the past, daigou was a major channel for Chinese shoppers looking for lower prices on luxury goods that were heavily taxed in China. About 66% of Chinese consumers surveyed said that they intend to increase their purchases at Chinese luxury goods outlets. In the past, daigou was a major channel for Chinese shoppers looking for lower prices on luxury goods that were heavily taxed in China. Daigou, which translates as buying on behalf, enabled Chinese shoppers to appoint retail agents to buy merchandise abroad for them. Chinese shoppers would take advantage of the lower overseas price, circumvent import duties and sometimes obtain merchandise that was not available in China. Many daigou agents launched websites and offered standardized delivery options. According to a Bain & Company survey published in 2017, Chinese consumers are now purchasing more luxury goods locally, driven by the government s strategy to boost domestic consumption and price harmonization of such goods across the globe: About 66% of Chinese consumers surveyed by Bain said that they intend to increase purchases at Chinese luxury goods outlets. About 78% of Chinese luxury goods shoppers research products online prior to purchasing, and 50% of those surveyed said that they have increased their shopping at domestic e-tailers in the last year. Although the prices of most luxury goods remain higher in China than in much of the rest of the world, the price gap has decreased following tax cuts and global price harmonization by luxury brands, according to a June 2017 report in Nikkei Asian Review. The rise of e-commerce as a luxury goods distribution channel in China has contributed to pricing pressure, as it permits greater price transparency. Premiums on luxury goods in China have declined in the past year, according to a 2017 Deloitte survey of the prices of nearly 2,000 luxury goods. The depreciation of the Chinese yuan is also encouraging domestic purchases. The currency s depreciation against major global currencies in 2017 has been the main driver of Chinese consumers decreased purchasing power, according to the Asia Times. The yuan depreciated by 7% against the US dollar in 2016, which bolstered the relocalization trend, according to digital intelligence firm L2. Luxury goods in China are now 32% more expensive, on average, than identical items in France, according to Deloitte. A year ago, they were 41% more expensive. The price decline was most significant in the clothing and footwear category, where prices decreased by almost 50%. Clothing and footwear products are currently priced about onethird higher in China than in France, according to Deloitte. Chinese consumers are also finding it easy and convenient to shop online for luxury brands through social media platforms such as WeChat. Around 80% of luxury brands are currently available in China through e-commerce platforms. Although there are still significant regional price gaps within the luxury goods market, the global trend is toward the relocalization of luxury: In 2016, Chinese consumers made two-thirds of their luxury goods purchases domestically, compared with one-third in 2013, according to the Boston Consulting Group (BCG). 7

8 Domestic luxury goods purchases exceeded tourist purchases by 5% in 2016, according to Bain. Overseas purchases will remain an important part of Chinese consumption, but will decline as a proportion of total Chinese luxury goods spending. The Chinese government is implementing policy initiatives designed to boost domestic consumption, including domestic consumption of luxury goods. Chinese consumers are taking advantage of narrowing luxury goods price differentials and as the euro strengthens, Chinese domestic spending may increase further. In addition, the Chinese government is implementing policy initiatives to boost domestic consumption, including domestic consumption of luxury goods. For example, the government has tightened customs controls at airports, which has made it more difficult for daigou services to operate and has resulted in more domestic luxury purchases. The government has instituted tighter customs controls that limit foreign shopping in an effort to fight the gray market of unauthorized sales, according to Bain & Company. Authorities have also enforced greater import controls on luxury goods, particularly watches and handbags, discouraging excessive overseas purchases. Chinese company China National Service Corporation (CNSC) opened Shanghai s largest duty-free shop, which sells luxury goods at prices that are 20% 30% lower than retail prices. Chinese travelers who have returned from abroad within the past 180 days can take advantage of the discount. Hainan Province has been running a trial duty-free program whereby consumers can buy 16,000 worth of duty-free goods at a discount of approximately 30%. Florentia Village is a luxury discount-mall chain that offers entry-level discounted prices on luxury brands. The mall chain s operator, RDM Asia, currently has three outlets and plans to open three more by Luxury goods companies have also been addressing the pricing gaps among regions: Louis Vuitton has not implemented price hikes in China, Hong Kong or Japan since 2014, or in France since LVMH s strategy is to use seasonal product to drive down price gaps, especially between Europe and other regions. Moncler started a price harmonization program a year ago, mainly between Europe and Asia. Moncler s prices in Asia were too high last year, especially in Japan and China, and management has been trying to reduce its regional price gaps. The company has succeeded in decreasing the price gaps between Europe and China and Europe and Japan: the gap between Europe and China now stands at about 50% 55% and the gap between Europe and Japan now stands at about 60%, whereas two years ago, it was over 90% between Europe and Japan. The company s price harmonization efforts have been well received and have resulted in increased sales volumes at store level and increased comparable store sales. 8

9 Hugo Boss implemented price adjustments in China at the beginning of Burberry made serious product price changes in The company may make some minor adjustments later in 2017, but they will not be nearly as significant as the changes made in Traditionally, luxury goods companies addressed currency movements in order to maintain pricing structures between countries. Currency Currency plays a key role in luxury goods pricing globally. Following economic weakness and currency devaluation, certain geographic regions tend to become more affordable. According to data from Deloitte s BenchMarque division, luxury goods companies have typically addressed currency movements in order to maintain pricing structures among countries: In the weeks following the UK s EU membership referendum in June 2016, the British pound depreciated by 18% against the US dollar. Luxury brands responded by increasing prices, and by March 2017, prices in the UK were 5% higher for like-for-like products than they were before the referendum. Luxury goods brands achieved a further 5% increase in the UK by replacing existing inventory with higherpriced products. Due to an economic downturn and weakness in the Russian ruble, Russia has emerged as a more affordable place for foreigners to shop for luxury goods. By mid-2016, the ruble was trading at half the value to the US dollar than it had two years prior. The country has also experienced an increase in Chinese visitors. Historically, luxury goods in Russia were 20% 30% more expensive than in France or Italy due to heavy import duties. Likewise, when currencies in producing countries strengthen versus currencies in which products are sold, production costs rise and brands may have to raise prices. In the past year, the euro has appreciated versus the US dollar, Asian currencies and the British pound, and analysts are pondering whether luxury goods houses will increase prices around the world or in certain regions to offset the cost increase. When the euro has appreciated in the past, European luxury brands have raised product prices in non-euro markets in order to maintain a price gap between Europe and those markets and keep prices at their lowest in their domestic markets. Multiple luxury brands have stated that they will not raise prices outside the eurozone due to uncertain macroeconomic demand prospects. Furthermore, luxury goods prices in Europe, which are usually lower, now align better with higher prices in Asia, and luxury brands are currently feeling less pressure to lower prices in non-eurozone countries. Luxury brands ability to raise prices also depends on global macroeconomic conditions and consumer demand. Amid the current uncertainty in many markets, a number of brands have stated that they will maintain pricing and passively benefit from shrinking price gaps across geographies without explicitly decreasing prices in Asia. Luxury brands are typically cautious about implementing price hikes, but they are watching the euro, so strategies may change going forward. LVMH 9

10 management stated on the company s most recent earnings call that currencies are volatile and can quickly reverse course, and that LVMH, accordingly, does not plan to raise prices in the coming months, but will adopt a wait-and-see approach. Furthermore, the weakening of the US dollar and Chinese yuan against the euro is contributing to a narrowing of regional price gaps. Luxury goods companies do not have to lower prices in Asia and the US, as the price differential between Europe and those regions is adjusting naturally. Discounting Activity In the US luxury goods market, we have seen heavy discounting, especially in the high-end department store channel. Numerous luxury goods brands are trying to shrink their department store distribution in favor of offering more products through their own retail stores, as they cannot control wholesalers prices. Even at the high end, consumers are increasingly reluctant to pay full price, whether in the wholesale, retail or e-commerce channel. Hudson s Bay Company, the owner of the Saks Fifth Avenue high-end department store chain, reported that gross profit margin declined by 130 basis points year over year in its most recent fiscal quarter due to a highly promotional environment. The Gucci brand has undertaken a wholesale partner rationalization strategy in the last few years and has also changed its markdown strategy, eliminating markdowns in retail shops. The company seeks to be more selective and disciplined in terms of its wholesale partners and to offer more consistent prices. Gucci s wholesale accounts will be more concentrated in the future. Burberry management reported on the company s most recent earnings call that it is focused on ensuring that inventory shipped to US wholesalers matches sellouts, in order to avoid the need for discounting. The company s level of discounting in the US is greater for the apparel category than for leather goods. In the second quarter of 2016, Hugo Boss discontinued distribution relationships with many off-price retailers and stated that the company remains disciplined about selling into the US department store channel in order to avoid excessive inventories and clearance sales. Luxury brands have varying capacities to raise product prices across geographies, depending on brand strength. Pricing Strategies Pricing strategies vary by brand, and some brands have greater pricing power than others due to either brand strength or erosion. Companies can extend their price bracket to include high-end price points and/or introduce products at entry price points. However, luxury brands have varying capacities to raise product prices across geographies. Strong and highly covetable and absolute luxury brands such as Louis Vuitton and Cartier have greater ability to raise prices than do struggling and lower-priced brands such as Hugo Boss and some brands do not hold sufficient pricing power to raise prices at all. 10

11 Thanks to its unique, niche positioning, Brunello Cucinelli has the brand strength and pricing power to increase its average selling prices to align them more closely with those of its absolute luxury peers such as Hermès, Chanel and Dior. Half of Moncler s comparable store sales increases in the first half of 2017 were driven by price increases. Gucci has been able to increase its average product selling prices and the brand stopped markdown activity in its most recent fiscal quarter. However, management does not anticipate that it will make additional major changes in terms of average selling prices. Salvatore Ferragamo does not plan to change its pricing architecture, but the company does plan to narrow existing price gaps. Hugo Boss is strengthening its offerings in the important entry-price product segments by providing more entry price points in all product categories. The company seeks to regain access to and growth among younger consumers and consumers who are more price-conscious but are starting to discover the brand. According to Hugo Boss management, online shoppers are much more price-driven than offline shoppers. Prada increased its average price points for some products and lost a bit of sales volume because it sold fewer units. The company believes it has reached a consistent price positioning and is working on intermediate and entry price ranges in order to increase sales volumes. Tod s does not want to change the price positioning of its collections. Its products may be a bit more expensive, but, considering the challenging environment and the company s recent sales weakness, management prefers not to upset customers by changing pricing. The rapid growth of e-commerce and luxury online marketplaces will create even greater pricing transparency going forward. What Does the Future Hold? The rapid growth of e-commerce and luxury online marketplaces will create even greater pricing transparency going forward. Only 8% of Chinese luxury purchases are currently made online, according to Bain & Company, but that figure is expected to increase dramatically, driven by millennials, a growing middle class and greater workforce participation among women. Historically, the luxury goods industry not been nimble in adapting prices to shifts in consumer demand. In the future, luxury brands will likely strive to adjust product prices at a faster rate. Key Takeaways Despite some brands moves toward price equalization, luxury goods still sell at a premium in China due to import duties and brand pricing strategies. Companies can exploit foreign currency moves in order to harmonize prices. The rapid growth of e-commerce and luxury online marketplaces will create even greater pricing transparency going forward. 11

12 Deborah Weinswig, CPA Managing Director FGRT New York: Hong Kong: China: Eva Kubicka Senior Research Associate Hong Kong: 2nd Floor, Hong Kong Spinners Industrial Building Phase 1&2 800 Cheung Sha Wan Road, Kowloon Hong Kong Tel: London: Marylebone Road London, NW1 6JQ United Kingdom Tel: 44 (0) New York: 1359 Broadway, 18th Floor New York, NY Tel: FungGlobalRetailTech.com 12