Driven by short-term pessimism, luxury shopping malls in China have begun to hand out shopping vouchers in a bid to bump up transaction volumes in the second half of 2024.
Wuhan International Plaza, a legacy luxury retailer in China’s mid-land hub, unveiled a points-reward system in July across different tiers of luxury brands that allowed shoppers to use vouchers on luxury goods, which was reframed by Chinese netizens as a considerable 15 percent to 30 percent discount.
As the news of “Japanese prices in Wuhan” spread on social media like wildfire, shoppers from all over China flocked to the mall, where they queued for up to four hours at stores like Louis Vuitton, Dior, Prada and Miu Miu, all brands well-received by the market.
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At the same time, across the street from Wuhan International Plaza, Heartland 66, the Hang Lung-owned luxury shopping mall, launched a similar points rebate program, such as buying 10,000 renminbi ($1,400) and get 1,500 renminbi in spending credit at stores across the mall, including the only Hermès in the region.
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Brands Cracked Down
However, the excitement was short-lived. After major brands, most notably Vuitton — which is said to have logged more than 50 million renminbi, or $7 million, in daily transactions — and Dior found out about the unauthorized operations, they put a stop to them with a highly visible storefront notice.
“The malls are drinking poison to quench thirst,” said Ting Zhou, dean of the Yaok Institute, a luxury research and consulting organization, referring to an old Chinese adage. “It not only looks bad on the mall but also discourages shoppers from ever shopping at full price.”
The voucher frenzy that began in Wuhan’s established malls came as little surprise to local retail experts, as the arrival of SKP in the city this summer — which has caused several luxury tenants such as Burberry and Piaget to restrategize their local presences — is bound to stir up competition.
For Jonathan Siboni, founder and chief executive officer of Luxurynsight, the existence of hour-long lines in Wuhan, albeit short-lived, is a good sign for the market during turbulent times.
“This is an electroshock moment, and malls hope that it can last. It says they [consumers] do want to buy it, which is positive news for the market, but it also brings more challenges for the brands, and for the malls. It becomes a competition of channels,” said Siboni, who explained that the malls have an incentive to boost sales because high-end landlords usually collect rent based on sales levels, as opposed to receiving a fixed amount.
It remains to be seen whether the Wuhan-style shock therapy will be adopted by other regional shopping malls and retailers, but the latest results from major luxury mall operators show that many could have an incentive to shift strategies that will help retain customers.
Tough Times All Over
In the six months ended June 30, revenue at Shanghai’s Plaza 66, a flagship project under the Hong Kong real estate developer Hang Lung that is looking to bring in more niche cool brands like Sacai, fell 8 percent as tenant sales dropped 23 percent.
At Swire Properties, the owner of seven luxury mall franchises in mainland China, during the first half of 2024, sales at its flagship Taikoo Li Chengdu and Beijing projects fell 17.2 percent and 3.5 percent, respectively, while its Taikoo Li Qiantan project in Shanghai, where Louis Vuitton opened its first chocolate store in China, were flat.
A recent report from UBS pointed out that China’s domestic luxury goods sales have fallen by 10 percent in the first seven months of 2024, which means brands may slow their pace of opening new stores in China between the second half of 2024 and 2026.
Facing rental pressure, UBS said luxury shopping malls may have to reduce rents or transform into daily-life-oriented commercial centers.
However, fervent online discussion around discounted luxury goods is a reminder that the value-seeking middle class remains relevant.
According to Bernstein, by 2027, over 76 percent of luxury goods will still be purchased by the aspirational and wealthy shopper cohorts, who spend around 5,000 euros to 50,000 euros on those products annually.
“There is one thing that has not changed about the huge majority of Chinese shoppers. They are smart, they are discount hunters. Now that the Chinese market is not doing so well, they feel like they have less money to waste,” Siboni said.
“Nobody talks about the fact that brands have built robust e-commerce operations during COVID-19, so whether in China or Japan, people can go online and see prices in real-time, which creates a new competition between markets, between channels. I think as markets evolve, brands need to readjust their strategy based on the new environment, because when you show the product in China, but then people buy it in Japan, there will be a huge inventory problem,” Siboni said.
According to data from Stylensight, brands favored by Chinese shoppers in Japan are Prada, Miu Miu and LVMH Moët Hennessy Louis Vuitton’s labels, which recorded 55 percent growth for Prada Group and 57 percent for LVMH in the market during the second quarter, driven by tourism.
Secondhand Market Booms
Back at home, the increasingly rational Chinese consumer has begun to offload luxury goods on the secondary market in droves — as did the Japanese during that country’s 1990s economic slump — which gives rise to a robust secondhand luxury goods market and grey market.
Case in point, on Dewu, a streetwear-focused social commerce platform, sales of Louis Vuitton products — whether sourced from Daigou or pre-owned — jumped 11 percent to 260 million renminbi, or $35.62 million, in the first half of 2024, according to local media reports.
Based on additional data from Re-Hub, a Shanghai-based luxury consulting agency, sales of the top 50 luxury and fashion brands on Dewu and other resell platforms in China grew 20 percent year-over-year in the first half of 2024.
According to Re-Hub, Dewu’s consumer base strongly skews toward Gen Z, a demographic crucial for luxury growth in the future. In 2022, 70 percent of China’s 264 million Gen Z population claimed to be a Dewu user.
“A robust gray market will create a higher negative impact in terms of sales cannibalization, brand equity for the luxury brand,” said Max Peiro, CEO of Re-Hub. With issues facing authentication in the gray market, or the pre-owned market, Beijing officials has vowed to provide detailed guidance to facilitate its healthy growth, which would in turn “contribute to the development of a circular economy,” according to a recent report in China Daily, a state-owned media publication.
“The secondary market will continue to grow, thus it becomes more important for brands to understand what is the value retention level of their products as a measure of brand power among the consumers,” added Peiro.
Against the backdrop of a slowing economy, Peiro thinks price sensitivity will be a major theme in China’s luxury market normalization story.
“However, once the basis of comparison is normalized, we will be seeing revenues in China going back to growth mode,” Peiro said.