Luxury brands have been quiet in Shanghai since 2013, as new store openings slowed. Recently, facing high inventory and disappointing sales figures, a few brands in Shanghai closed underperforming stores and relocated to stronger performing locations. In early March, Chanel made the official announcement of cutting product prices in Hong Kong and Mainland China. The brand reduced prices of three iconic purses: the 2.55, 11.12 and Le Boy Chanel by around 20%, while increasing prices in Europe. After the adjustment, a Chanel Le Boy handbag is just 5% more expensive in China than in France. (See chart below.)

Source: China Daily

The response was immediate. For almost a week, consumers waited patiently in front of the flagship stores in Shanghai, hoping to pick up a much cheaper Chanel handbag. Purses mentioned above were sold out in days. However, those who’ve been waiting in line are not the typical Plaza 66 shoppers of the past, who were high-net-worth individuals from nearby cities, or business people involved in gift-giving. In the past, non-price sensitive consumer groups spent generously in China, making some of these stores the most profitable globally according to media reports. Since the anti-corruption crackdown started in 2013, luxury purchases from these groups have dropped dramatically. According to Bain Consulting, 2014 marked the first year that China’s domestic luxury spending declined.

Today, the luxury buyer profile is shifting to aspirational shoppers in China, who travel more, and are often savvier, better informed, and more price-sensitive. Realising the significant price differences between products sold in China and elsewhere, this group of consumers will either buy overseas, or turn to the grey market called daigou, where people purchase foreign products and resell them back to China via Taobao or Wechat at lower prices than those charged in mainland stores. According to a recent survey conducted for Exane BNP Paribas, 35% of Chinese consumers have shopped via daigou.

Multiple factors have contributed to the price gap between China and elsewhere: some blamed the high import tariffs; others attributed the brands’ deliberately higher price setting in China; and the devaluation of foreign currencies versus the RMB certainly did not help. Chanel’s measure may not change Chinese tourists’ decisions to purchase overseas, but it is certainly strong enough to squeeze out the daigou agents. More luxury brands have joined Chanel since April. However, simply lowering prices cannot be sustainable in the long term because it hurts retailers’ margins. On May 21, the Ministry of Finance of China announced that the import tax on a variety of consumer goods, including skincare, western-style clothes, and diapers, will be lowered starting from June 1. Both retailers and the government are beginning to make significant efforts to close the price gap between China and abroad, in order to encourage Chinese consumers to spend more domestically. More actions can be expected in the near future.

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