Op-Ed | Could Global Pricing Alignment Backfire?

PARIS, France — Chanel's announcement back in March that it was increasing prices in Europe by 20 percent, and decreasing them in China by a similar amount, raised many an eyebrow in the luxury industry. Ostensibly, the move was made to "align" prices in anticipation of a global e-commerce push.

In the context of the euro’s sharp devaluation since mid-2014, Chanel’s decision was also seen as a way to discourage the ongoing grey market of ‘daigou,’ shopping agents who buy at lower prices overseas and resell to consumers in China.

But, in the months since, has the move really been beneficial? And, more importantly, what has the fallout been for the wider luxury industry and what new dynamics should we be watching for now?

Some luxury brands quickly followed Chanel, making similar pricing adjustments. Prada, for example, lowered pricing in China, but decided to leave European pricing unchanged given weak demand on the continent. Burberry hinted at an imminent change similar to Chanel's, stating that it was keeping a close watch on exchange rate variations. Most, however, have been more cautious.

Kering has taken a "wait and see" approach, though rumour has it that ailing Gucci may be a potential test case for a similar move. LVMH has categorically stated that unified exchange rates (consistent pricing across markets) is not a strategy the company espouses as it limits flexibility for luxury brands.

Unquestionably, a weak euro resulted in a significant high in the price differential between the same goods in Europe and China. Certain luxury goods were 60 percent more expensive in China than they were in Europe. Consequently, sales in Europe to Chinese tourists have soared in recent months, according to Global Blue. The significant price differential still exists, albeit to a lesser degree, between China and other markets as well.

Japan and Korea, in particular, are two of the most important destinations for Chinese tourists, as well as choice destinations for luxury good shoppers. But while prices in the US are on average 30 percent higher than Europe, the country continues to attract Chinese travellers and resellers.

Since March, some economic factors have shifted, favouring firms that have taken a “wait and see” approach. Market weakness in the US has led the Federal Reserve to postpone increasing lending rates, leading to a rapid and significant downward movement for the US dollar.

After reaching a high of 1.04 in March, the dollar in recent weeks lost almost 9 percent against the euro, reaching a low of 1.14 on May 18. Where the dollar will settle is uncertain, although the euro is not expected to strengthen significantly given the current expansionary monetary policy of the European Central Bank. Nonetheless the correction has been both rapid – and not insignificant.

There is another side of the equation that many firms have underestimated: the Chinese renminbi (RMB). The assumption that China’s currency will remain resolutely stable is one that has been questioned. China has immense assets at its disposal, but with a housing bubble, a slowing economy and whispers of increasing capital flight, absolute stability of its currency cannot be guaranteed. A devaluation of the RMB could have a tremendously negative impact on luxury firms, particularly those that that are already overextended in China.

Another key development, which may potentially change the dynamics for many luxury brands, was the recent announcement by China’s State Council, who declared a crackdown on grey market imports, ordering more transparent and consistent tax collection, while increasing seizures of counterfeit products.

The Council also requested a reduction in import duties by July in order to stimulate local demand which has been weak – although which products and how much of a reduction will apply has not yet been announced. In the meantime, brands like Chanel have imposed limits on purchases in yet another attempt to curb grey market selling.

But the bigger question is would a reduction in price in China stimulate local demand and deliver better performance from Chinese business units?

While grey market trading would certainly be far less attractive, it is unlikely that this alone will change the behaviour of a Chinese consumer’s penchant to shop abroad. Price is one aspect but there are other factors that drive purchasing decisions, such as service, trust, experience and perceived novelty.

Even with a 20 percent price hike in Europe or a 20 percent decrease in China, multiple factors still make it more attractive for Chinese consumers to purchase overseas. It is possible that the decision to adjust pricing might backfire, eroding the perceived value of the brand in the process. There is some indication of precisely that happening since Chanel’s price realignment.

China Luxury Advisors conducted a sentiment analysis in May across Chinese social media platforms to measure and observe the reaction of Chinese consumers to Chanel’s announcement. While about 40 percent of consumers spoke positively of Chanel's price decrease, close to 60 percent had a negative reaction towards the price adjustment.

Some welcomed the decision stating that they intended to buy quickly and would queue in stores, whereas others bemoaned that “(Chanel) shouldn’t forget (the example of) LV” and asked “Where’s the exclusivity?” Others worried that “lower prices will leave us overseas buyers with less profit.”

How international economic dynamics and Chinese policies evolve in the short to medium term will have a significant impact on the luxury industry. Currencies are notoriously prone to volatility, so basing strategy on currency fluctuations can prove to be risky at best. Brands that choose to “wait and see” are probably in the best position to be resilient.

Philip Guarino is a partner at China Luxury Advisors.

The views expressed in Op-Ed pieces are those of the author and do not necessarily reflect the views of The Business of Fashion.

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