China's dazzling luxury market dimmed by anti-graft drive
Strict government regulations to ban officials' consumption of luxury items are dampening the demand for luxury goods and changing patterns of consumer consumption in China.
Statistics from the Federation of the Swiss Watch Industry show that Swiss watch exports to the Chinese mainland dropped 27.5 per cent year-on-year in September.
China's demand had been weakening through the year, but September was the worst, followed by another 12.3-per-cent fall in October, noted Ren Guoqiang, a partner at Roland Berger Strategy Consultants in China, a consulting firm based in Germany.
Ren said government officials, who used to be the main recipients of luxury watches as gifts, are now reluctant to fall foul of Beijing's anti-graft climate.
Several government officials who were noticed by the public to own luxury watches were investigated for corruption last year.
Officials are cautious now about receiving gifts, Ren said.
"It hurts the luxury watch business a lot," since more than 25 per cent of the luxury items sold on the Chinese mainland were used as gifts.
The government has made a new regulation banning government officials from using public funds to buy luxury items. The regulation was made in July and came into effect in October.
The regulation specifically restricts buying luxury items as gifts, especially products such as men's watches and garments, said Bruno Lannes, a partner of Bain & Co, a consultancy based in the United States.
Bain & Co shows that the yearly sale of luxury watches on the mainland rose by 40 per cent in 2011 before suddenly falling 5 per cent last year.
Domestic distributors were also hit.
"The ban will have an adverse effect on our watch sales," said Sun Xuguang, the operations manager at Sparkle Roll Group, a Hong Kong-listed luxury dealer of Swiss independent watch brands, including Parmigiani and DeWitt.
The recent ban on public money for luxury goods has had an impact not only on sales, but also on consumer trends.
Buying gifts, which will remain an important part of luxury spending, is moving away from items with logos due to the extensive exposure on social media, said Lannes.
Meanwhile, low-key luxury products, or those without obvious logos, are likely to get more popular, such as tailor-made suits and shirts, said Zhou Ting, director of Fortune Character Research Centre.
But the luxury watch market has received a boost from wealthy private entrepreneurs, who are likely to be the main consumers in the future. The number of China's multimillionaires surpassed 1 million in 2011, according to the China Rich List released by Hurun Report.
"The multimillionaires can support the luxury watch market," Zhou said.