Observers are wondering if and how Chinese President Xi Jinping’s anti-corruption and anti-extravagance campaign could  damage luxury brands in China.

Communist Party General Secretary and Chinese President Xi Jinping told Beijing media in June of his quest for a ‘thorough clean-up’ of ‘four forms of decadence: formalism, bureaucratism, hedonism and extravagance,’ BBC News reported. This was the second wave of the government’s attempt at driving out extravagance and corruption in China since Mr Xi took over as party leader in November 2012.

Advertising ban

In a country where corporate entertainments, gift-giving and ostentatious displays of wealth are the order of the day in the fast-moving business world, such a movement has taken its toll on luxury brands. The policy aims to restrict using luxury goods for bribery purposes and corruption in the political and corporate environments. Back in February, Xi Jinping announced a ban on radio and TV adverts for luxury gifts, claiming that it promotes incorrect values and encourages bribery and corruption, BBC News reported.

Banquets and baijiu

The banqueting industry in China has experienced a dramatic slump in recent months where businesses are cutting back on luxury spending for entertaining clients. A survey by market research company Data Driven Marketing Asia, as reported by Jing Daily, has found that 42 per cent of 100 companies polled stated that their decreased luxury spending for corporate entertainment purposes was a direct result of new government policies. The report also found luxury Chinese liquor baijiu, the hugely expensive drink and gift of choice at many an official banquet, has been hit the hardest during the government’s crackdown, as a brand that relies on ‘corporate entertainment and gifting’ for 70 per cent of all profits consequently has to turn to foreign markets to survive.

Corporate gift-giving

Rupert Hoogewerf, founder of Hurun Report, told Reuters: ‘with the current anti-corruption drive, officials can no longer receive blatantly expensive products, so we're seeing a trend towards less-expensive giving.’  According to the South China Morning Post, luxury fashion brand Burberry openly spoke out about slowing 2012 sales in China, with Chief Financial Officer Stacy Cartwright revealing the importance of the role that Chinese gift-giving culture plays in Burberry’s sales.

In contrast, CEO of luxury watchmakers Hermès, Patrick Thomas, is not perturbed by government policy in the long run, believing that the anti-corruption campaign will lose steam in the coming months and see sales recover toward the end of the year.  A new report by the Economist Intelligence Unit (EIU), entitled 'Rich Pickings', finds corporate gift-giving to make up 25 per cent of China’s luxury goods market, reports Bangkok Post. Despite this huge number, the report suggests it is not all doom and gloom for luxury brands in China, as its forecast of rapid growth in Asian household incomes could ultimately thwart the government’s attempts to decelerate luxury spending. China is unique in the sense that, as opposed to the rest of the world where women are the biggest buyers of luxury goods, the principal buyers are evenly split between men and women, the report also finds.

Counterfeiting – a threat?

Government policies are not the only challenges that luxury brands in China have to face, as counterfeiting issues still haunt many brands, particularly fashion houses and watches, as they face a frightening statistic from a UN report – approximately 70 per cent of all counterfeit products seized around the world come from China. The EIU report, however, does not see counterfeiting as a huge threat to sales in the luxury brand market, asserting that counterfeit consumers are not the same buyers that luxury brands target, as those who buy the fakes generally cannot afford the originals.  

Consumer tastes

In spite of the effects that government policy is having on sales in China, there is an argument for the changing consumer tastes in the country bearing more of the responsibility for this slowdown in sales. A Business of Fashion article claims that the anti-corruption campaign is in effect ‘masking the real causes of the luxury slowdown,’ as consumer tastes in the luxury market are generally shifting towards a younger generation who ‘tend to be less enthusiastic about overexposed, heavily logo-ed products,’ opt for less flamboyant displays of wealth and choose more low-key brands.