China Is Cutting Back on Foreign Luxury Goods -- Here's Why

TAIPEI, Taiwan (TheStreet) -- China's crackdown on government corruption is taking a toll on sales of foreign luxury goods.

The effort to control spending of public money on fancy cars, name-brand handbags and expensive liquor got serious around the end of 2012. A government discipline commission probed or punished more than 182,000 people over corruption in 2013 alone, business consultancy Global Risk Insights says.

As a result, officials are allocating less public money to blow-out banquets and other signs of ostentatious wealth such as the goodies picked up during junkets to places like Hong Kong, which also are increasingly becoming a no-no.

Luxury spending grew only 2% in 2013, down from 7% in 2012, and it declined 1% last year, according to Boston-based management consulting firm Bain & Co.

But the antigraft drive is just one factor pressuring luxury sales. Consumer spending has lagged as Chinese economic growth slows to around 7%, and the most eager shoppers are emerging in secondary cities with smaller wealth concentrations compared to old hot spots such as Beijing and Shanghai.

Common consumers prefer "emerging" brands, intimate brand-customer relations and products without import tariffs built into their prices, said Matthieu David-Experton, founder of market research firm Daxue Consulting in Beijing and Shanghai.

"It's true that the anticorruption drive in China has hit certain luxury items quite hard, especially wines, spirits, watches, jewelry and handbags," David-Experton said. "But even though the drop in luxury goods sales from anticorruption was dramatic, it's not the driving force behind the steady decline of China's luxury brands."

Liquor and apparel label LVMH Moet-Hennessy Louis Vuitton (LVMUY) and cosmetics maker Estee Lauder (EL) conceded declining sales in China last year, though they did not point to the antigraft campaign as a cause.

Paris-based LVMH said in a February press statement that sales of wine and spirits had been "penalized" by a "continued destocking by distributors" of cognac in China. In its own media statement the same month, Estee Lauder noted lower spending and higher advertising costs in China. Neither vendor would comment for this report.

Multinational luxury sellers are beginning to figure out how to earn money from a less corrupt and more complex marketplace, analysts say. Some are delving into the second-tier cities. Others are holding down prices or focusing on useful product features rather than bling value.

"The 'pool' of luxury buyers in China has dramatically grown with the dispersal of wealth," said James Berkeley, managing director of management advisory service Ellice Consulting in London.

Some high-end stuff shows no dents in sales, as their brands are long-standing household names that represent durability or utility as well as status.

Automaker BMW (BAMXF) called China one of its four top sales regions in 2014. Market consultancy Digital Luxury Group rated BMW China's No. 2 "most searched for" luxury brand in 2013, behind its European peer Audi (AUDVF).

Daimler BMW and Audi also lowered parts prices in antitrust negotiations, a "wise" move to win business, Global Risk Insights says.

Apple's (AAPL) pricey iPhone 6 and 6 Plus are hardly retreating from China, either. They helped give Apple a 25.4% share of the market in urban China from November through January, up 4.5 percentage points over the same period a year earlier, according to market research firm Kantar Worldpanel ComTech. Chinese customers like the screen sizes, and Apple timed the release to avoid tough competition.

"As always, the fact that the iPhone 6 comes with a bunch of cutting-edge features -- whether the user really takes advantage of them or not -- also helps elevate its standing as a status symbol," said Mark Natkin, managing director of tech research firm Marbridge Consulting in Beijing.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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