Luxury brand margins higher in China

20 February 2013

BEIJING: Global luxury goods retailers are making "scary" margins on the Chinese mainland by selling goods at high prices by international standards, an industry expert has claimed.

Speaking in a recent CCTV report, Lu Xiaoming, former head of the China operations of Montblanc, the pen and jewllery maker, said: "The profits [luxury brands] are making in the China market will scare you to death."

The same programme, as reported in the South China Morning Post, found huge "unaccounted" mark ups on most products even after allowing for China's high luxury goods taxes.

A Burberry scarf, for example, cost 87% more in China than in the UK. After factoring in China's 25% customs duty and 15% value-added tax, there remained a gap of 1,000 yuan.

The report concluded that rich Chinese consumers are ready to pay high prices, meaning that brands are therefore setting their price points higher.

"The pricing strategies adopted by these brands reflect that they have already determined that purchasing power [for luxury goods] will be higher here in this emerging market than Europe and the US," said Lu.

In December 2012, a Bain report suggested that the high prices were one reason that 60% of luxury goods purchases were made overseas.

Warc Trends Snapshot from last year noted that Patek Philippe, which produces 40,000 timepieces a year, had capped the number of watches sold to Chinese tourists in Paris to one per passport in order to ensure it could continue to supply its other customers.

But price is only one of the factors involved. Italy's Bottega Veneta, the leather goods specialist, plans to invest as much in new shops in Western Europe as in emerging countries in the coming years.

"I am convinced that consumers from emerging markets will buy there (in emerging markets) if they see that the brand is well positioned in Europe," chief executive Marco Bizzarri told Reuters.

Data sourced from South China Morning Post/Reuters/Warc; additional content by Warc staff