Rich Chinese go under the radar with designer goods

DALIAN, China -- Business is no longer as lucrative as it used to be for international fashion brands in China, due to such factors as the government's austerity drive and improved access to lower prices abroad.

     When Xi Jinping rose to the apex of the Chinese Communist Party in the autumn of 2012, he pledged to fight corruption and rein in lavish spending. This made it taboo for government officials and executives of state-owned corporations to stand out. The percentage of male customers in the market for designer brands thus declined from the peak of about 90% to around 50%.

     The buzzword in the Chinese fashion industry today is "stealth wealth": hiding one's affluence the way stealth bombers obscure themselves from radar. Consumers have started avoiding such easily recognized brands as Louis Vuitton and Gucci. Instead, it has become fashionable to own products that sport discreet logos but still offer a feeling of quality, such as Prada and Bottega Veneta.

     Chinese consumers started buying large numbers of luxury-brand goods around the time Beijing hosted the Summer Olympics in 2008. Chinese accounted for 1% of worldwide consumption of designer goods in 1995 but had jumped to 29% in 2013 -- the biggest slice of the pie, ahead of the 22% claimed by Americans.

     The designer goods market in mainland China amounted to 116 billion yuan ($19.1 billion) in 2013, according to U.S. consulting firm Bain & Co. It had expanded about 30% through 2011, only to have its growth slow to 7% in 2012 and 2% last year.

This change has sent shock waves across the industry. The number of luxury-brand shops opening in mainland China fell 37% to around 100 last year. Several stores were shuttered in the Bund tourist district of Shanghai, including those for Dolce & Gabbana and Patek Philippe.

There's no logo like no logo

Meanwhile, Bottega Veneta, whose popularity is growing as a logo-free brand, opened six shops in China, including Chongqing and Tianjin. And Gucci's local unit has been forced to change its design strategy, carrying more products with smaller logos.

     It is not that the Chinese have stopped buying designer brands, since more are doing so in Hong Kong and abroad. Overseas purchases of designer goods by Chinese grew 33% in 2013. Products can be bought overseas at discounts of more than 40% compared to their prices in China because of tariffs and exchange rates. Chinese consumers now have easy access to information on cheaper prices overseas through such social media services as Weibo, a local version of Twitter.

     At a Brooks Brothers store in Dalian, it is not unusual for men to walk in, try on suits and other clothing, jot down their sizes, and then leave without buying anything.

     "A shirt that costs 1,690 yuan here can be bought for 800 yuan in Hong Kong," a store clerk says with a resigned look. Some 67% of Chinese luxury shoppers who answered a Bain survey said they made purchases outside the mainland.

Some individuals have turned the price difference into business opportunities. A 27-year-old Chinese woman who runs a restaurant in Japan said when she announced on Weibo that she was going to check out the latest collection at a Chanel store in Tokyo, she immediately received purchase requests from friends and relatives back home.

     This woman charges from 2,000 yen ($19) to as much as 3,000 yen for her services. More importantly, she racks up rewards points from various brands -- and can exchange them for handbags as well as receive top VIP treatment at the shops.

     Several Internet businesses have cropped up in China that offer to buy designer brands abroad on behalf of customers. Six in 10 have used such services, according to a Bain questionnaire of about 1,400 people.

     The government's belt-tightening policy is expected to run at least until 2022, the end of Xi's term as Communist Party chief. Chinese customs duties of 20-40% on luxury goods are an important source of income, so they are unlikely to go down. Designer brands need to devise innovative means of grabbing a greater share of a market that has suddenly lost steam.