"Chinese radio and television stations are to ban advertisements for expensive gifts such as watches, rare stamps and gold coins, as part of a push by the government to crack down on extravagance and waste."
China's coming campaign of frugality was no secret. But that announcement from China's state-run media sealed the deal, and maybe the purse strings, of China's state-run spending class.
Demonstrating just how powerful a spending segment the Chinese cadre is, shares of Burberry and other luxury brands immediately dropped. Meanwhile, shares of high-end Chinese liquor brands Kweichow Moutai and Wuliangye Yibin — both of which routinely dominate China's CCTV ad buys and are a staple of state dinners — have recently dropped. Last spring, the CCP also declared that all state-owned vehicles must be domestic and carry price tags under about $30,000. That move saw brands like Audi sigh and grimace. (In 2009, a full 20 percent of Audi's China revenue was from sales to state officials.)
Follow the Chinese state press and it's obvious there is a campaign on to send a message, even if it is just for show. Every day features news of an official exposed for owning 192 properties, repatriated after fleeing abroad with bribes, or photographed at work with luxury accessories.
As part of a multi-pronged propaganda attack, op-eds, such a recent article in China Daily, declare "luxury brands in China are full of uncertainty." Reinforcing this at the topmost level is Party leader Xi Jingping, who, during a recent tour of Guangdong province, was repeatedly photographed waving from the window of a minibus and not a luxury sedan. Xi is embracing an image of spending sobriety in a kind of frugality trickle down strategy.
The government's thrift drive has recruited private citizens as well. Star actor and performer Zhao Benshan, a regular on CCTV's annual Spring Festival (Chinese New Year) gala program announced that this year, for his last ever, he would perform for “零片酬” or "no paycheck."
Much of this is being driven by an eagle-eyed online community that is faster than ever to expose graft, including state-money being spent on luxury goods. A new reality "watch brother" discovered after Weibo users pointed out numerous photos of the Shanxi official wearing Rolex and Vacheron Constantin wrist watches. Last year, Weibo users created a kind of sartorial "CCP Look Book" of leaders arriving in Beijing with luxury bags and accessories. The practice has only ballooned and forced action.
"From Beijing to Geneva to Paris, a pall hangs over the men and women of fine linens and exquisite timepieces," wrote The New Yorker's Evan Osnos about the new official austerity for officials push.
Do not fret — that pall will be lifted with money. Audi's China president recently predicted up to 8 percent growth in car sales in 2013, an increase from 7.1 percent in 2012. And yes, the luxury auto segment will still grow faster than other segments. And Moutai, the $300-a-bottle Chinese liquor that could probably fuel an Audi? While the brand saw 73 percent growth in 2011, it still saw its 2012 net profit up 50 percent to RMB13.1 billion ($2.1 billion).
As a recent McKinsky China report observed, even with the frugality drive, "the nation’s share of global luxury spending will continue to soar to more than one-third by 2015" and that any current lull in corporate gifting "may well prove a temporary phenomenon related to the transition of the nation’s leadership." McKinsy's report further forewarned of a China luxury goods market used to 16 to 20 percent per year growth crashing to an "annual rate in the 12% to 16% range between now and 2015."
Meanwhile, on the surface, China's new frugality campaign may seem to clash with its recent drive to transition to a consumer economy — a goal Xi Jingping has said is a necessary transition, and one many have noted flies directly in the face of an existing culture of "savers."
But revised statistics show that in 2011, 55.5 percent of economic growth in China came from consumers (as opposed to investment such as infrastructure construction). The kicker is, that consumption figure bound together both private and state consumption, e.g. Mr. Ma's spending on Lay's potato chips for his grandson was included with Cadre Lin's purchase of a new Audi A4.
While state spending on luxury may be strangled for a short time, a recent ocean of data on Chinese consumers should provide ample other avenues for luxury brands top pursue.
First, the ostentatiousness of China's richest cities like Beijing and Shanghai is now being embraced by the lower level. Luxury brand profits in the coming years will rely on growth in these tier 3 and even 4 cities. (As Brandchannel noted, attitudes can be different "down" there.)
Also, Chinese luxury consumers are also increasingly turning to niche and unbranded high-end products. Others are developing different definitions of luxury, turning away from watches and handbags to "lifestyle" luxuries like top-of-the-top-shelf whisky. Case in point, the "road yacht" of Beijing's elite, the Buick GL8 minivan. GM saw a 28 percent increase in GL8 sales in China in 2011 where the model is very profitable for the automaker. A minivan a luxury item? The sticker on a GL8 is over $60,000, a little more than the price of an Audi A6. Johnnie Walker's new Johnnie Walker House in China has a 200 patron cap and exclusive access to RMB22,800 (US$3,700) bottles. Personalized blends available for about $130,000.
The truth is that this turn to niche luxury had, in part, already contributed to a Burberry stock drop back in October — well before the frugality drive. Even as Burberry sales dropped 18 percent, Bottega Veneta, a brand which boasts no identifying logo, saw sales grow 62.4 percent.
One huge advantage of such unbranded luxury goods and luxury consumables is that they are infinitely harder for pesky Weibo users to spot and expose. But there is more to it than that; from the 2012 McKinsky report:
"Asked whether they prefer luxury items that are 'low-key and understated,' two-thirds of the respondents to our 2012 survey agreed or strongly agreed, up from one half two years ago. The share of respondents agreeing or strongly agreeing that 'showing off luxury goods is in bad taste' was 51% – the same as Japan, and a big jump from the 37% who said so in 2010."
Finally, while the general consensus is that "this too shall pass," there is one group that might be hit hard by the new frugality: mistresses.
Men account for 55 percent of all of China's luxury purchases, but that does not mean those purchases are for themselves. Nathan Washburn, assistant professor at Thunderbird School of Global Management, has argued that the success of Apple's iPhone in China is partly because they "make great gifts for rich young men to give to their girlfriends." In an August 2012 article in the Chinese edition of The New York Times, a socialite proposed a fashion magazine devoted to mistresses, a.k.a. "the little third," noting: "If a fashion magazine cannot win over the little third, it will hardly have any readers in China at all. However, not one single fashion magazine would openly admit that its main target audience is the little third group."
Officials who lavish luxury goods on mistresses are in a particularly brutal crossfire right now. As the party punishes a few extravagantly spending members to sate the wolves, it is also focusing on lascivious behavior. China has seen a number of high-profile, sordid tales lately of officials involved in sex scandals. As Forbes notes, of those outed for corruption since the new drive started in earnest in November, almost 50 percent have been punished for sex scandals.
As for the CCTV ad ban, it may be misplaced: a recent Microsoft survey noted that 92 percent of Chinese consumers learn about luxury goods online.