Doing what was once unthinkable, luxury labels slash prices in China, some by over 50%

Hong Kong - Some luxury labels are discounting their products to an unprecedented degree in China, reflecting a growing panic over unsold inventory as local consumers pull back on spending.

Starting in June, Chinese shoppers can snap up a small beige, crocodile-patterned version of Balenciaga’s iconic Hourglass handbag for US$1,947 (S$2,630), or 35 per cent off, on the mainland’s dominant e-commerce platform, Alibaba Group Holding’s Tmall.

That price is lower than what is listed on the brand’s official websites globally and major luxury platforms including Farfetch.

Balenciaga – part of French luxury giant Kering – averaged a 40 per cent discount on sale items in three of the first four months of 2024, according to people familiar with the matter, who asked not to be identified discussing private data.

The brand has also more than doubled its number of discounted products on Tmall, accounting for more than 10 per cent of its inventory on the platform from January to April, the people said.

During the same period in 2023, Balenciaga discounted items only in January, and at an average of roughly 30 per cent, according to the people. It had no markdowns at all in the first four months of 2022, they said.

A similar trend can be seen for other labels. Capri Holdings’ Versace, LVMH’s Givenchy and Burberry Group have all slashed prices, some by more than half, on Tmall and other domestic platforms in June.

Versace’s average discount jumped from roughly 40 per cent at the start of 2023 to over 50 per cent in 2024, according to the people.

Versace and several other premium brands have also offered discounts for longer periods of time so far in 2024 than they did in 2023, the people said.

The number of products on sale shot up to the hundreds in the first four months from only a few in 2023, they added.

The price war would have been unthinkable just a few years ago for labels whose growth stems from an image of exclusivity and products that keep their value.

It is rare to see luxury brands, which usually try and clear stock out of sight in outlet malls or through private sales, put such deep discounts front and centre on a flagship platform.

“What I find surprising and frankly ill-advised is that these discounts are being offered on the most visible consumer touchpoint in the world, which is Tmall,” said Mr Jacques Roizen, managing director of China consulting at Digital Luxury Group.

It is “the equivalent of hosting a public sale on Fifth Avenue or the Champs-Elysees”.

Kering declined to comment, while Capri and LVMH did not respond to requests for comment. Burberry did not comment on the discounts.

The strategy underscores the predicament global fashion houses face in the mainland as an economic slowdown erodes household wealth.

While upscale labels are counting on China to boost revenue and improve performance, the country’s middle class – a pillar of the global luxury market – is growing increasingly frugal, holding out for sales or backing away altogether from major purchases.

Compounding some luxury brands’ pain are high return rates on Tmall, fuelled by the platform’s promotional campaigns allowing people who meet certain spending thresholds to obtain discounts – even if they later return some of their purchases.

That has led some shoppers to game the system, ordering expensive items just to secure rebates.

Meanwhile, labels at the highest end of the luxury market, including Hermes, Chanel and LVMH’s Louis Vuitton, appeared to have fared better.

They have done without discounts, limited e-commerce exposure and focused on cultivating high-net-worth clients, making them more immune to economic downturns.

Some brands, including Kering’s Gucci, Prada and sister brand Miu Miu, also refrain from offering public discounts on China’s e-commerce platforms, said the people.

While discounts might help clear inventory in the short term, frequent price cuts could make brands appear too accessible and drive away coveted VIP clients, said Mr Angelito Perez Tan, Jr, co-founder and chief executive of RTG Group Asia, whose businesses include a luxury consultancy.

Some high-end labels discount merchandise around events like Black Friday, but markdowns are usually lower than the current China sales, he said.

Online orders made up nearly half of China’s luxury revenue in 2023, according to consultancy Yaok Group, with Tmall capturing the majority of that spending.

Faltering demand from the Chinese market has already hurt luxury earnings.

Kering warned in April of a potential first-half profit drop of as much as 45 per cent, hurt by weak Gucci sales in China.

Burberry’s stock has more than halved in the past year off weak demand in China and the US.

Chanel cautioned that conditions, even at the higher end, are growing more challenging.

Japan’s weak yen is also contributing to slowing sales in China, as people flock there seeking out the lowest prices. BLOOMBERG