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posted on 24 March 2015

The Queen of Luxury Cheapens Herself in China's Mainland Market

Written by , GEI Associate

Based on the latest news, Chanel, the world leading well-known luxury brand, decided to cut prices by around 20% in the China mainland market and raise prices by same range in European markets starting April 8. As a top luxury brand which always bases its marketing strategy on higher price to establish "nobility", this decision will doubtless bring about reform in Chinese luxury market.

As we all know, high pricing is always a business strategy for luxury brands to maintain their "noble" status in consuming markets. Thus maintaining high prices and even raising prices periodically are often the best choice for luxury brands to compete in global markets and lead a "misconception" of value maintenance to their clients.

Chanel, as the queen of luxury, defines its target consumers as rich people and nobility at all times, and raised prices by about 15% in Chinese market over the past five years. Why would the company make such decision to cheapen itself in China now?

There seem to be three main reasons likely.

  • First, improve Chinese market exploitation. The price of Chanel products in China is higher than that in European markets due to tariff and some other factors, thus more and more Chinese customers prefer to travel abroad to purchase luxury products. Although it seems that the price gap motivates European tourism, it impedes the company's development of the international market. According to relevant statistics, only 30% of Chinese customers purchase luxury products in the Chinese domestic market. Therefore, such price adjustment will bring significant promotion for Chanel to exploit the Chinese domestic market.
  • Second, control the effect of Euro depreciation. In the past year, the Euro depreciated continuously against Chinese yuan, which makes the price of luxury products in original factory to be cheaper and cheaper in yuan terms. Together with the original price gap, Euro depreciation further damages Chinese domestic luxury market making overseas purchases even more attractive. Thus the price loweriing strategy can also effectively control the effect of exchange rate.
  • Third, fight against purchasing agents. During past several years, with gradually larger price difference in various areas, more and more overseas purchasing agents created and developed their business, which brings negative impacts to both European customers and development of flagship stores abroad. Through the price adjustment, pricing gap between Chinese and European market narrows to only 5%, which effectively prevents the expansion of the purchasing agency market, and will bring more customers to enjoy the service in domestic boutiques.

Many economists predict that Chanel, as a leading brand in luxury market, may lead a tide of price reductions for European goods in the Chinese market. This will bring positive effects for stimulating China's domestic market and leading luxury consumption to go back to China. Therefore, this business strategy seems to be a win-win for both enterprise benefits and the Chinese economy.

Luxury companies are able to reduce their prices because they have enough profit space in pricing. Chinese customers will be able to benefit from more reasonable prices for luxury products, but only if they can get rid of misconceptions relating to conspicuous and symbolic consumption (snob appeal).

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