Wealthy Chinese shift their luxury spending overseas

Wealthy Chinese people are buying more luxury goods — but not at home.

A report from the Beijing-based World Luxury Association found that luxury spending in China last month fell to its lowest level in five years. Affluent Chinese spent $830 million on luxury goods in China — half of what they spent last year. The month included the important Chinese New Year holiday, which is critical for Chinese tourism and spending.

The report predicts the Chinese luxury market is slowing from double-digit growth to single-digit growth.

But that doesn't mean the Chinese weren't spending at all. While spending on luxury at home was down, the Chinese spent big on luxury abroad.

They spent $8.5 billion on luxury goods overseas during the month — an 18 percent gain over last year. The report said the Chinese accounted for half of all the global luxury products consumed during the period, and they remain far and away the largest luxury consumers in the world.

Such a huge share of the market may not be sustainable over the longer term, of course. Most luxury experts say Chinese consumers will account for about a third of the global market by 2015.

And the overseas spending will drive much of that growth. As we mentioned earlier this month, the Chinese are buying more luxury goods overseas primarily because they're cheaper. The Chinese are also traveling more, and they prefer buying luxury brands overseas because there is smaller likelihood of fakes (presumably they're buying more on Fifth Avenue and the Champs Elysees than along Manhattan's knock-off row, on Canal Street.)

The high costs of luxury goods in China are due mainly to stiff government taxes, which can range between 20 percent and 70 percent on some luxury goods. A designer bag can cost 40 percent less in Paris, for instance, than in Shanghai. While the government may be considering a reduction in those taxes, a report from McKinsey & Co. — called "Luxury Without Borders" — predicts that the Chinese appetite for luxury abroad will continue.

"The price gap is likely to remain substantial in the next two to three years," the report said, "and assuming it does, Chinese spending on luxury goods will grow about as fast overseas as it will domestically."

McKinsey said the migration of Chinese luxury spending makes it even more important for luxury retailers to maintain a consistent image in China and abroad.

Marc-Andre Kamel, a retail and luxury expert at Bain & Co. said luxury companies are also installing special payment systems for Chinese consumers and adding more salespeople who speak Mandarin.

He cautioned, however, that the big flagship luxury stores in Paris and other Western cities need to be careful of the long lines and crowd problems associated with an influx of Chinese tourists.

"They need to be mindful of their other customers, as well," he said.

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