Once a bastion of big-ticket spending, China’s middle-class consumers are now proving to be a headache for luxury brands operating in the world’s second-largest economy. As the country grapples with an ongoing economic slowdown, these once-reliable shoppers are increasingly seeking discounts and exhibiting a worrying trend – returning purchases in droves.
During China’s mammoth Singles’ Day shopping festival last November, upscale labels like Ralph Lauren, Burberry, and Richemont’s Net-A-Porter experienced a surge in sales on Alibaba’s Tmall platform. However, the joy was short-lived, as brands saw up to 75% of that sales value vanish within days, as consumers rushed to return or cancel their purchases.
This unusually high rate of returns, far exceeding the industry norm of 20-30%, has persisted since China’s exit from its strict COVID-19 policies over a year ago.
This unusually high rate of returns, far exceeding the industry norm of 20-30%, has persisted since China’s exit from its strict COVID-19 policies over a year ago. The trend has sparked a reevaluation of how luxury brands approach the Chinese market, as the middle class – once the backbone of discretionary spending – now appears to be shifting away from pricier purchases.
The problem has only worsened in the first quarter of 2024, with Tmall return and cancellation rates for brands like Brunello Cucinelli, LVMH’s Marc Jacobs, Richemont’s Chloé, and others skyrocketing compared to the previous year. Platforms like Tmall have attempted to boost sales through more frequent promotions, but this has inadvertently encouraged consumers to game the system, ordering expensive items just to secure discounts and then returning them.
While the immediate financial impact of returns may be limited, as they don’t incur logistics or shipping costs, the trend has severely inflated initial sales figures, painting an overly rosy picture of luxury brands’ performance in China.
The weakening consumer sentiment has already taken a toll on some global luxury giants. LVMH reported slower sales growth in the first quarter, while Kering saw its market value plummet after warning of slumping China sales for its Gucci brand.
The high-end luxury segment, however, has remained relatively resilient, with brands like Hermès, Chanel, and Dior limiting their reliance on e-commerce channels and sales campaigns. Their “hard-to-get” strategy, which focuses on cultivating relationships with wealthier customers, has allowed them to weather the storm.
For the broader luxury industry, the rise of return-savvy consumers has underscored the need to refine their strategies in China. Brands are investing in more personalized experiences, concierge services, and private sales to build lasting connections with their most valuable clientele. As the luxury market in China navigates this challenging period, brands must strike a delicate balance between catering to the middle class and protecting their brand image and exclusivity.
