Ripples in Hong Kong's Luxury Goods Market

Hong Kong's luxury goods market got a shock when rumors started earlier this year that LVMH - the ne plus ultra of European luxury brands - was backing away from taking up a big space formerly occupied by an entire movie theatre in the city's upscale Times Square shopping mall in Causeway Bay.

Apple Daily, the Chinese-language broadsheet, earlier reported that LVMH, the parent company of the Louis Vuitton luxury brand, had taken the space at a price of HK$20 million (US$2.58 million) a month.

It is unclear exactly what happened. The luxury jewellery brand Tiffany & Co. opened its doors to customers in the space earlier this month, taking 3,800 square feet of the rumored Louis Vuitton shopfront. Chanel is expected to take another portion of the retail space. Whether Louis Vuitton will sweep up the remaining store front is unknown.

The developments have led to speculation that luxury brands may be losing their footing among the hordes of Chinese tourists pouring into the territory - 27 million in a city of 7.5 million in 2012 - and whether Hong Kong will remain China's go-to shopping haven. When the rumors surfaced about Louis Vuitton's bid to rent the entire ground-level area formerly occupied by the movie theatre in one of Hong Kong's leading shopping hubs, it came as no surprise. Soaring rents have continue to push out smaller, local businesses, paving the way for luxury brands and irritating the city's residents, who have seen their favourite restaurants and shops fall to the wrecker's ball.

For industry analysts though, this was not unanticipated.

"What we have seen is very high rent that's not necessarily supported by retail sales, and instead comes out of a marketing budget," said Andrew Lawrence, head of Hong Kong and China property research for CIMB Securities. "[Luxury brands] want to be in prime locations, so clearly they are clearly going to be paying relatively high rents," he added.

This retail property move has led to speculation that luxury brands are fading in the Chinese market and, coupled with the mainland's anti-luxury measures, could affect Hong Kong as China's shopping haven. The installation of Chinese President Xi Jinping has led to a harsh crackdown on partying and purchases by mid-level Communist Party satraps, so severe in fact that it has affected the stock price of such longtime standards as Maotai liquor and other luxury items in China.

The Communist Party has disciplined 2,290 officials so far this year, according to state media, causing the luxury items to disappear from around necks, wrists and waists, among other places. But while trends may be changing and could affect individual businesses, Hong Kong remains an important market for mainland consumers. The concerns over the Louis Vuitton property notwithstanding, it appears they continue to regard the territory as a shopping mecca.

The fact is that actually mainlander values of luxury are evolving, perhaps away from ostentatious demonstrations of flashy wealth. According to research conducted by the Digital Luxury Group on China's luxury market, Chanel has overtaken Louis Vuitton as the most sought-after high fashion brand. This seemingly trivial fact speaks volumes about consumer trends in China.

While Chanel is celebrated for bringing simple sophistication to its designs, Louis Vuitton is famous for plastering its iconic monogram logo on fashion and leather goods alike. The key difference in the two brands suggests that Chinese consumers are beginning to develop more sophisticated tastes and are opting for more subdued looks.

This is predominately driven by "tenured shoppers." According to The McKinsey Chinese Luxury Consumer Survey, published in December 2012, Chinese shoppers who began purchasing luxury goods more than 10 years ago are more inclined to look for simpler designs.

"Chinese luxury consumers are increasingly looking for less flashy and more understated products," the report said. Sixty-six percent of respondents said that they preferred "low-key" products and 51 percent said that they "feel that showing off luxury goods is in bad taste."

However, due consideration must be given to the newly emerged luxury consumers. A report by Fung Business Intelligence Center, the research branch of the Hong Kong-based Fung Group, agreed luxury values have changed in China. However, they are quick to argue that this doesn't mean that the allure of flashy luxury brands is faltering.

China is developing. With that comes the rising middle class, in particular in smaller cities. "Some consumers in lower-tier cities may still prefer brands with conspicuous and easily recognized logos. These consumers may have just reached the income level where they can afford luxury goods and would like show off their newly found social status," the Fung Group report said.

For those who do crave luxury goods, Hong Kong remains an ideal market for conspicuous and inconspicuous products alike. According to a report by KPMG, "Hong Kong plays a vital role as a window to the world and a sophisticated market for the Chinese consumers from the Mainland."

Europe is a growing luxury goods market for mainland consumers, ranking second as the choice for luxury shopping, but it is unlikely that Hong Kong will be pushed off its perch any time soon. Alongside the geographical perks making it a prime shopping destination, the city is also abundant in both choice and quantity.

Major fashion houses have shops scattered across the city. Louis Vuitton already has seven of its own stores in Hong Kong. Chanel has eight. Opening one less shop is unlikely to affect Louis Vuitton's business dramatically, especially when a steady flow of customers flock to the city for its goods. It is also not an unprecedented move.

"There seems to be a period of consolidation rather than expansion among luxury retailers," Lawrence told Asia Sentinel. "What we have seen is something of a slowdown in retail sales, particularly in the luxury end of the market - I suspect that may have weighed on [LVMH's] decision to expand."

Lawrence's analysis reflects other recent moves by LVMH. At the group's annual results presentation earlier this year, CEO of LVMH Bernard Arnault said: "The group's strategy now is to limit store openings." The focus will shift from opening new boutiques to expanding existing ones and offering customers a more personal relationship and service, Reuters reported. This move is to prevent Louis Vuitton from becoming too "commonplace" in China.

"Fashion can dictate which brands are likely to expand," Lawrence said. "If we are seeing some shifting amongst brands, the up and coming brands are more likely to be the ones that expand."

That said, whether big fashion houses choose to expand or consolidate and regardless of the changing values towards luxury, Hong Kong will remain the shopping hub for mainlanders. The point remains that Hong Kong offers not only a variety of products but also a variety of brands tailored to fit the desires of these wealthy customers.