China’s central television recently drew online backlash for criticizing Starbucks for charging higher prices in its Beijing stores compared with those in other international cities such as London, Chicago, and Mumbai. This latest episode of public debate over a foreign company’s practices shows the complicated business environment foreign companies operating in China face today.
As the US-China Business Council noted in its latest China Business Environment Survey Results, slowing economic growth, rising costs, competition with Chinese companies, intercultural property rights enforcement, and uneven enforcement of law are among the top ten challenges likely to deflate corporate optimism toward the Chinese market. We believe four of these challenges, in particular, frustrate luxury brands doing business in China.
Intellectual property issues. For luxury brands, brand awareness is crucial. However, intellectual property issues in China have become a serious problem for luxury brands in categories ranging from fashion accessories to fine wine and spirits. The better known the brand, the higher the chance it will be counterfeited. Take the French luxury label Louis Vuitton for example, replica Louis Vuitton handbags, which are widely carried by China’s young people who can not afford an authentic one, are tarnishing the brand’s image and exclusivity. China’s largest e-commerce firm, Alibaba, is looking to put a stop to the sale of counterfeit luxury goods in China. Recently Alibaba announced a partnership with Louis Vuitton. Under the agreement, Alibaba-owned Taobao Marketplace will take down suspected counterfeit goods and implement preventive measures. A good way for luxury brands to avoid the negative impact of counterfeiting is to possess registered IP rights.
High costs. Chinese consumers prefer to buy luxury goods overseas due to the steep import duties imposed on luxury goods in China. Luxury goods sold in China are generally priced 30 to 40 percent higher than abroad. For instance, the luxury British car maker Rolls-Royce’s Ghost sedan costs $715,000 in China, while a similar vehicle in the U.S. is priced at $256,000. To make higher prices more palatable, many luxury brands offer high-end services to appeal to customers. However, the after-sale services offered by luxury brands in China still lag. Chinese consumers have become more sophisticated and their expectations have risen accordingly.
Human resources. Customer service is inextricably linked to brand image. Yet, rising wages due to shortage of good talent is leading to intense competition among luxury brands in China. This is especially the case for luxury brands in the lower-tiered cities. Compare to Beijing, Shanghai, or Shenzhen, it is harder to recruit qualified and skilled staff in second and third-tier cities. Furthermore, training an employee in a less developed city is costly.
Protectionism. Foreign companies often are held to different standard and regulation by the government than their domestic competitors. Luxury brands have been targeted by Chinese media for treating Chinese consumers unfairly in pricing and services compared to the brands’ consumers in western countries. For example, the recent CCTV report took a medium-cup latte sold by Starbucks in different cities and questioned why prices are higher in China given that the cost of making this cup of latte is not any higher than, say, in the U.S. An article in China Daily early this year urged luxury brands to focus more on their poor customer services given a rapidly changing consumer and social environment.
image credit: chris