Equities

Luxury Brands Face 75% Returns in China, Hermes Resilient

Luxury brands face up to 75% return rates on China's Tmall, challenging sales strategies amid economic slowdown.

By Bill Bullington

4/17, 03:04 EDT
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Key Takeaway

  • Luxury brands on Alibaba's Tmall, including Ralph Lauren and Burberry, face up to 75% return rates post-China's Covid Zero policy shift.
  • High return rates challenge sales strategies, with Brunello Cucinelli experiencing a jump to 69% returns in Q1.
  • Consumer behavior exploiting promotions and economic slowdown impacts luxury sales; brands like Hermes and Chanel remain resilient by targeting wealthier customers.

Rising Return Rates Challenge Luxury Brands

During China's largest shopping festival last November, luxury brands like Ralph Lauren, Burberry, and Net-A-Porter experienced significant sales on Alibaba's Tmall platform. However, an unexpected trend emerged as up to 75% of these sales evaporated due to high rates of returns and cancellations, far exceeding the global luxury industry's normal 20% to 30% return rate. This phenomenon has persisted since China moved away from its Covid Zero policy, reflecting a shift in consumer behavior amidst the country's economic slowdown. Middle-class consumers, once the mainstay of luxury spending, are now seeking discounts or avoiding expensive purchases, impacting the sales strategies of luxury brands in China.

Tmall's Luxury Dilemma

The first quarter of the year saw a notable increase in return and cancellation rates for several luxury brands on Tmall. Brunello Cucinelli's return rate jumped to 69% from 59% a year earlier, while Marc Jacobs and other luxury labels also saw significant increases. Tmall, a major platform for luxury brands in China, faces challenges as these high return rates could undermine efforts to boost sales through promotions. Tmall responded to the claims about return rates, stating that the figures were inaccurate and not reflective of the actual performance of brands on their platform. Despite this, the trend of high returns is causing luxury brands to re-evaluate their strategies in the Chinese market.

Consumer Behavior and Brand Strategies

The increase in returns is partly driven by consumers exploiting promotional campaigns, ordering expensive items to secure discounts, and then returning some purchases. This behavior, coupled with a weakening consumer sentiment, has affected luxury sales growth, as seen in LVMH's slower sales growth in the first quarter. High-end brands like Hermes, Chanel, and Dior, which have limited their reliance on e-commerce and sales campaigns, have not been as affected by the returns issue. These brands maintain a strategy focused on cultivating wealthier customers, which has kept their sales resilient amid China's economic slowdown.

Street Views

  • Mark Tanner, China Skinny (Neutral on the luxury market in China):

    "I can imagine there are plenty of people in the luxury category taking out and showing off a luxury item for an evening, earning the status, and then returning it at no cost... There are definitely signs of luxury softening, which I am sure is driving the opportunists to get a free showing."

  • Jacques Roizen, Digital Luxury Group (Neutral on high-end labels' strategy in China):

    "The returns issue has not affected labels at the highest end, like Hermes International SCA, Chanel and Dior... This hard-to-get strategy, which focuses on cultivating wealthier customers, has meant sales have remained resilient amid China’s slowdown."

  • Angelito Perez Tan Jr., RTG Group Asia (Neutral on premium brands' strategies in China):

    "The increase in product returns highlights the imperative for luxury brands to refine their strategies for the Chinese market."

Management Quotes

  • Tmall Luxury Pavilion spokesperson:

    "The unverified figures provided by Bloomberg are materially off base and at odds with actual brand operational performances on our platform. Global luxury brands have continued to launch and invest in flagship stores on Tmall as a cornerstone of their China market strategy."

  • Brunello Cucinelli spokesperson:

    "The group had no visibility into the returns and cancellations data, which are subject to commercial dynamics, and statistics on a single quarterly basis are not representative."