August 14, 2019 / 1:54 PM / 2 months ago

Breakingviews - Western luxury brands’ China dilemma will worsen

Shopping windows of Italian luxury brand Versace are seen outside a shopping mall in Xiamen, Fujian province, China July 6, 2018. Picture taken July 6, 2018.

By George Hay and Karen Kwok

LONDON (Reuters Breakingviews) - Western luxury is binge-eating humble pie. In the last few days, storied brands - including Swarovski, Versace and Givenchy - have submitted grovelling apologies for offending Chinese sensibilities. With Hong Kong protests against the mainland getting worse, it’s the thin end of a potentially very awkward wedge.

The brands’ decision to bow down to Beijing will be noted by Hong Kong citizens sympathetic to the protesters. But the humility is hardly surprising. Economic reality is a powerful incentive. China accounted for 33% of all luxury goods sold globally last year, according to Bain, and 2018 was the second consecutive year in which the domestic market grew by 20%. Asia provided a third of Versace’s $207 million revenue in the first quarter, and Greater China represented 22% of Coach’s global sales.

Also, the brands got their facts wrong. Swarovski’s website and products by the likes of Givenchy, Coach and Versace have implicitly represented Hong Kong as a country. Foreign executives based there may feel like they live in a different country, and many residents may not want their system to merge with China’s, but Hong Kong has been a special administrative region of the People’s Republic for decades. The political mislabelling may not be quite as insulting as Dolce & Gabbana’s crass advertising campaign last year that featured a Chinese woman struggling to eat pizza with chopsticks. Still, domestic politicians and social media have reason to cry foul.

So far, so easy. But what if Beijing acts on its thinly veiled threats to stifle Hong Kong’s protests with military force? Blood on the streets would shock the growing band of investors who are guided by environmental, social and governance standards. Luxury is especially exposed to pressure. It represents foreign goods which bring no prized technology, obvious targets for renewed nationalism. Western bosses could have to choose between virtuously condemning human rights abuses and profit-harming boycotts proposed by Chinese stakeholders on huge social media networks like Weibo and WeChat. Dolce & Gabbana’s brand is struggling to recover from last year’s run-in with national pride. Even gorging on humble pie may still leave luxury peers hungry for profits.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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