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Luxury brands like Marc Jacobs, Burberry, and Balenciaga have been offering big discounts in China to try to reel in customers following a drop in sales figures.
This week, Hugo Boss, Burberry, Richemont, and Swatch Group all reported slumping sales in China.
Hugo Boss said in its preliminary Q2 financial results on Monday that the Chinese market was "particularly challenging. While British fashion house Burberry's sales in mainland China fell 21% year-over-year in the most recent quarter.
The slumping demand has led some brands to offer hard discounts in China to shift excess stock.
The FT reported that in early July, Marc Jacobs was offering discounts of more than 50% on Alibaba's upscale e-commerce platform, Tmall Luxury Pavilion.
Bloomberg reported that Balenciaga — owned by luxury conglomerate Kering — averaged a 40% discount on sale items in three of the first four months of 2024. And that Burberry was also slashing prices in China.
Business Insider contacted Burberry, Balenciaga, and Marc Jacobs for comment but didn't immediately hear back.
These brands are dropping prices in the face of a softer market in China, Bernstein luxury goods analyst Luca Solca told Business Insider.
China is a key market for luxury brands. Between 2017 and 2021, China's luxury market tripled in size, Bain & Company said in a report earlier this year. However, COVID-19 restrictions led to a sharp decline in the market in 2022.
Once restrictions were lifted in 2023, there was a "significant" rebound, the report said.
"After the pandemic, we saw an incredible amount of revenge spending, leading to spectacular success rates in China," Daniel Langer, a professor of luxury at Pepperdine University and CEO of the luxury strategy firm Équité, told BI.
He continued: "This was, in part, fueled by people not traveling, freeing additional budgets for products like watches and leather goods."
However, that effect has since worn off.
Consumer spending is down in China as the country faces a series of economic challenges, from a real-estate crisis to geopolitical headwinds and stock-market volatility.
This economic uncertainty is likely putting consumers off buying discretionary goods.
Brands produced more during the boom to keep up with demand, but once demand dropped, they were left with unsold products.
"Almost in a myopic way, brands did not realize that this was a temporary phenomenon, and consequently, we saw a slowdown of demand, which was absolutely to be expected," Langer said.
Brands may have also taken a hit in China as local luxury consumers travel to Japan to take advantage of the lower prices of luxury goods due to the particularly weak yen.
But discounting might not be the best response.
"Discounting is the fastest and most secure way to brand equity destruction," Langer said; lower prices undermine the long-term value of the brand's products.
But not all brands are responding to slowing consumer spending in China in the same way.
Hard luxury brands like Hermès, Dior, and Louis Vuitton don't drop their prices — and that's by choice.
By not discounting, "these hard luxury brands are growing at a slower rate and declining faster," Solca told BI.
But for a hard luxury brand, that's better than discounting, he said, adding that "these brands are defending their long-term brand equity."
