Western brands aren’t sweating China’s crackdown on luxury

Bottoms up.
Bottoms up.
Image: Getty Images / China Photos
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This isn’t the Chinese government’s first declaration of war on official corruption and wanton spending—and Western companies know it. Some of the world’s biggest liquor producers and carmakers are shrugging off dramatic falls in sales of luxury cars, watches and alcohol resulting from Xi Jinping’s recent crackdown on assorted luxuries.

China’s Communist Party has banned banquets, restricted the registration of military license plates on premium cars and banned television and radio advertisement for expensive watches, stamps, and gold coins. As a result, Chinese sales of luxury watches have suffered. (As many as 60% of high-end timepieces are gifted to public servants.) Revenues at upscale restaurants in Shanghai, Beijing and Ningbo fell between 20% and 35% in January, state media Xinhua reported. Sales of Bentleys in China dropped 20% (paywall) for the first quarter, while sales growth for BMW and Volkswagen’s Audi slowed dramatically (paywall). Sales of baijiu, a premium Chinese grain liquor, by Diageo, the world’s largest distiller, fell 40% in the first three months of this year, according to a company call on May 14.

Nomura analyst Ian Shackleton thinks the ”rough ride” in the baijiu industry is temporary; he sees double-digit growth returning in the long-term. Pernod Ricard, the world’s second largest distiller, attributed the recent drop in its Scotch sales in China to the country’s leadership change and the corruption crackdown. “We definitely see this impact as a short-term one,” said Jean Touboul, vice-president of investor relations in March. Pernod’s CEO, Pierre Pringue added in April, “We will return to double-digit growth in the medium term.” Referring to China’s last leadership transition, he said, “We have seen this before in 2003.”

Similar sentiments are guiding carmakers like Mercedes and Porsche. “There’s too much wealth being generated in China at this point in time for people not to have an interest in vehicles,” said Hans Hennig, group managing director of Jebsen, which distributes Porsche in China. Last year, China, Hong Kong and Macao accounted for Porsche’s fastest growing region in terms of sales.

Still, Diageo is making at least one strategic shift. Gilbert Ghostine, president of Diageo Asia-Pacific, said on the May 14 call that it was angling to sell more scotch, especially Johnnie Walker, which accounts for roughly half the company’s investment in China. So far, sales of liquors like scotch and cognac, 10% to 15% of which go towards gifts, haven’t flinched.