Chinese shopping malls fight for local shoppers with ‘shock therapy’ vouchers

Due to short-term pessimism, luxury shopping malls in China have begun issuing shopping vouchers to boost transaction volume in the second half of 2024.

Wuhan International Plaza, a long-established luxury retailer in China's central metropolis, introduced a points reward system for various luxury brands in July, allowing shoppers to redeem vouchers for luxury goods, which was interpreted by Chinese internet users as a significant discount of 15 to 30 percent.

As news of “Japanese prices in Wuhan” spread like wildfire on social media, shoppers from across China flocked to the mall, queuing for up to four hours at stores such as Louis Vuitton, Dior, Prada and Miu Miu – all brands that are well-received in the market.

At the same time, Heartland 66, the luxury shopping mall in Hang Lung, opposite Wuhan International Plaza, launched a similar points discount program: When you spend 10,000 renminbi ($1,400), you get 1,500 renminbi credit in the mall's stores – including the region's only Hermès.

Brands in sight

The excitement didn't last long, however. When major brands like Vuitton – which is said to have processed more than 50 million renminbi, or $7 million, in transactions every day – and Dior learned of the unauthorized activities, they put a stop to them with a prominent sign on their storefronts.

“The malls are drinking poison to quench their thirst,” said Ting Zhou, dean of the Yaok Institute, a luxury goods research and consulting organization, citing an old Chinese proverb. “This not only casts a bad light on the malls, but also discourages shoppers from ever buying at full price.”

The coupon rush, which began in Wuhan's established malls, came as little surprise to local retail experts, as SKP's arrival in the city this summer – which prompted several luxury tenants such as Burberry and Piaget to refocus their local presence – is likely to fuel competition.

For Jonathan Siboni, founder and CEO of Luxurynsight, the hours-long queues in Wuhan, even if only short-lived, are a good sign for the market in turbulent times.

“This is an electric shock moment, and the malls hope it lasts. They say they [consumers] want to buy it, which is positive news for the market, but it also brings new challenges for the brands and the malls. It's becoming a competition between channels,” said Siboni, who explained that malls have an incentive to increase their sales because landlords of upscale properties usually receive rent based on sales rather than a fixed amount.

It remains to be seen whether Wuhan-style shock therapy will be adopted by other regional malls and retailers, but recent results from major luxury mall operators show that many may have an incentive to change their strategy to encourage customer loyalty.

Hard times everywhere

In the six months to June 30, revenue at Shanghai's Plaza 66 – a flagship project by Hong Kong property developer Hang Lung, which is looking to attract more cool niche brands like Sacai – fell 8 percent, while tenant sales fell 23 percent.

At Swire Properties, the owner of seven luxury shopping malls in mainland China, sales at its flagship Taikoo Li Chengdu and Beijing projects fell 17.2 percent and 3.5 percent respectively in the first half of 2024, while the Taikoo Li Qiantan project in Shanghai, where Louis Vuitton opened its first chocolate store in China, stagnated.

A recent report from UBS pointed out that China's domestic luxury goods sales fell 10 percent in the first seven months of 2024. This means that brands may slow their pace of opening new stores in China between the second half of 2024 and 2026.

Given the rental pressure, luxury shopping centers may need to lower their rents or transform themselves into shopping centers geared toward everyday life, according to UBS.

However, the heated online discussions about discounted luxury goods are a reminder that the price-conscious middle class is still relevant.

According to Bernstein, by 2027, over 76 percent of luxury goods will still be purchased by the emerging and affluent class of buyers, who will spend around 5,000 to 50,000 euros annually on these products.

“One thing has not changed for the vast majority of Chinese shoppers. They are savvy and bargain hunters. Now that the Chinese market is not doing so well, they feel they have less money to spend,” Siboni said.

“Nobody talks about the fact that brands have built robust e-commerce operations during COVID-19, so people in China or Japan can go online and see prices in real time, which creates a new competition between markets and channels. I think as markets evolve, brands will have to adapt their strategy to the new environment, because if you show the product in China but then people buy it in Japan, there will be a huge inventory problem,” Siboni said.

According to data from Stylensight, the most popular brands among Chinese shoppers in Japan are Prada, Miu Miu and LVMH's Moët Hennessy Louis Vuitton brands. In the second quarter, the Prada group recorded a market growth of 55 percent and 57 percent for LVMH due to tourism.

The second-hand market is booming

Back home, increasingly rational Chinese consumers have begun dumping luxury goods in droves on the secondary market – just as the Japanese did during their economic crisis in the 1990s. This has given rise to a robust market for used luxury goods and a grey market.

A typical example: On Dewu, a social commerce platform specializing in streetwear, sales of Louis Vuitton products – whether purchased from Daigou or used – rose 11 percent to 260 million renminbi, or $35.62 million, in the first half of 2024, according to local media reports.

Based on additional data from Re-Hub, a Shanghai-based luxury consulting agency, sales of the top 50 luxury and fashion brands on Dewu and other resale platforms in China increased 20 percent year-on-year in the first half of 2024.

According to Re-Hub, Dewu's consumer base is heavily skewed towards Generation Z, a demographic that is key to future growth in the luxury segment. In 2022, 70 percent of China’s 264 million Generation Z people said they were Dewu users.

“A strong grey market will have a greater negative impact in terms of sales cannibalization and brand value for the luxury brand,” said Max Peiro, CEO of Re-Hub. Given the problems with authentication in the grey or second-hand market, authorities in Beijing have promised to provide detailed guidelines to enable healthy growth, which in turn would “contribute to the development of a circular economy,” according to a recent report by state-run media outlet China Daily.

“The secondary market will continue to grow and therefore it will become increasingly important for brands to understand the value retention of their products as a measure of the power of the brand with consumers,” added Peiro.

Against the backdrop of a weakening economy, Peiro believes price sensitivity will be an important issue in the normalization of the Chinese luxury market.

“However, once the comparison basis has normalized, we will see sales in China grow again,” said Peiro.