China's 'gifting' corruption crackdown causes a sales disaster for Prada

China’s middle class is growing rapidly and more citizens are finding themselves with fatter wallets.

In fact, according to Wealth-X and UBS’ Billionaire Census 2014, China’s 157 billionaires are not only the youngest in the world, but around 89% of them are “self-made.”

The luxury sector rubbed their hands with glee at the potential growth in profits the region could provide. But judging by Prada’s latest results, it wasn’t the plain sailing goldmine it probably expected.

The Italian luxury fashion house mainly blamed China for its overall 1% decline in sales for 2014 to £2.6 billion. The slump in sales across most of the Asian region stung the most.

According to Prada’s results, Asian sales fell 5%, following “significantly deteriorated”
market conditions in the second half of 2014.

“The different timing of the Chinese New Year also affected performance for the month of January throughout the Greater China area,” it added.

In comparison, Prada saw an overall growth in sales from mostly everywhere else, including 8% in Japan and America, and 10% in the Middle East. European sales were also lower but only by 1%.

Prada’s CEO Patrizio Bertelli said the environment is “more uncertain and complex” than the group first thought.

In 2011, research firm McKinsey said China would account for 20% of the world’s luxury sales by the end of 2015, which is worth £17.6 billion.

However, Bain & Company’s 2014 China Luxury Market Study, which was released at the beginning of this year, warned that “the region’s luxury market is undergoing a fundamental shift, brought on by evolving customer dynamics, an influx of new, emerging luxury labels, and an economic slow-down.”

Bain blamed consumers preferring to try out emerging luxury brands rather than established players in the market like Prada.

While, China’s luxury goods industry now accounts for 29% of the global market, Bain highlighted how growth is cooling down.

“The field of luxury brands in China is breaking wide open,” said Bruno Lannes, a Bain partner and author of the 2014 luxury study at the time. “This creates a new window of opportunity for emerging brands. At the same time, it is imperative that more established brands don’t grow complacent as China’s luxury market continues to evolve, or they risk falling out of favour with consumers.”

Meanwhile high profile corporate China bribery and corruption cases, such as that at GlaxoSmithKline, has allegedly caused a big cut back in luxury product sales in the region. It hasn’t just hurt Prada, it has hurt some of the world’s most famous fashion houses across the globe, including Versace.

Since China’s leader, Xi Jinping, came to power two years ago, the country has cracked down on “gifting” activities, which is the practice of offering very expensive gifts to company executives or people in power.

While, it is a long standing tradition in Asia, the practice has fallen under great scrutiny due to the range of corruption cases that have dogged a range of government officials and company executives.

So, what’s next for Prada?

“This situation has temporarily held up [Prada’s] path of growth, but it will not affect our medium/long-term growth objectives,” said Bertelli. “We shall continue to pursue said objectives, adapting our strategy and organisational structure to the constantly evolving global environment. [Prada’s] medium-term plan shall continue with the focused industrial, marketing and retail investments needed to guarantee solid future growth.

“The closest attention is always paid to costs, in order to safeguard profit margins and yield satisfactory returns on investments.”

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