International Law

Piracy, Luxury Goods, and Recession

By Stan

This article from FT last week (which I finally read today) is thought provoking. Here’s the interesting part:

Not even the black economy, it seems, can escape grim news. Over in Shenzhen and Hong Kong, one perennially thriving “black market” has been experiencing leaner times.

Those who have walked through these vibrant cities will have met the armies of touts in streets and arcades pushing counterfeit luxury goods – wristwatches, handbags, perfume, brand-name apparel. For years the business has been doing a booming trade. With rip-offs costing a fraction of the price of originals, an emergent and self-conscious Chinese middle class could afford to strut around with shiny Rolexes and Tag Heuers, and with Prada and Gucci python leather – much to the chagrin of western luxury goods makers.

But not even this market has been immune from the contagion of economic anxiety. Vendors have been reporting falling sales, as Chinese consumers brace themselves for a slowdown.

The article talks about a new trend of renting real luxury goods, and although this is kinda weird, I am more interested in the falling sales of fakes.

What’s going on here? A couple of thoughts. First, a lot of these products are not exactly necessities. Whether it is real or fake, the purchase of another handbag is quite optional (note: my wife would beg to differ). With tough economic times, one would expect to see all purchases of non-necessity items go down, right? This seems to make sense.

Second, would we expect to see any countervailing movement toward fake items (away from the high priced real stuff) in the face of a recession? I have no numbers on this, so I am merely speculating, but it does stand to reason that there are a number of individuals out there who, during good economic times, would splurge and buy the real thing, but these days might consider buying the fake. These are people who are still doing well enough to purchase that non-necessity item, as long as they don’t have to pay too much.

Third, if #1 and #2 are both true, and we are seeing a big drop in purchases of fakes, then it might tell us something about how serious the economy is doing — i.e., there are a lot more folks out there who can’t afford even the fake these days than there are people who move from real goods to fakes. For the Americans out there, note that during a recession, one would expect that sales at Neiman Marcus will go down while sales at Wal-Mart will do much better. If the recession is shallow, Wal-Mart actually may benefit from the downturn, but if the recession is nasty, even Wal-Mart will see sales slacken. See where I’m going with this?

These fake products are not necessities, and so it stands to reason that sales are income sensitive. I am making a lot of assumptions here, so I might be completely full of shit on this. Some numbers would be nice. It would have been interesting, for example, to see whether the recent bout of energy and food inflation in China had an impact on purchases of fakes (again, we would potentially have trends in two directions).

If the above makes any logical sense at all, perhaps the drop in fake luxury goods sales is reflective of just how poor consumer confidence is in China at the moment. When viewed from that perspective, the news does not make me happy.

Full post as published by China Hearsay on December 08, 2008 (boomark / email).