Despite soaring taxes and levies being imposed on all manner of goods from Ferraris to Chanels, it seems that our collective appetite for the finer things in life cannot be quelled even by a financial meltdown. While the average high-street retail industry is still suffering the effects of the crisis, the luxury goods market bounced back as early as 2010, according to research by Bain & Co. The markets in the US and Europe improved fast after a slight dip, and demand from China continues to soar.

The luxury goods market, however, has recently been regarded as something of an easy target for increased taxes and levies, because of its obvious connection to those with more disposable incomes. At a time of economic austerity and sedate spending globally, governments have been raising taxes and cracking down on tax evasion. Increased taxes have been directed at luxury products, because of the perception that those who buy these products can afford the increased costs. Though the supercar industry might be facing some trouble, the overall luxury goods markets will exceed €200bn in sales globally this year, according to Bain; “sales are defying initial concerns over eurozone turmoil and fears of a cool down in emerging markets.” But certain parts of Europe continue to suffer from recessions, which raise questions about how the market will adapt to the changing luxury environment.

A clamp on the car industry
Italy has always been a hotbed for supercars and other luxury goods. Home of the Ferrari, the Maserati and the Lamborghini, it is no surprise that locals have a certain penchant for high-potency vehicles. But a recent wave of tax crackdowns on luxury goods has auto-enthusiasts running scared. Austerity measures and cuts are also threatening the supercar export trade, as Italy is pushed into its fourth recession since 2001.

The economy has been shrinking for four years, and Mario Monti’s government has passed a series of stringent budget cuts and austerity measures that are doing little to help revive domestic interest in supercars. Demand has been so weak, that Fiat, owners of Ferrari and Maserati has announced it is suspending investments in its home country.

Research by IHS Automotive suggests that sales of high-performance vehicles in the country are likely to amount to only 593 cars this year, a 47 percent drop from 2008 when 1,116 cars were sold. Sales are unlikely to return to pre-recession levels until at least 2016, according to the same research.

Many of the measures put in place by the current administration are specifically designed to help tackle the endemic issue of tax evasion in the country, which reportedly costs Italy €120bn in revenues every year. But in actual effect the measures are working to suppress the luxury goods trade. One such measure is the increase of the ownership levies imposed on high-performance vehicles. Such fees have quadrupled since coming into place; it has been widely reported that the yearly levy on a Lamborghini now costs over €8,400 in taxes, an increase of roughly €6,600.

The increased levy targets owners of cars with over 251 horsepower. The knock on affect has been that luxury car owners have embarked on a dash to sell off their vehicles abroad, before having to put up with the additional costs. According to Italian industry group Unrae, the number of second-hand supercars being exported out of Europe has tripled from 4,923 last year to 13,633 in the first five months of 2012. They estimate that the increased levy has the potential to raise €165m in revenue this year alone. Luxury cars have become a burden in Italy where they once were the ultimate symbol of status. Not only have the charges become exploitative, but government agents have been targeting luxury car owners and drivers in mass raids, in an attempt to catch tax evaders. The twisted logic seems to be that the more expensive the car, the less likely the person driving it has paid all of his or her taxes, as if preference in automobiles and tributary practices are somehow correlated.

The raids have been held in Milan, Rome, Florence and on the Italian Riviera, after kicking off at a luxury ski resort last winter when over 251 cars were stopped. In the raids, officers demand the drivers’ licences and car registrations, which are then passed on the national tax agency and run through a database to determine whether the driver or owner has declared an appropriate amount of income. Though there has been severe criticism of the raids, the inaugural session at the ski resort found that 42 supercar owners had reported incomes of less than €30,000, often less than a third of the value of their cars, in their returns for the previous two years.

But the luxury goods market inItaly is worth more than just recovered taxes. Fiat closed down two of its main Italian factories since the beginning of the year, and Chief Executive Sergio Marchionne, has said he does not see the automobile situation in Europe improving until at least 2015. “The European car market is a disaster. It has plunged off a precipice that doesn’t seem to have bottomed out yet. The prospects are anything but rosy,” he went on to say.

Affluence on ice
Where Italy is losing, other countries are more than willing to pick up the slack. Russia, for instance, which has an economy based largely on its abundant natural resources. The country will see the number of households that can afford luxury goods almost double by 2025, from seven million in 2010 to over 13 million. German luxury automobile manufacturers like Porsche and Audi are already planning to expand their business in the country. Porsche is doubling its dealers to 36 over the next six years, and Audi is gearing up to shift 30,000 vehicles per year.

In fact, Russia is already poised to overtake Germany as Europe’s largest automobile market by 2014. Though Russia is also planning a levy on supercars, similar to the one in action in Italy, the rates are significantly lower. The bill has been proposed as a car tax but will only be applied to high-potency vehicles with over 410 horsepower, and will cost around nine rubbles per unit. The Finance Ministry estimates that over 20,000 vehicles will be liable to pay the levy.

It seems that the notion of increasing taxes or levies on luxury goods has somewhat taken hold. Aside from additional levies on supercars, Italy has been taking other unusual measures that have been strangling its once world-class luxury goods market. Most notably, Monti’s government has passed a law demanding that all Italian nationals adhere to a stringent €1,000 cap on cash purchases. This seemingly innocuous piece of legislation has had a devastating effect on the luxury goods industry.

According to research by the Via Montenapoleone street association – which represents some of the most exclusive retailers domiciled in the eponymous street – since the ban one in three customers has refused to pay by credit card. There is the further inconvenience that all customers making cash transactions worth over €3,600 must be identified. That is, any boutique or shop must keep a clear record of customers who spend a lot and in cash, complete with passport numbers and nationality. The Italian government is concerned about the intractability of cash, and that large purchases of luxury goods might be used as tools for tax evasion or money laundering. But it can also cause buyers to feel screened and scrutinised. As many luxury brands now operate in more than one country, Italian outlets are missing out in valuable patronage, as potential buyers take their money to other jurisdictions where they might not be scrutinised or limited in their purchases.

Chinese buying power
Chinese buyers visiting Italy are a particularly valuable set of customers, and some of the most affected by Italy’s new legislation. The use of credit cards is not as widespread among Chinese customers as it is among American and Europeans, mostly because extremely high interest rates put people off using them.

Any boutique or shop must keep a diligent, clear record of any customer who spends a lot, and in cash, complete with their passport numbers and notation of their nationality

Chinese tourists are also far more likely to purchase luxury goods when travelling abroad because of the high taxes afflicting foreign goods brought into China. Every luxury item imported into China is subject to customs tariffs that range between 4.4 percent and 60 percent, in addition to standard value added tax (VAT) of 17 percent, and a one off consumption tax of 30 percent. Luxury products that were already expensive to begin with become nigh on unaffordable. Italy’s tirade against super expensive goods and their buyers has had the obvious effect of driving shoppers elsewhere to spend their money. It has also sparked fresh debate about China’s import tax situation.

However, at the same time, the Chinese luxury goods market has been estimated to be worth over €40bn in sales in 2011, not far from the amount clocked in by the entire US luxury market. There are over one million millionaires in China, up threefold from 2006. In 2011, 170 million people purchased at least one luxury item, 13 million of these were regular buyers. There is a clear appetite in the country for these goods, but it is estimated that up to three quarters of luxury goods consumption has taken place abroad. The amount spent by the Chinese at home is only a small percentage of the total spent by Chinese buyers on luxury items globally. Speculation has been rife on the possibility of the Chinese government cutting the much maligned import duty. Several sources ranging from the Wall Street Journal to local Chinese newspapers and research centres have all but guaranteed that a cut is imminent. The numbers are too good to resist, they argue, and cutting the tax would be a sure fire way to revive domestic demand.

There is no doubt about the phenomenal appetite for luxury. In a social 2010 survey by China Youth Daily, 89 percent of respondents said they themselves and those around them bought luxury goods because of what they represent. Almost 60 percent claimed to buy branded items to show economic strength and 56 percent to show wealth and class. Sun Feng, from Tsinghua University, believes that the changing economic climate in China has altered people’s perceptions of wealth: “People used to care more about the use value of commodities, but now prefer their symbolic value as commodities are no longer scarce.”

Though the huge taxes on luxury goods play a big part in the disproportionate pricing, they are only part of the story. Other culprits are the luxury brands’ own pricing strategies, which feed off the buyers’ perception that luxury equals prestige and class. Zhu Lin, a Chinese brand promoter, says that regular price increases in the Chinese market are as a result of the country’s high buying power, which keeps prices at the more expensive end of the spectrum. He compares China to India, which also has significantly high taxes and import duties, but because the population has low buying power, the prices of luxury goods are lower even than prices in the European market. It seems that in the luxury market value is based on exclusivity.

But while handbag, cosmetic and watch sales struggle with the price discrepancies in China, the biggest losers by far are once again the luxury cars. Imported high-potency vehicles are liable to over 146 percent worth of total taxes, which is not even considering delivery costs, and price mark ups. A Ferrari can be bought in Italy for around €200,000, but it has been reported that a F430 model retails in China for as much as €500,000. Despite this, 84 percent of affluent Chinese people own a luxury vehicle, according to the 2009 China Luxury Goods Report, and 35 percent of 18 to 35 year olds are fundamentally more interested in the brand than in the price when it comes to supercars.

Priced out of prosperity
Despite all of the obstacles that convolute the luxury goods market globally, perhaps it is this shift in demographics that will be the most challenging. Europe has long since been the epicentre of luxury, but as the recession and debt crisis endure many countries like Italy, are seeing their world renowned luxury trade shrink, Chinese buyers emerge as the new super-buyers. Asian consumers as a whole will account to more than 50 percent of the sales worldwide in 2012, according to research by Bain.

This change in the demographic of buyers will undoubtedly hail significant shifts in the industry. Different perceptions of wealth, and the value of luxury items will influence brands’ decisions and marketing strategies. In the past trends set in France or Italy were enough to carry a company through years of sales globally, today that is no longer enough. Fashion houses now rely on fragrances, sunglasses and more affordable ranges to break into emerging markets. Because everyone wants a part of the prestige that wearing or driving a luxury brand entails, surely not everyone can afford it, these auxiliary products have become driving forces behind the brand expansion.

There will always be a market for luxury, but for the industry to continue successfully brands will have to crack new markets without losing their status. “Fast growth is bringing even faster change to the luxury sector,” concluded Bain’s Claudia D’Arpizio. “With more markets to manage and accelerating trends to anticipate, brands that struggle to respond quickly may find the markets’ rapid growth a double-edged sword.”