Have sales of luxury goods started to falter?
By Emily Ford |
00:00 UTC+8 May 3, 2012
|
Print Edition
Print Edition
The shift is subtle, but is there nonetheless.
In the past month or two, the French champagne sipped by the haute couture representatives in Shanghai has lost a touch of its sparkle. In the gleaming stores of Nanjing Road W., sales assistants nervously fluff handbags as they wait for customers.
Two years of dizzying growth lulled many into thinking that demand for high-end goods in China was a rocket with no "stop" button, with some commentators even suggesting that the luxury-goods sector was distinct from the rest of the global economy, operating in a "supercycle" of its own.
Now, these market bulls are coming down to earth with a bump. A wave of less-than- glittering first-quarter results has led many to ask whether a slowdown in China's economy - it grew by 8.1 per cent in the first quarter, the weakest since the start of the financial crisis - may have caught up with the most lucrative sector of the retail market.
Have luxury goods sales finally started to falter?
The first warning sign came from Burberry, the 6.3 billion pound (US$10.2 billion) British fashion house that has been riding the crest more than most in the past few years. Last month, it said same-store sales in China grew by 20 percent in the second half of the year.
That might be cause for celebration in any other sector, but it was a significant slowdown from a 30 percent increase in the third quarter.
The German fashion house Hugo Boss said sales to China and Hong Kong slowed to 13 percent. Even Swiss watch exports to the mainland are rising far less quickly than before.
Melanie Flouquet, a luxury goods analyst at JP Morgan Chase, said the slowdown so far hasn't bothered luxury-goods makers much because growth rates are still in the double digits.
"The slowdown was already evident in the fourth quarter, with countries such as Korea starting to falter," she explained. "The new news is that Chinese mainland is decelerating."
LVMH shocks sector
The biggest shock came from LVMH, the titan of the sector, which shook the luxury establishment when it announced that its sales to the Chinese mainland had grown by a single digit in the first quarter, tumbling from 20 percent in previous quarters.
Growth on the mainland was not only poorer than in Asia as a whole, it was also weaker than in the US and Europe.
Most striking was the news that Louis Vuitton, its flagship label and perhaps the most famous luxury brand in the whole of China, was no longer growing in double digits.
Analysts at JP Morgan called the results "a shocker," noting that "while investors had brushed away signs of deceleration in the sector as company specific, it's trickier to do so when the leader and most resilient shows signs of faltering."
Thomas Mesmin, a luxury analyst at CA Cheveux, wrote in a note to investors that "brands that are currently leading a very aggressive store opening strategy in Chinese mainland are at risk."
But is the party really over?
Although the overall trend appears to be down, the picture is not entirely consistent. Industry gloom was tempered by PPR, owner of Gucci, which defied expectations to say its luxury-division sales rose 17.8 percent, including a similar rise in China. Its flagship brand Gucci sold well, and Bottega Veneta and Yves Saint Laurent did even better.
There may be a white knight in the shape of the travelling luxury-goods shopper who lives on the mainland yet buys handbags on London's Bond Street or Paris's Champs-élysées, where, thanks to tax differences, goods can be had for up to half the price.
The effect of this growing band of luxury shoppers was most visible in LVMH, which said sales at home were slowing, but tourist spending elsewhere – during Spring Festival, for example - was making up for it.
Tourist effect striking
"The first quarter is an important one for travelling, so the real question is whether the effect was to transfer cash away from China to be spent elsewhere," Flouquet said.
The tourist effect is so striking that some market watchers suggest that looking at sales nationality by nationality, instead of region by region, might give a more realistic picture.
The situation may become clearer when Richemont, the Swiss owner of Cartier, and Hermes report their results in the next few days.
Sandy Chen, research director at TNS Global in Shanghai, cautioned that one quarter does not necessarily make a trend.
"Luxury brands are starting to worry that sales are not as good as they expected," she said. "It might be that they have set targets that are too aggressive, but that doesn't mean they still aren't growing."
However severe the slowdown turns out to be, the bulls have it right in one sense.
At the top end, the retail sector is driven by the super wealthy who are largely immune to rising inflation and a broader economic slowdown.
In retailing, it's often said that 20 percent of customers bring in 80 percent of revenue, Chen said. "In the luxury sector, it is more like 10-90. Very visible luxury consumption is driven by the super-rich, who are not as affected by events."
In the past month or two, the French champagne sipped by the haute couture representatives in Shanghai has lost a touch of its sparkle. In the gleaming stores of Nanjing Road W., sales assistants nervously fluff handbags as they wait for customers.
Two years of dizzying growth lulled many into thinking that demand for high-end goods in China was a rocket with no "stop" button, with some commentators even suggesting that the luxury-goods sector was distinct from the rest of the global economy, operating in a "supercycle" of its own.
Now, these market bulls are coming down to earth with a bump. A wave of less-than- glittering first-quarter results has led many to ask whether a slowdown in China's economy - it grew by 8.1 per cent in the first quarter, the weakest since the start of the financial crisis - may have caught up with the most lucrative sector of the retail market.
Have luxury goods sales finally started to falter?
The first warning sign came from Burberry, the 6.3 billion pound (US$10.2 billion) British fashion house that has been riding the crest more than most in the past few years. Last month, it said same-store sales in China grew by 20 percent in the second half of the year.
That might be cause for celebration in any other sector, but it was a significant slowdown from a 30 percent increase in the third quarter.
The German fashion house Hugo Boss said sales to China and Hong Kong slowed to 13 percent. Even Swiss watch exports to the mainland are rising far less quickly than before.
Melanie Flouquet, a luxury goods analyst at JP Morgan Chase, said the slowdown so far hasn't bothered luxury-goods makers much because growth rates are still in the double digits.
"The slowdown was already evident in the fourth quarter, with countries such as Korea starting to falter," she explained. "The new news is that Chinese mainland is decelerating."
LVMH shocks sector
The biggest shock came from LVMH, the titan of the sector, which shook the luxury establishment when it announced that its sales to the Chinese mainland had grown by a single digit in the first quarter, tumbling from 20 percent in previous quarters.
Growth on the mainland was not only poorer than in Asia as a whole, it was also weaker than in the US and Europe.
Most striking was the news that Louis Vuitton, its flagship label and perhaps the most famous luxury brand in the whole of China, was no longer growing in double digits.
Analysts at JP Morgan called the results "a shocker," noting that "while investors had brushed away signs of deceleration in the sector as company specific, it's trickier to do so when the leader and most resilient shows signs of faltering."
Thomas Mesmin, a luxury analyst at CA Cheveux, wrote in a note to investors that "brands that are currently leading a very aggressive store opening strategy in Chinese mainland are at risk."
But is the party really over?
Although the overall trend appears to be down, the picture is not entirely consistent. Industry gloom was tempered by PPR, owner of Gucci, which defied expectations to say its luxury-division sales rose 17.8 percent, including a similar rise in China. Its flagship brand Gucci sold well, and Bottega Veneta and Yves Saint Laurent did even better.
There may be a white knight in the shape of the travelling luxury-goods shopper who lives on the mainland yet buys handbags on London's Bond Street or Paris's Champs-élysées, where, thanks to tax differences, goods can be had for up to half the price.
The effect of this growing band of luxury shoppers was most visible in LVMH, which said sales at home were slowing, but tourist spending elsewhere – during Spring Festival, for example - was making up for it.
Tourist effect striking
"The first quarter is an important one for travelling, so the real question is whether the effect was to transfer cash away from China to be spent elsewhere," Flouquet said.
The tourist effect is so striking that some market watchers suggest that looking at sales nationality by nationality, instead of region by region, might give a more realistic picture.
The situation may become clearer when Richemont, the Swiss owner of Cartier, and Hermes report their results in the next few days.
Sandy Chen, research director at TNS Global in Shanghai, cautioned that one quarter does not necessarily make a trend.
"Luxury brands are starting to worry that sales are not as good as they expected," she said. "It might be that they have set targets that are too aggressive, but that doesn't mean they still aren't growing."
However severe the slowdown turns out to be, the bulls have it right in one sense.
At the top end, the retail sector is driven by the super wealthy who are largely immune to rising inflation and a broader economic slowdown.
In retailing, it's often said that 20 percent of customers bring in 80 percent of revenue, Chen said. "In the luxury sector, it is more like 10-90. Very visible luxury consumption is driven by the super-rich, who are not as affected by events."
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