How the Coronavirus is Impacting the Luxury Industry for Brands over-leveraged in China

 

In Luxuo’s inaugural State of the Luxury Industry report for 2019, we concluded that an over-dependence on China could be detrimental to the luxury industry; It made theoretical assumptions based on economic factors and monetary fundamentals but it appears that our concerns have now been expressed in real world terms due to the unfortunate outbreak of the deadly coronavirus, we can see just how the damaging effects of Chinese economic slowdown on the luxury industry.

Even accounting for tumultuous conditions in Hong Kong since March 2019, LVMH posted record growth in almost all regions during 2019, a year that witnessed mega-acquisitions in jewellery with Tiffany & Co and hospitality with Belmond, the famed owner of the Orient Express brand. Notably, the luxury juggernaut was slowed only during the 4th quarter, thanks to a 40% drop in Hong Kong (resulting from the aforementioned civil unrest) and generating the necessary catalyst for the brand to shut a duplex boutique in prominent Times Square Mall in Causeway Bay. The silver lining, a commonality across other luxury conglomerates like rivals Richemont and Swatch, was that right up till January 2020, there was still a steady stream of growing revenues coming from mainland China.

That is until the coronavirus ground things to a shuddering halt.

How the Coronavirus is Impacting the Luxury Industry for Brands over-leveraged in China

LVMH, owner of fashion house Louis Vuitton, had a relatively good 2019, earning $59 billion gross revenues, up 10% year-over-year, fuelling an expansionist strategy that saw it make high profile acquisitions but the fourth quarter left much to be desired with sales plunging in Hong Kong – an economic situation mirrored across luxury sector. The Special Administrative Region was also a major market for Burberry, accounting for 8% of sales, almost completely taking the wind out of its sales growth in mainland China and reducing its expected total revenue growth estimate to low single digit percentage for its financial year ending in March 2020

“Group management expects healthy growth in 2020 in all markets in local currency, with the exception of Hong Kong SAR,” – Swatch Group

According to a Swatch Group financial statement,  the specialist watchmaker was hit by sharp declines in Hong Kong, where the group has significant exposure – with sales dropping 2.7% and net revenues falling 13%

Swatch Group posted declining sales and profits for 2019 as the Hong Kong protests bit hard on its business — the group has close to 100 retail points there. Swatch Group’s dependence in the middle kingdom deepened in 2017 when “Chinese consumers powered a stronger than expected increase in sales and a return to profits growth at Swatch that (2017) year” when watch exports to China rose almost 19 percent.

Watch and Jewellery rival Richemont Group also reported mostly positive growth in the third fiscal quarter ending December 2019 with double digit growth in the mainland offsetting losses in Hong Kong. Vontobel analyst Rene Weber opined that Richemont’s organic growth in the Christmas quarter was slightly above expectations, with sales growing 4% in all regions except Japan. For the owners of brands like Cartier and Van Cleef & Arpels, sales in Europe grew by 9%, benefiting from favourable comparative numbers and strong sales in most markets. Sales in Asia Pacific increased by 2%, driven by strong double digit sales growth in China and Korea, which more than offset a severe sales contraction in Hong Kong SAR, China and contrasted performances in other Asian markets. The performance of Cartier, Van Cleef & Arpels and Buccellati was particularly noteworthy given the negative impact of anti-government protests in the Special Administrative Region. .

But if everyone’s Hong Kong losses are Offset by China… What happens when China is “off the table”?

With mainland China now nearly under lockdown because of the coronavirus, Savigny Partners, specialists at luxury mergers and acquisitions, are reporting that investor fears over the spread of the coronavirus are echoing the sentiments during the 2003 SARS epidemic.

The Savigny Luxury Index fell 4% in the month ending Jan 2020

With Chinese consumers estimated to account for over a third of all global purchases of luxury items, the reliance on China is especially prominent when unseen market forces (such as a coronavirus epidemic) hits just before a period of peak economic activity during the Lunar New Year festivities celebrated across Asian markets.

The Savigny Luxury Index fell 4% in the month ending Jan 2020 showed correlated declines for luxury stocks and the broader MSCI World Market index, a weighted stock market index of 1,644 stocks from companies throughout the world, but it is evident from the graphlines that luxury shares saw steeper declines; Like many of the luxury conglomerates and brands who had both posted positive recoveries in quarterly and annual sales, the growth was largely undone if not retarded by the coronavirus: Burberry and Tod’s both fell 11.4%, Ferragamo fell 11%, Capri Holdings Limited, owner of Versace, Jimmy Choo and Michael Kors lost 21.5% of its value in January.

An employee sprays disinfectant on a train as a precaution against a new coronavirus at Suseo Station in Seoul, South Korea, Friday, Jan. 24, 2020. China broadened its unprecedented, open-ended lockdowns to encompass around 25 million people Friday to try to contain a deadly new virus that has sickened hundreds, though the measures’ potential for success is uncertain. (AP Photo/Ahn Young-joon)

In 2017, 130 million Chinese tourists spent USD 274 billion while travelling abroad, making up 21% of the total tourism spending worldwide, with travel bans and closed borders with China, one can only guess how deep the damage will run in the luxury sector. Meanwhile, Richemont Group has pledged 10 million renminbi (around US$1.5 million) to combating the coronavirus while Swatch Group and Art Basel has announced the cancellation of their respective Time To Move watch exhibitions and Art Basel Hong Kong 2020 art fairs respectively.

 

 

 

@Credit by Luxuo

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