May 11, 2014 10:28 pm

Traditional luxury markets benefit as China slows

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Two female shoppers looking at a store window©Reuters

Not just window shopping: sales in developed markets have started to rise

After five years of rapid growth driven by voracious Chinese demand, the luxury industry is experiencing a cold blast of reality.

“The bad news is that easy growth on the back of opening stores in China is over for most luxury brands,” says Luca Solca, head of luxury goods research at Exane BNP Paribas.

China’s lower economic growth, anti-corruption crackdown, pollution in the big shopping cities and a maturing consumer turned off by logos have all been blamed by luxury executives for lacklustre sales in 2013, which for many have extended into the first quarter of this year.

Nonetheless, bright spots are emerging as a result of macroeconomic and social change. For example, the focus is swinging back to developed countries where half of luxury’s total global sales are made to consumers in their traditional markets.

The US is considered the biggest growth opportunity for the luxury market over the next decade because of spending by locals as well as tourists, according to Boston Consulting Group (BCG).

Accessible luxury brands led by US group Michael Kors, which doubled its European sales at the end of last year, are also changing the face of the luxury industry.

Scilla Huang Sun, who runs the Julius Baer Luxury Brands Fund, points out that it is crucial to differentiate between the moderation of luxury sales in mainland China compared with the solid demand from Chinese tourists, especially in the US.

The Chinese are the world’s biggest tourist spenders and increased their spending by 28 per cent in 2013, according to the World Tourism Organisation. This underpins belief in “the growing purchasing power of Chinese consumers and their appetite for western luxury brands”, Ms Huang Sun says.

It is also driving the opening of luxury outlets for brands from Ferragamo to accessible fashion bagmaker Furla in airports around the world, even in Europe where local demand remains subdued.

Another new focus for luxury goods brands, such as Milan’s Prada, is converting concessions in department stores into directly operated shops, and driving online sales.

Hard luxury brands – with Swatch at the vanguard – are expected to open more stores selling directly to shoppers.

More than half of total luxury purchases are influenced by online marketing, according to a BCG survey of more than 10,000 customers in 10 countries.

Social media and the rise of smartphones and wearable technology are also opening a new business frontier – as well as a potential threat.

The fallout has extended to creative directors and management at leading fashion and luxury conglomerates, LVMH, Kering and Richemont, all of which have moved to shake up at least some of their business.

Louis Vuitton and Gucci, the leather goods brands of LVMH and Kering, respectively, are considered by analysts to have only just emerged from intensive care after their logo-heavy styles hit saturation in China, prompting a repositioning.

At Gucci, which accounts for half of Kering’s revenues but where sales remained sluggish in the first quarter, analysts say bolder creative choices may be needed, especially since the hiring of young designers by other Kering brands Balenciaga and Saint Laurent led to sharp sales rises.

Meanwhile, Richemont’s decision not to sell its underperforming soft luxury brands, including Montblanc and Lancel, means that they now need to be turned round.

But while the mega-brands stutter, the anti-corruption drive in China and return to form of US consumers are benefiting high-end niche players.

Loro Piana, bought by LVMH last year, and Brunello Cucinelli and Hermès, which do not rely excessively on fashion and focus on high-quality goods in casualwear, are in better shape in China where they have avoided the anti-logo backlash. The brands are gaining traction in the US, where consumers prefer a casualwear look.

Sales at Cucinelli rose 50 per cent in China in 2013 and 20 per cent in the US. Bottega Veneta, the ultra-luxe brand owned by Kering, saw first quarter sales up 15 per cent on the end of 2013.

Meanwhile, valuations of independent Italian brands Moncler, Tod’s and Ferragamo remain high amid expectations that they, like Giorgio Armani, will be takeover targets, as the Chinese slowdown drives consolidation. Mirroring the extent to which the global economy moves into a sustained recovery, luxury will grow too, according to Deloitte Touche Tohmatsu, the professional services firm, in an upcoming report.

Not unexpectedly, notwithstanding the slowdown in China, growth is still disproportionately focused on the Asia-Pacific region. Although economic growth has slowed lately in much of Asia, this is to some extent offset by the rise in income inequality.

Income available to upper-income households is therefore growing faster than overall income, Deloitte maintains.

The near-term future of the luxury market will depend, in part, on how the global economy evolves.

Deloitte considers the more promising markets to include Colombia, Mexico, Philippines, and much of sub-Saharan Africa – where Ermenegildo Zegna, Hugo Boss and MAC have been at the vanguard of opening stores.

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