For the past decade the global luxury market
has counted on the Chinese consumer market for the lion’s share of growth. But
as the coronavirus continues its virulent spread – 28,000 cases confirmed and
another 25,000 suspected cases as of February 6 – the luxury market will have
to count Chinese luxury consumers out, at least for now.
China is the second-largest personal luxury
goods market after the U.S., and Chinese consumers, both at home and abroad,
are estimated to account for about one-third of global spending, €100 billion
in 2018 out of €313 billion globally in 2018, according to McKinsey &
Company. From 2012 to 2018, China provided more than half of the
luxury market’s growth and it is expected to contribute 65% of its lift through
2025.
China on hold
To stop the spread of disease, travel to, from
and within China has been curtailed. Stores are closed and even the ones that
are open see a dramatic decline in foot traffic. For example, 150 out of Capri Holdings’ 250
mainland China stores are closed, Ralph Lauren has
closed half of its 115 stores, and Adidas reports it
has temporarily shut down a “considerable” number of its 12,000 stores there.
Trade shows have been cancelled or postponed
with Michael Kruppe, general manager at Shanghai New
International Expo Centre Co. (SNIEC), saying most public venues in
China — including Shanghai and SNIEC — will not hold shows in February and as
each day passes, March shows look at risk, too.
Jing Daily reports that Shanghai Fashion
Week, held in late March, may be affected and upcoming runway shows
in New York City,
London, Milan, and Paris are anticipating disruption if Chinese
guests can’t attend.
The supply chain for goods coming out of China
is also taking a big hit. Factories are traditionally closed for the Chinese
New Year celebration, which this year was from January 25 through February 2,
but in some regions the shutdown has been extended through February 10, though
it may go longer depending upon the rate of infection.
Factory orders that typically arrive in
February for delivery in April may be delayed until May or June. Xi Yang, an
attorney with the Seattle-based firm of Harris Bricken told Jing Daily:
“Factories are closed now and will not resume production anytime soon. Even
when they resume production, it doesn’t guarantee they will have enough
manpower to complete orders placed.”
As of now, most analysts are predicting the
coronavirus will have only a short term impact on the Chinese economy.
Coresight Research released a report “Coronavirus
Briefing: Assessing the Economic Impact” assessing the damage
between 0.5% to 1.0% to China’s previously expected GDP growth of 5.9%, a loss
of some $7.2 billion to $14.3 billion.
Luxury market will be hard hit
But looking across China’s vast $14.3 trillion
economy, Cowen’s Oliver
Chen believes luxury brands will be the most impacted by the
epidemic, given that the companies he covers depend on China for an average of
14% in revenues.
In particular, LVMH (17% of revenues) and
Tiffany (17%) are most at risk, with Richemont (11%), Tapestry (10%), Canada
Goose (10%), and Capri Holdings (6%) having less exposure there.
Farfetch is also heavily dependent on China,
accounting for 28% of its business, but because it is an e-commerce company, it
won’t likely suffer as much as other brands relying upon in-store sales.
For all the luxury brands in China, “The first
three months of 2020 are toast, and the next three months are questionable,
too,” Suketu Gandhi, partner and leader for digital
supply chain at Kearney (previously A.T. Kearney), shared with me.
And because Chinese consumers are not
traveling, there will be a ripple effect across the globe. “Depending on the
sources, somewhere between 35%-40% of their luxury spending is within China,
but as much as 60% could be outside. If they can’t travel, we will see a
dramatic impact at least for this quarter, if not more.”
Noting that wealthy Chinese consumers have
been in the habit of flying into luxury shopping capitals of the world to make
opportunistic purchases, Gandhi sees this halted, even if people can get a
flight out of the country. “Nobody’s going to get on a plane and risk their
health to buy something.”
For some purchases, particularly the very
high-end segment, he expects those purchases will be deferred and come back
once travel bans are lifted. But for more affordable luxury, like trend-driven
fashion, those sales are lost for good. “It’s a whole different purchasing
cycle.”
Another luxury sector that he expects to be
hard hit is wine and spirits. “Alcohol purchases are much like airplane and
restaurant seats. That means if you don’t get drunk today, you’re not going to
get drunk twice tomorrow,” he quips.
And because luxury goods brands have long
enjoyed a first quarter bump in sales, thanks to gift-giving for the New Year
holiday, which was expected to total $150 to $160 billion before the outbreak,
this is another time-sensitive purchase opportunity that is lost.
“Luxury is a very popular gift in China
because the choice of a gift isn’t about the person receiving the gift, but a
reflection of the person giving it. It is a completely different mind set than
in the U.S.,” Gandhi says.
And he disputes the assumption that the
e-commerce sector isn’t going to be seriously impacted, too. The critical
factor is manpower for deliveries. “With the lockdown in some areas, there’s
nobody to deliver,” he continues.
This too will pass, but how soon?
The situation remains fluid with Wednesday,
February 6 being the most deadly day yet
for the disease. As it looks now, the luxury brands remain cautiously
optimistic and expect the worst to be over by the middle of the year.
Capri Holdings is
expecting a loss of $100 million and reduced year-end 2020 revenue projections
to about $5.65 billion in the company’s third-quarter reporting. But John D.
Idol, the company’s chairman and CEO, said, “This estimate could materially
change if the severity of the situation in China worsens.”
Tapestry is
projecting a $200 million to $250 million hit to revenues, as reported in its
second-quarter results today. It also disclosed that a majority of its stores
were shut down in mainland China. CEO Jide Zeitlin further said the company’s
revised sales estimates were based only on the current assessment in China. “If
the situation further deteriorates, or the outbreak affects demand outside of
the country, this impact could be worse.”
LVMH’s CEO Barnard Arnault is reported in
the Wall Street
Journal saying if the outbreak lasts through March, “that
wouldn’t be terrible,” but added, “If it last two years, that would be another
story.”
After it ends
Most are counting on the Chinese luxury
consumers to come roaring back after the pandemic subsides driven by pent up
demand and the symbolic meaning luxury brands hold for them.
“Luxury goods in China represent a sense of
accomplishment both at an individual level but even more importantly, pride in
the nation,” Gandhi believes. “While I’m not a psychologist, my hypothesis is
that the demand for luxury will actually increase once this ends.”
That is assuming that the consumers on which
the luxury market depends have jobs and remain willing to spend their
disposable income on luxury indulgences.
“The longer the factories and shops are
closed, the longer airports, hotels and restaurants have no guests, the more
the employees of those businesses are at risk. Will they have jobs once the
coronavirus subsides?” asks Mickey Alam Kahn,
editor-in-chief of Luxury Daily.
While these workers may not be the customers
for the high-end of the luxury market, they have been the most enthusiastic
consumers for the more affordable ranges in luxury beauty, fashion, handbags
and shoes.
“A lot of the luxury market depends on the
aspirational drives of middle-income Chinese consumers. But if they lose that
income, the luxury market will lose those customers,” Alam Kahn concludes.
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