Shuttered Stores, Fewer Tourists: Luxury Feels Coronavirus Effects

Shuttered Stores, Fewer Tourists: Luxury Feels Coronavirus Effects




Original Source


LONDON — Chinese tourists normally flock to Bond Street, home to some of the most expensive retail space in the world. They gather behind the velvet ropes outside the Gucci store or emerge from the flagship boutiques of Chanel and Louis Vuitton with stuffed shopping bags.

This week, however, there were next to none. The scene was replicated on the shopping boulevards of Paris, in the malls of Dubai and on the streets of Hong Kong. The coronavirus has caused the quarantine of more than 50 million people in China, and travel and visa restrictions to more than 70 countries. Alongside widespread shutdowns of stores and malls in China, it has taken a heavy toll on the global luxury goods sector, long dependent on the spending of Chinese shoppers at home and abroad.

Some fear that the sector could be facing its worst crisis since the global financial meltdown of 2008.

The investment bank Jefferies estimates that Chinese buyers accounted for 40 percent of the 281 billion euros, or $305 billion, spent on luxury goods globally last year, and drove 80 percent of the past year’s sales growth in the sector, making them the fastest-growing luxury shopper demographic in the world.

Now, with the latest season of fashion weeks well underway — and several runway show cancellations in New York, London, Milan and Paris — some of the biggest names in the industry are publicly counting the cost of coronavirus-related disruption on bottom lines.

“Our environment has changed significantly with the coronavirus outbreak,” Kering’s chief executive, François-Henri Pinault, said on an earnings call Wednesday, adding that half of the company’s China stores were closed, while those still open had limited hours.

“Due to the evolving nature of the situation, it is impossible at this time to fully evaluate the impact on business and how fast it will recover,” he said.

  • Updated Feb. 10, 2020

    • What is a Coronavirus?
      It is a novel virus named for the crown-like spikes that protrude from its surface. The coronavirus can infect both animals and people, and can cause a range of respiratory illnesses from the common cold to more dangerous conditions like Severe Acute Respiratory Syndrome, or SARS.
    • How contagious is the virus?
      According to preliminary research, it seems moderately infectious, similar to SARS, and is possibly transmitted through the air. Scientists have estimated that each infected person could spread it to somewhere between 1.5 and 3.5 people without effective containment measures.
    • How worried should I be?
      While the virus is a serious public health concern, the risk to most people outside China remains very low, and seasonal flu is a more immediate threat.
    • Who is working to contain the virus?
      World Health Organization officials have praised China’s aggressive response to the virus by closing transportation, schools and markets. This week, a team of experts from the W.H.O. arrived in Beijing to offer assistance.
    • What if I’m traveling?
      The United States and Australia are temporarily denying entry to noncitizens who recently traveled to China and several airlines have canceled flights.
    • How do I keep myself and others safe?
      Washing your hands frequently is the most important thing you can do, along with staying at home when you’re sick.

Despite posting robust quarterly results, Kering, owner of names like Gucci, Saint Laurent and Alexander McQueen, had seen “a serious drop in traffic in mainland China,” Mr. Pinault said, and a “strong drop” in global sales in recent days because of the virus.

Burberry, which derives about two-fifths of its sales from Chinese consumers, has said the effect of the virus is worse than the disruption caused by the Hong Kong protests, which halved sales for the British luxury brand in its last fiscal quarter. Roughly a third of Burberry stores in mainland China have been shut, the company said in a statement, while foot traffic had plunged 80 percent at the stores that remained open, prompting the company to scrap its full-year guidance.

Several leading American fashion groups have also cut their profit forecasts this month. Last week, Capri, the owner of Michael Kors, Versace and Jimmy Choo, said it was reducing its sales outlook for the quarter by $100 million after closing 150 of its 225 mainland China stores. And Tapestry, which owns Coach, Kate Spade and Stuart Weitzman, said it was expecting sales to drop as much as $250 million after closing most of its stores across mainland China.

“Luxury spending has hit a sudden stop in China, with sales either at zero for most brands or down by at least 80 percent,” said Luca Solca, a global luxury goods market analyst at Bernstein. “The coronavirus is likely to have a greater impact on the sector than the SARS epidemic did in 2003, given how much more reliant brands are on China and Asia for sales growth.”

Concerns are also growing around the effect on consumer morale. Beyond just the physical barriers to luxury spending, the contamination fears centered on crowded places are unlikely to create the sort of positive emotional and psychological background that make people inclined to shop.

Little wonder, then, that major names have clamored to publicly donate money to combat the outbreak. On Jan. 27, Louis Vuitton Moet Hennessy LVMH announced that it had given $2.2 million to the Red Cross Society of China. Days later, Richemont donated $1.4 million to the same cause, and Kering donated $1.1 million.

The outbreak could not have come at a worse time for many Western luxury brands. It coincided with the Lunar New Year festival, which is usually one of the most commercially significant weeks on the global trading calendar. It also means that thousands of factories — already closed over the celebratory New Year period — have yet to reopen, bringing manufacturing to a near standstill.

Few top-tier luxury names produce in China (and those that do are often not willing to disclose it). Ralph Lauren makes a quarter of its goods in China, according to estimates by Wells Fargo, while the number for the upmarket outerwear company Canada Goose is around 10 percent.

But many other high-end apparel and footwear brands are reliant on the country when it comes to their supply chains. There could be added costs because of order backlogs and logistics delays, as well as a looming threat to global trade. Given that China is the world’s largest textile producer, with exports worth more than $280 billion a year, some analysts think shortages may soon become apparent in stores, even though the fashion industry often orders goods further in advance than many other sectors, owing to seasonal collection cycles.

“The next few weeks should be critical, as further delays in the restart of production could begin to result in out-of-stocks at U.S. shelves as early as mid-April,” the Wells Fargo analyst Edward Kelly said in a note to investors.

Regardless of widespread jitters about the short-term disruption caused by the virus, key luxury stocks like LVMH and Kering have remained relatively resilient. Most analysts think that well-managed luxury brands with enduring popularity and high margins should be able to withstand the short-term volatility.

Concern is reserved for hard luxury players (groups, like Richemont, that largely sell watches and jewelry) and midmarket labels with less ability to absorb financial shocks or that were already seeing sluggish sales. Assuming a 20 percent drop in Chinese consumption in the second quarter of 2020, UBS predicts a 3 percent decrease in earnings per share for brands like LVMH and Hermès, compared with 8 percent for Richemont and 7 percent for Burberry, which has a particularly high exposure to China.

“The market seems to be taking the coronavirus in its stride, with the idea that this will be temporary, while the underlying appeal of the sector and its strength is very strong,” Mr. Solca of Bernstein said. “It would appear investors think this will be a temporary blip, and then we will go back to normal.”

Right now, however, the sidewalks of Bond Street feel much different. One shop assistant at an Italian luxury house, who asked not to be named discussing store business, said the absence of Chinese shoppers had been keenly felt. She estimated that in the last month, sales had dropped 40 percent.

“There are still clients coming in, mainly from Britain, America and the Middle East,” she said, adding, “It feels far from normal.”

Amazon’s 30-Day FREE Trials


 



Read more on our Reddit


Read more on our Facebook


Read more on our Instagram