Warn­ing Bells for Lux­ury In China

Ap­ple’s sales warn­ing might be sig­nal­ing trou­ble for high­end fash­ion sales this year.

WWD Digital Daily - - Front Page - BY EVAN CLARK

If Chi­nese con­sumers want fewer ex­pen­sive cell phones, what else are they ready to pull back on?

The warn­ing last week by Tim Cook, Ap­ple’s chief ex­ec­u­tive of­fi­cer, over slower sales of the brand’s prod­ucts in China rocked global stock mar­kets — and could be the prover­bial ca­nary in the coal mine for the lux­ury crowd.

“While we an­tic­i­pated some chal­lenges in key emerg­ing mar­kets, we did not fore­see the mag­ni­tude of the eco­nomic de­cel­er­a­tion, par­tic­u­larly in Greater China,” Cook said, at­tribut­ing a sur­pris­ing short­fall in the com­pany’s rev­enues to iPhone, Mac and iPad sales in the coun­try. “China’s econ­omy be­gan to slow in the sec­ond half of 2018. The gov­ern­ment-re­ported GDP growth dur­ing the Septem­ber quar­ter was the sec­ond low­est in the last 25 years.”

The warn­ing was felt acutely across the high-end uni­verse as Ap­ple has many of the as­pects of a lux­ury brand, with its higher price point, fo­cus on aes­thetic and pre­sen­ta­tion and prom­i­nent logo.

And many lux­ury stocks felt the sting, start­ing 2019 with de­creases as the mar­ket see­sawed and posted big gains on Fri­day. Dur­ing the first week of the New Year, the de­clin­ers in­cluded Ker­ing, down 3.7 per­cent to 397.40 eu­ros; LVMH Moët Hen­nessy Louis Vuit­ton, 2.9 per­cent to 251.15 eu­ros; Burberry Group, 2.3 per­cent to 16.98 pounds; Tapestry Inc., 2.2 per­cent to $34.24, and Her­mès In­ter­na­tional, 1.5 per­cent to 477.80 eu­ros.

But this isn’t the first warn­ing flare to shake con­fi­dence in the Chi­nese con­sumer.

An­a­lysts and in­vestors fret­ted over tighter en­force­ment of daigou re­sellers when LVMH re­leased third-quar­ter re­sults in Oc­to­ber. And shares of Tif­fany & Co. were hit hard in late Novem­ber, when the com­pany ac­knowl­edged that, while sales in main­land China were up dou­ble dig­its, Chi­nese tourists had cur­tailed their spend­ing abroad.

When China wor­ries arise, the lux­ury play­ers stress the long-term view, em­pha­siz­ing the ca­chet they have built in the mar­ket and how they’re us­ing new tools, es­pe­cially Alibaba’s Tmall, to reach shop­pers.

As Tif­fany ceo Alessan­dro Bogli­olo told WWD af­ter third-quar­ter re­sults: “The Chi­nese pop­u­la­tion is a ma­jor growth driver for the lux­ury in­dus­try. For me, what is cru­cial is that we are rel­e­vant for them. We know that the fu­ture — not only one quar­ter, but the fu­ture of this brand — has a lot to do with the rel­e­vance of Chi­nese con­sumers [who] in gen­eral buy at a higher av­er­age ticket than Amer­i­cans or Euro­peans or Ja­panese cus­tomers.”

Lux­ury might not have a choice but to rely on China over the longer term. Swiss bank Julius Baer noted re­cently that Chi­nese make up 32 per­cent of global lux­ury spend­ing, com­pared with Amer­i­cans, who ac­count for 22 per­cent of the pie, and Euro­peans at 18 per­cent. The for­tunes of high-end brands will be tied to China for the fore­see­able fu­ture.

In­stinet an­a­lyst Simeon Siegel de­scribed the Ap­ple warn­ing as “the loud­est data point” be­cause it’s the most re­cent sign of trou­ble, but said the over­all pic­ture is more mixed.

“Re­tail stocks were dec­i­mated over the last sev­eral months due to fears of global un­cer­tainty, trade war, China de­mand, etc., so the macro fac­tors are def­i­nitely there,” he said. “This sim­ply serves to stoke the coals. It’s just an­other rea­son to be wor­ried that China, which has been such an im­por­tant part of growth across all of re­tail in gen­eral and lux­ury in spe­cific, is cool­ing down. This is a fear that we all have to in­ter­nal­ize. The re­al­ity is, it’s a fear the [stock­hold­ers] have been dis­cussing for some time.”

Wall Street has de­vel­oped a par­tic­u­larly itchy trig­ger fin­ger with is­sues from lux­ury spend­ing to the U.S.-Sino trade war pil­ing on.

“Peo­ple are con­cerned about ev­ery­thing and we can see that in the stock mar­ket,” Siegel said. “The stock mar­ket is telling us peo­ple are scared of ev­ery­thing. And the rea­son they’re scared of ev­ery­thing is be­cause of the volatil­ity.

“The commentary from the bulk of com­pa­nies that have re­ported over the past month or two would not sug­gest that the China de­mand is evap­o­rat­ing,” he said. “But there’s enough fear out there to ques­tion: Is it slow­ing and to what de­gree?”

So­nia Lap­in­sky, a man­ag­ing di­rec­tor in AlixPart­ners’ re­tail prac­tice, said the lux­ury world is catch­ing up to other parts of the mar­ket that have al­ready seen weak­ness in China, driven by the trade war with the U.S.

“This is re­ally the start of a sig­nal for a turn for lux­ury,” Lap­in­sky said, re­fer­ring to the Ap­ple warn­ing. “The un­cer­tainty of the econ­omy and the slow­ing growth in China, that’s go­ing to raise un­cer­tainty across the board, par­tic­u­larly in the up­per end and lux­ury pur­chases. This is the first time we’re go­ing to start to feel more of a hit for lux­ury sales in China.”

The trade war en­tered into a 90-day cease­fire when Pres­i­dent Trump and Chi­nese Pres­i­dent Xi Jin­ping met last month — but the threat of 25 per­cent tar­iffs on vir­tu­ally all Chi­nese-made goods com­ing into the U.S. re­mains and the early bat­tles of the trade fight, in­clud­ing 10 per­cent tar­iffs, have al­ready hurt man­u­fac­tur­ers. That in turn has helped cool the Chi­nese econ­omy.

Even if the trade ma­chine started back up as nor­mal af­ter a year of tar­iff hikes, barbed com­ments and threats, it would take man­u­fac­tur­ers and brands time to ramp pro­duc­tion back up to help buoy the econ­omy.

The Chi­nese econ­omy slowed steadily through the first three quar­ters in 2018, with first-quar­ter GDP growth of 6.8 per­cent slow­ing to 6.7 per­cent in the sec­ond quar­ter and 6.5 per­cent in the third.

And the in­crease in Chi­nese re­tail sales of con­sumer goods slipped to 8.1 per­cent in Novem­ber, down from 9.2 per­cent as re­cently as Septem­ber, and off from an in­crease of 10.2 per­cent in Novem­ber 2017, ac­cord­ing to of­fi­cial gov­ern­ment fig­ures.

That shows the vul­ner­a­bil­ity of Chi­nese con­sumer spend­ing, which is still grow­ing at a very strong rate com­pared with de­vel­oped West­ern mar­kets. At the higher end, the spend­ing might even change more quickly given the pro­file of the lux­ury shop­per in the coun­try.

Jean-Jac­ques Guiony, chief fi­nan­cial of­fi­cer of LVMH, told an­a­lysts in Oc­to­ber: “The propen­sity to buy lux­ury goods from the Chi­nese cus­tomer is higher than it is any­where else in the world, which means that the start­ing point in terms of in­di­vid­ual av­er­age in­come at which they sort of get an in­ter­est into lux­ury is prob­a­bly lower in China than it is out­side, in the West­ern world, in Europe and in the U.S., hence, higher volatil­ity. For this client, the level of in­vest­ment into lux­ury goods is prob­a­bly higher in pro­por­tion of their in­come than it is in the West­ern world.

“When they feel good or bad on the econ­omy and on their own sit­u­a­tion, it has dis­pro­por­tion­ate con­se­quences on their propen­sity, ei­ther to pur­chase or not to pur­chase,” he said. “So it’s a more volatile mar­ket, but a more dy­namic mar­ket at the same time. I mean, we have the two sides of the coin.”

For 2019 and per­haps be­yond, it looks like a lux­ury roller­coaster in China.

A slow­down in Ap­ple sales in China could sig­nal trou­blefor lux­ury fash­ion.

Louis Vuit­ton in Beijing.

Tif­fany & Co. has worked to build its Chi­nese busi­ness by join­ing Alibaba's Lux­ury Pav­il­ion.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.