Warning Bells for Luxury In China
● Apple’s sales warning might be signaling trouble for highend fashion sales this year.
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.