Luxury Faces Headwinds in China, Room to Grow in the Americas
Luxury brands may face additional headwinds in China as pandemic-related restrictions widen to Beijing, Barclays warned in a research report Monday.
With around a dozen locations each, “Gucci and Salvatore Ferragamo appear to have the highest number of stores in Beijing,” analyst Carole Madjo wrote, noting that Gucci blamed its exposure to China, and lockdowns in Shanghai, for the weak first-quarter figures that parent Kering unveiled last Thursday. “Going forward, we also remain cautious around Ferragamo and Tod’s first-quarter sales and second-quarter outlook.”
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Shares in all of Europe’s luxury groups — LVMH Moët Hennessy Louis Vuitton, Kering and Compagnie Financière Richemont — slumped up to 5 percent in trading on Monday.
“I think it is because the Chinese COVID-19 problem seems to be escalating, plus the continuing war in Eastern Europe, with no apparent end in sight,” commented Luca Solca, senior research analyst, global luxury goods, at Bernstein.
Beijing began mass testing on Monday following a rise in case numbers over the weekend in the Chaoyang district, prompting panic buying of groceries and other necessities. China aims to eradicate the virus from the country completely.
The capital city is home to 20 million residents — and the highest number of luxury units with 183 stores across 31 brands versus 178 in Shanghai, according to Barclays tallies. “Case numbers reported in Beijing remain low as of today, but this could change following mass testing.
“We expect some cautiousness to remain in the sector until we get more visibility around the Chinese macro environment,” it added.
Swatch Group also has a sizable network in Beijing, including 36 Tissot stores, 13 Omega boutiques and 11 Longines locations. Fendi and Saint Laurent each boast nine boutiques in the city.
In a separate report on Monday, Barclays suggested luxury brands enjoying robust U.S. sales growth should consider opening more stores in such cities as Boston, Chicago, Dallas, Detroit, Houston, Washington, San Francisco, Philadelphia and Los Angeles.
“Despite being one of the biggest luxury goods markets, the penetration of luxury brands in the U.S. is still highly concentrated to a limited number of cities,” the investment firm said, recommending cities based on population density and income levels — and Vuitton’s trailblazing experience.
Prada, Hermès, Kering and Burberry are among players said to be plotting openings in those cities, with Moncler advised to do the same.
Barclays also analyzed credit-card data to project prospects for luxury spending the U.S., which has become a key growth engine for Europe’s big players.
Based on about 1 billion transactions and “a basket of brands such as Louis Vuitton, Gucci, Dior, Moncler, Burberry and others,” Barclays found 42 percent growth in fashion and leather goods in the first quarter, which came above its own forecasts of a 32 percent bump for soft luxury.
By contract, sales growth in jewelry — based on purchases of such brands as Cartier, Van Cleef & Arpels, Tiffany and Bulgari — came in at 27 percent, below Barclays’ expectation of a 35 percent gain.
According to company data, the luxury players with the most exposure to the Americas are Ferragamo at 29 percent; Kering and Burberry at 26 percent; Richemont at 22 percent; LVMH’s fashion and leather goods brands, 21 percent; Prada, 18 percent; Moncler, 17 percent, and Hermès, 16 percent.
“The key question on the U.S. market remains whether the higher level of demand that was seen during the pandemic can be sustained,” the report said, citing some risk of slowdown, including a risk of recession and of spending reverting to services over personal goods.
SEE ALSO:
Gucci Casts a Shadow on Kering in Q1
America Seen as Eldorado for Luxury Consumption
LVMH Q1 Revenues Jump Despite War in Ukraine, China Lockdowns
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