- China has rebounded after feeling the early effects of the pandemic
- A collapse in international travel has weighed on the luxury sector
It has been a bad year for luxury companies. A sector that has been slow to embrace online shopping has been ravaged by pressures on consumer spending, a travel slowdown and manufacturing disruption. Louis Vuitton Moët Hennessy (FR:MC) brought the spotlight back onto the sector last week, after the French giant and jewellery company Tiffany & Co (US:TIF) were able to agree on a reduced price for a takeover that was on the verge of collapse in the autumn.
LVMH had derided Tiffany’s prospects as “dismal” in court filings in September – a shot that appeared part of the strategy that has culminated in a cheaper deal. LVMH chief executive Bernard Arnault has since said that the company remains “convinced as ever of the formidable potential of the Tiffany brand”. But the current luxury landscape and LVMH’s earlier diagnosis beg questions about the health of the sector and its future as a whole.
China is back on its feet
The coronavirus initially took hold in the luxury sector’s key growth market, Greater China. This was the first disaster for luxury businesses. At RMB770bn (£89bn), Chinese consumer spending contributed to a third of the world’s total spending on luxury goods in 2018, according to McKinsey. Last year, the consultancy projected this to rise to 40 per cent of global luxury spend by 2025, with Chinese consumers accounting for two-thirds of luxury spending growth.
Store closures followed. But the area has since staged a recovery, with Boston Consulting Group forecasting a 10 per cent lift to the sale of luxury goods in China compared with last year. Consumers have opted not to travel abroad and purchase goods from Kering-owned (Fr:KER) Gucci and Hermes (Fr:RMS) from their home countries. In May, Burberry (BRBY) caveated an April improvement in its mainland Chinese sales, compared with 2019, with the likelihood that spending had been repatriated into China. Most brands have experienced a lift to Chinese revenues.
“This has actually led to a polarisation in the luxury brands,” observed Third Bridge analyst Harry Barnick. “We’re seeing a rebound across certain brands, and those brands are primarily Louis Vuitton, Hermes, Chanel and Dior.” These companies have been able to leverage the might of their brands and their focus on exclusivity to drive Chinese sales. Their existing customer base and store estate have not required the onerous redirecting of inventories.
The travel slowdown has hampered luxury
A new problem for luxury businesses emerged as the pandemic moved into Europe. Around a half of European luxury custom relies on international buyers, according to Third Bridge estimates. This year, demand for air travel has fallen by two-thirds globally, according to the International Air Transport Association. In Watches of Switzerland’s (WOSG) second quarter, only 9.2 per cent of sales were linked to tourists and airports, compared with around a third over the same period in 2019. Last month, the watch purveyor nevertheless lifted its full-year revenue forecast to a range of £880m-£910m, having previously not expected sales to exceed £860m.
But falling demand has not been the only source of discomfort for luxury businesses in Europe. The continent remains a significant supply base for luxury companies. Mulberry (MUL) makes more than half of its bags in the UK, while more than 40 per cent of all luxury manufacturing takes place in Italy, according to McKinsey. Italy is famed for its ‘ateliers’, often small and family-run producers of luxury goods. Of Kering’s supply base, 84 per cent are located in Italy.
The ateliers, like most Italian businesses, were forced to close in the earlier half of the year, and the luxury sector remains highly exposed to the tightening of Italian coronavirus restrictions. So while LVMH and Tiffany have provided luxury’s recent blockbuster takeover, there is a building case for insourcing production and reducing reliance on potentially fragile external suppliers. A growing focus on vertical integration may therefore translate into higher M&A volumes.
Is there a growing case for luxury e-commerce?
The pandemic has also placed rising emphasis on the importance of online channels. The in-store experience is a key part of buying luxury goods and some businesses, most notably Chanel, continue to shun online platforms for products such as handbags.
The market for online ‘hard luxury’ sales – think watches and jewellery – appears small, with the total online market for luxury watches only sitting at £54.4m last year, according to market research group GFK. Store closures are likely to have contributed to a 41 per cent increase in online sales during the first six months of this year compared with 2019. It remains to be seen how permanent this growth in the online market is, but we should have a clearer picture of the future of luxury e-commerce as retailers shutter their doors once more across Europe as we head into the Christmas period. A tenth of UK consumers visited luxury stores last Christmas, according to Deloitte.
