The luxury world is very vigilant about the situation in China

Will the consumer virus be stronger than the Covid19 virus while Shanghai remains confined and Beijing ramps up its health restrictions in the face of rising pollution? The question monopolizes the leaders of luxury. The entire sector is closely watching the situation in China, its second market after the United States.

In 2021, China was a strong starting point; In the first quarter of 2022 as well. Stronger than expected, Moncler sales jumped 60% in the first quarter, to 589.9 million euros, driven by “strong performance in China that offset new restrictions linked to Covid19” as well as sales in the US and online, a factor shared by others, as evidenced by From first-quarter results from LVMH (owner of Les Echos), Hermès and L’Oréal.

However, due to store closures in China, first-quarter sales of Gucci, Kering’s flagship brand, disappointed, sending the group’s share price down, the largest drop in CAC40 on April 22 (loss of 4.8% to €526.1) . “Gucci is a brand that is more exposed than others to this market and relies on Chinese consumers,” explains Luca Solca, an analyst at Bernstein. In mid-March, a pivotal period as restrictions tightened, a tenth of the Gucci network (which has more than fifty stores) closed.

Italian and American brands are more likely

“If restrictions continue in China, the impact could be greater on Kering, Ferragamo or US brands that embody accessible luxury,” the analyst continues. According to him, LVMH and Hermès would then be “less affected”.

Moncler indicated on May 5 that its network in mainland China (40 stores) is now affected by 30%, compared to 10% in March. However, Remo Ruffin, the Italian group’s chief executive, still says he is “optimistic about the future”. Despite the economic situation, its priority markets will remain China and the United States; Rather, they will have to ensure “50% growth by 2024”.

Towards a double reversal of the market?

In April, during the general meetings of shareholders of luxury groups (LVMH, Hermès, L’Oréal, etc.), no dark scenario for China was presented. The fear of a setback in the Chinese market is now even deeper. Some no longer see signs of a “quick return to normal”. “Everything will depend on the scale of the outbreak and the Chinese authorities’ choices with the Zero Covid policy,” one analyst notes. Claudia Darbizio of Bain & Company believes it is too early to say whether the latest actions will have a significant impact on sector activity in China. Already, nearly 40% of stores in this segment in China have been affected by the restrictions. Louis Vuitton will have 53 stores there, Chanel as many and Hermès, more than 25. “There could be a leak and then a clear rebound,” an expert in Asia estimates. “The recovery in May and June could save the following results,” says one analyst.

In Shanghai, China’s most dynamic fashion metropolis, which accounts for 9% of global luxury sales, the director of a ready-to-wear subsidiary is concerned: “We can’t predict anything. Remember that the shutdown had to be partial and of short duration, within limits Fifteen days, it was said; the opposite has happened. Despite social protests, the strict lockdown has been extended indefinitely.

Besides consumption, the barriers associated with the pandemic are crippling production chains. Estée Lauder has lowered its sales and profit growth forecast for 2022 to 7-9% (from 13-16% previously) due to restrictions that have “affected consumer traffic in the Chinese market” and the impact on its distribution sites in China in the Shanghai region. The Cosmetics Group (sales up 10% to $4.25 billion in the first quarter) has seen a 4% drop in sales in the Asia Pacific region since January 2022.

Seoul on the horizon

Will online sales (read Tmall interview) be a growth engine? E-commerce saved luxury in China in 2020 and 2021, but the logistical problems are now more acute.

Meanwhile, luxury is spreading elsewhere in Asia. Dior showed a parade in Seoul on April 30 and opened a pop-up there. South Korea (6% of the global market) is very dynamic for both fashion and cosmetics (significant growth of L’Oréal’s luxury division). Chanel and Louis Vuitton could have recorded 30% growth there in 2021. This is the market designated as “Asia’s most beautiful growth promise”. Before China regains its role as a locomotive.

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