Luxury Feels The Corona Effect

Luxury brands are taking a blow from the coronavirus and should brace for sluggish sales throughout this spring. Chinese tourists normally flock to high-end designer stores like Gucci, Louis Vuitton and Channel, queuing outside before they can go on a spending spree. This has been the story in London, Paris, and Milan, where the biggest stores are situated. Today, the stores are next to empty.

Chinese consumers accounted for around 35% of the total spending in the global luxury market in 2019 and 90% of the growth in global luxury goods sales, according to data from Bain.  Approximately 50 million Chinese are in quarantine due to the coronavirus and have travel restrictions to 70 countries. The luxury brands have long been dependent on the consumption from Chinese tourists and are now taking a beating in decline of sales.

François-Henri Pinault the CEO of Kering who owns Gucci, Saint Laurent and Alexander McQueen announced that they have seen a “strong drop in traffic and in sales” in the recent weeks. Burberry has also said that the coronavirus is having a bigger effect on sales than what the Hong Kong protests did, which slash sales by 50%.

The market response has been to sell off the companies sensitive to Chinese consumption. Louis Vuitton Moet Hennessy LVMH is certainly one of these companies which stock has plunged 30% since mid-February. However, Bernard Arnault, the LVMH CEO, commented on the coronavirus outbreak telling the markets not to panic. 

“If it dies out in two months or two months and a half, it’s not terrible. If it takes two years, that’s a different story”

Bernard Arnault

LVMH differs from most luxury companies with regard to its well diversified product portfolio. LVMH derives income from six separate business divisions in many global areas. For example, Duty Free Shops sales may drop as travel declines in all markets, but they can be offset by a rise in wine and spirits revenues. Last year, the company’s sales grew by 15 percent and was complemented by the acquisition of high-end jewellery designer Tiffany & Co. LVMH is a good operator and is likely to find synergies with its current jewellery resources.

Good financial performance, a diversified market model, a loyal consumer base and a versatile workforce provides LVMH with a good capacity to withstand the current retail climate. The businesses that have a greater chance of recovering in the second half of this year are those with an aligned supply chain, a well-balanced geographical mix of stores and a diversified business model.

Article published in our March Newsletter

Max Römbo, MSc in Finance

Published by lisboninvestmentsociety


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