Hurt by China economic slowdown, luxury sector can recover if...
Originally published at the South China Morning Post on January 25, 2016.
Although China’s economic slowdown and anti-corruption campaign have caused a sales slump in the luxury sector recent years, analysts say that growth could pick up if the equity markets stabilise and travel recovers.
The luxury sector saw growth of just 3 per cent to 4 per cent last year as China’s sluggish economic growth – compounded by the government’s anti-corruption drive – and a sharp decline in the equity markets from mid-June caused sales growth to slow, HSBC said in a report released on Thursday. Yet analysts say that growth will rebound to about 6 per cent this year if markets become less volatile and travel picks up.
“We see no concrete signs that Chinese consumers have lost their appetite for luxury products and argue that the psyche of the Chinese consumer as well as the perception of travel safety will be more important driver than China GDP or the level of the RMB,” HSBC analysts said, adding that measures to stabilise the equity markets including watch de-stocking and price changes will help boost sales. “Given the sector’s performance, we believe there are many buying opportunities but we favour LVMH (Louis Vuitton Moet Hennessy), Dior, Moncler and Richemont.”
Analysts expect the sector to see more long-term growth, with sales being driven more by sales in existing stores rather than expansion of retail space, as well as by Chinese travel and consumption. There will be continued instability in soft luxury goods like fashion, and earnings cuts will lead to lower target prices.
“Most of the brands have flagships. What they’re trying to establish is more sales in existing stores rather than rolling out more stores – it’s less costly,” said Erwan Rambourg, global co-head of consumer and retail for HSBC, who co-wrote the report.
Travel is also a main driver for luxury consumption, with travellers accounting for at least 45 per cent of sales in the industry, the report said. Last year saw a spike in travel safety scares as a result of terrorist attacks such as those in Paris on November 13. Other factors that have affected travel include the decline in the euro causing tourists from China and the US to buy earlier in the summer, a trend of travellers choosing to spend more on experiences rather than products, and “a possible hiccup” linked to the implementation of a visa scheme for Europe’s Schengen zone.
“Any threat to travel could derail growth. Korea saw a MERS-related collapse in sales at travel retail over the summer,” the HSBC analysts said. “The Paris attacks, events in other places and fears of increased geopolitical tension have put pressure on travel and, generally speaking, the psychology of high-end consumers.”
Despite the slowdown in China’s economic growth, current gross domestic product levels remain high enough to drive consumption from the middle class, with many more Chinese consumers still expected to enter the luxury market. Less than 10 million people in China consumed luxury products, and about 50 million to 80 million purchased affordable luxury goods, the report said, adding that Chinese travellers accounted for 35 per cent of global luxury consumption.
The depreciation of China’s currency has also sparked fears that have negatively impacted sales, but analysts say that the downturn – about a 6 per cent decrease from the peak against the euro and 2 per cent year-on-year fall – is not extreme and that 2016 will see a modest rebound in sales. Hong Kong’s luxury sector had also suffered as a result of the peg with the US dollar, which had made the local currency more expensive, the report said.
“A slight RMB weakness will incentivise mainlanders to purchase a bit more at home and enable luxury managers to avoid lowering prices in China, which apart from Chanel, Richemont and Burberry, most have been reluctant to do,” the analysts said.