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Gauging China’s Rebound

Promising third-quarter results reflect renewed market momentum in China after years of slowing growth, yet the rebound is no panacea for the luxury sector.
Illustration: Costanza Milano for BoF
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  • BoF Team

Hello BoF Professionals, your weekly briefing is ready.

Following a poor first half of 2016, several key luxury players have posted promising third-quarter results, partly driven by a rebound in China. Spending by the Chinese has long been a critical engine of growth and the country’s recent economic slowdown, coupled with a much-publicised government anti-corruption campaign, severely hurt luxury brand performance.

Now, LVMH, Hermès and others are reporting new momentum in China. This week, Hermès said it registered 14 percent growth in the Asia-Pacific region in the third quarter. “China is growing at a better pace, mainly because the economy is strengthening and because of domestic consumption,” said Hermès chief executive Axel Dumas on a call with reporters. Meanwhile, LVMH’s flagship brand Louis Vuitton — a key industry benchmark — reported that sales to Chinese consumers, which were flat in the first half of 2016, jumped 12 percent in the third quarter.

Certainly, the repatriation of Chinese spending associated with a wave of terror attacks in Europe, which has discouraged travel to Paris and other key fashion capitals, contributed to growing sales in mainland China. Tighter border controls and other measures discouraging ‘daigou’ (or illicit sales agents engaging in price arbitrage) have also been a factor. But growing industrial output and retail sales show that the wider Chinese economy is also rebounding, boosting the ‘feel good’ factor amongst shoppers and driving consumption.

Few industry observers expect China to return to the exuberant consumption patterns of the past, however, predicting healthy but moderate growth. Indeed, even as China rebounds, after three years of stagnation, 2016 marks the first time in history that Chinese consumers made up a smaller percentage of total global luxury sales than they did the year before, according to a study by Bain & Company released this week. Still, China’s contribution to total luxury consumption is expected to rise again in the long-term, buoyed by a growing middle class with more disposable income.

One thing’s for sure: a Chinese rebound is no panacea for a luxury goods sector facing widespread geopolitical uncertainty. For that, the industry may want to consider the opportunity in e-commerce, now the world’s third largest luxury market. Some observers are calling it ‘the new China.

THE NEWS IN BRIEF

Hermès recovery gathers pace

. Luxury giant Hermès posted a 8.8 percent rise in like-for-like sales, helped by growth in the Chinese market and in leather goods, including its classic Birkin bag. The company beat market estimates and reported revenue of €1.26 billion, leading its shares to rise as much as 2.4 percent on the Paris Bourse, bringing some relief to a luxury sector that seems to be gradually improving ahead of the key Christmas trading period.

Coach turnaround on track. Coach reiterated its expectation that revenue will grow by a low- to mid-single-digit percentage this fiscal year, despite a turbulent economic environment, signalling the company's progress with its turnaround plans. The affordable luxury player is recasting itself as a 'modern luxury' brand and has removed its merchandise from 250 department stores where poor sales had forced the label to apply steep discounts. With Stuart Vevers at the creative helm, Coach has also introduced new items and limited-edition products to entice shoppers to pay full price.

Hugo Boss cost-cutting drive shows progress. The struggling German fashion group says its cost-cutting drive is working, after posting better-than-expected third-quarter results, buoyed by sales in China. The company's new chief executive Mark Langer is refocusing on the company's core men's suiting business, reversing the decision of predecessor Claus-Dietrich Lahrs who invested heavily in womenswear as part of a plan to take the brand further upmarket.

Italian watchdog fines LVMH exec over Bulgari. LVMH managing director Antonio Belloni was fined €350,000 for divulging confidential information to a fund manager before the conglomerate's acquisition of Bulgari in 2011. Belloni, who denies the charges, is said to have informed an asset manager at Swiss wealth manager Pentagram of an upcoming LVMH offer for Bulgari shares. LVMH said none of the positions held by Belloni would be affected by the decision.

Higher luxury prices coming to Britain. This week, Harrods boss Michael Ward revealed that some luxury brands tried to aggressively push through price increases just days after Britain's 'Brexit' referendum sent the pound plummeting. Luxury brands will surely raise prices for consumers shopping in the UK starting next season. In the meantime, the country remains one of the cheapest luxury markets in the world.

Elder Statesman teams up with the NBA. Greg Chait's Los Angeles-based label The Elder Statesman has signed a long-term deal to produce luxury apparel and accessories with the National Basketball Association in the US. The NBA has likely benefited from the growing fashion savvy of its players and the deal could help further embed the association into the wider fashion conversation, while surely boosting brand awareness of The Elder Statesman. The collaboration is the latest in a string of partnerships between fashion brands and professional sports teams.

PEOPLE

Condé Nast's Chuck Townsend retiring amidst shake-up. The chairman of Condé Nast is retiring amidst sweeping changes at the print-led media giant, as it tries to transform itself into a major digital player. The company is undergoing a widespread restructuring, including a shake-up across its executive ranks and a reorganisation of its operations around five groups: business, editorial, research, technology and creative. Employees across the company are bracing for layoffs.

Carine Roitfeld and Stephen Gan part ways. Carine Roitfeld and Stephen Gan have ended their four-year partnership on CR Fashion Book, which launched under Gan's Fashion Media Group in 2012 after the end of Roitfeld's decade-long tenure as editor-in-chief of Vogue Paris. Issue 10 of the hefty biannual will be published by Roitfeld as scheduled in March 2017 without a new partner. Roitfeld and Gan will both continue to work for Harper's Bazaar.

H&M swaps Beckham for The Weeknd in bid for millennials. The Swedish fast fashion giant is dropping retired soccer star David Beckham from its marketing and launching a collaboration with the 26-year-old Canadian musician Abel Tesfaye, also known as The Weeknd, as it seeks to win over young shoppers. H&M will end its near five-year partnership with 41-year-old Beckham this autumn. On March 2nd, the company will launch a one-off menswear collection with Tesfaye, who was honoured this week in New York as one of WSJ's Innovators.

Fashion designer James Galanos passes away. Veteran fashion designer James Galanos passed away at his home in California at the age of 92. Galanos, whose dresses were worn by the likes of former First Lady Nancy Reagan and actress Judy Garland, was often referred to as 'America's couturier' due to his immaculate attention to detail. His creations won him numerous awards, including a lifetime achievement award from the Council of Fashion Designers in America and a plaque on Fashion's Walk of Fame on Seventh Avenue in New York.

TECHNOLOGY

Shooting the campaign for i.am+ Buttons | Source: Courtesy

Will.i.am debuts wearable tech accessories. The musician and entrepreneur has launched a pair of 'Button' Bluetooth headphones, partnering with the likes of Kendall Jenner, Naomi Campbell and Shaun Ross, who have joined Will.i.am's i.am+ wearable tech venture as ambassadors and model the new product in advertising. The headphones went on sale this week in Apple stores for $229.95. Additional connected fashion products, including Button bomber jackets and Button chokers, are expected to debut next year.

Instagram tests shopping. Long a powerful generator of purchase intent, Instagram is introducing a new feature that lets brands tag products in the images they upload to the platform. The move is part of a broader shopping strategy, though the company is starting small — mindful of the fact that commerce hasn't worked well on social platforms like Twitter and Facebook — and testing the new feature with just 20 US retail brands including Kate Spade, J.Crew and Warby Parker without taking a commission.

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