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Caution: China’s Luxury Rebound May Not Be What It Seems

Sales trends in Mainland China are encouraging, but don’t reflect anything remotely close to a cure for luxury’s woes.
A Louis Vuitton store in Shanghai | Source: Getty Images
  • Vikram Alexei Kansara

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According to reports, Hermès’ second-largest flagship in Guangzhou did $2.7 million in sales last Saturday. The news prompted optimism that pent-up demand for luxury goods would power a wave of “revenge spending” by shoppers and contribute to a wider rebound in sales in Mainland China as the relaxation of social distancing measures allows stores to reopen.

On Thursday, LVMH, the world’s largest luxury conglomerate and a bellwether for the sector, lent some support to the hypothesis, reporting a sharp rise in Mainland China sales, starting in mid-March as stores in the country began re-opening.

“We’ve seen very substantial growth rates, sometimes in excess of 50 percent, so it really shows the appetite of Chinese people after two months of lockdown to come back to stores and come back to their previous patterns of consumption,” said LVMH Chief Financial Officer Jean-Jacques Guiony on a conference call following the group’s first-quarter results presentation.


Chinese consumers made up 90 percent of global luxury growth last year and the early signs that the country’s luxury shoppers are shopping again suggests that a critical portion of demand for luxury goods may have been deferred — and not destroyed — by the Covid-19 crisis. This is good news.


And yet, the rebound isn’t exactly what it seems.

Chinese consumers historically do only about one-third to half of their luxury spending at home, preferring to buy while travelling outside Mainland China, both to capitalise on persistent price differentials and to benefit from the symbolic value of buying European luxury goods in the continent’s fashion capitals. In recent cycles, this ratio has started to shift a little, as some Chinese shoppers “repatriate” their luxury spending. But with overseas sales effectively at zero and unlikely to bounce back anytime soon, the reality is Mainland sales would roughly have to double or triple to make up for lost revenue.

Today, China’s National Bureau of Statistics reported that gross domestic product shrank 6.8 percent in the first three months of 2020 compared to the previous year, the first contraction since the country began reporting quarterly GDP back in 1992. The news is likely to take a heavy toll on consumer confidence, making the enormous jump in domestic luxury spending needed to even come close to making up for lost purchases by Chinese nationals overseas next to impossible.

What’s more, the early rebound seen in China is unlikely to be replicated in other key markets like Europe and the US. In the West, some countries are preparing to re-open, but the shape and speed of the recovery are likely to be shallower and slower than in China as less effective government measures for combating the virus result in deeper and more widespread economic dislocation and a greater hit to consumer confidence and discretionary spending.

Furthermore, Western luxury consumers have a very different profile to their Chinese counterparts. While Chinese luxury shoppers are largely younger, and more likely to be first-time buyers who remain eager to telegraph their newfound socio-economic status, in the West, luxury consumers are typically older repeat purchasers, who have less incentive to spend.

In the US, in particular, they have been hit by the stock market collapse and may also suffer from a sense of guilt that further dampens luxury spending, as many of their compatriots suffer disproportionately from the human and economic fallout of the virus due to the relative lack of a social safety net.


Overall, the prognosis for the luxury sector isn’t good. LVMH reported a 15 percent drop in first-quarter revenue year on year. Kering, which reports its first-quarter results next Tuesday, has signalled that it expects to see a similar decline. And second-quarter results may be far worse.


Indeed, even as social distancing measures begin to lift, it’s clear that the post-lockdown landscape won’t be the same. For one, a return to normality is almost certain to happen in waves over a significant period of time, especially in key Western markets, which have been worst hit by the crisis. And according to Bernstein analyst Luca Solca, even when government restrictions are loosened, we won’t return to travelling nearly as much as before, putting a huge dent in travel retail; we won’t be socialising as much, dampening sales of luxury fashion, accessories and beauty products; and we will be significantly poorer on average with possible long-lasting impact to discretionary spending. In the US alone, 22 million people have sought unemployment benefits in the last month, the worst stretch of American job losses in history.

Yet, there is hope for the future. The stock market is rising again, and investors appear to believe in the long-term prospects of major luxury players like LVMH and Kering, whose shares have remained relatively strong through the crisis and continued to climb since mid-March. But how the sector gets to that future, and just how long the disruption will last, remain to be seen.

— Vikram Alexei Kansara



A Louis Vuitton store in Manhattan's Soho district | Source: Getty Images A Louis Vuitton store in Manhattan's Soho district | Source: Getty Images

A Louis Vuitton store in Manhattan's Soho district | Source: Getty Images

LVMH reports 15 percent drop in first-quarter revenue to €10.6 billion ($11.5 billion). The luxury conglomerate saw the worst declines in watches, jewellery and selective retailing, which includes the duty-free shop chain. The dropoff in fashion and leather goods was milder with sales down 9 percent. While business is starting to pick up on Asia, stores and workshops in Europe and the US remain closed.

Neiman Marcus skips bond payment. The retailer has been advancing preparations for bankruptcy, and is now in default with its creditors according to a letter seen by Reuters. The retailer, with roughly $4 billion in debt, closed its approximately 40 stores last month and furloughed the majority of its 14,000 employees.


Adidas secures €3 billion coronavirus funding from German state bank. The sports retailer will also suspend its dividend as a condition of the government-backed loan. Retail business has been hit by government-imposed lockdown measures to limit social interaction and by the postponement or cancellation of large sports events, including the Olympic games. Adidas has said it was still unable to provide an outlook for the full year 2020 under the circumstances.

Rolex joins leading watchmakers withdrawing from Baselworld. The flagging event has already seen high-profile exits including Swatch Group, Patek Philippe and Chanel. Rolex said it was unhappy with changes at Baselworld and recent decisions of exhibitions company MCH Group, which postponed the 2020 edition of Baselworld planned for April 30 to May 5 due to coronavirus.

Macy's taps investment bank to explore recapitalisation. Macy's has asked advisers to help manage its liabilities and explore options that could include new financing, sources say. Macy's has reportedly also enlisted debt restructuring lawyers at Kirkland & Ellis LLP. The move by Macy's is a sign of the severity of the crisis facing brick-and-mortar retailers, which were already struggling with the shift to online shopping.

As Spain loosens lockdown, Inditex slowly sends employees back to work. The fashion giant's logistics centres in Spain have reopened, but the company is said to be taking measures to ensure staff safety. Employees are working reduced hours — only to less than half their normal levels of activity — to reduce contact between people. Just three of Inditex's 13 Spanish factories were back at work making medical supplies for health officials.

Chinese manufacturing is recovering, but demand is now a concern. A European business group warned shutdowns in the rest of the world are threatening the supply of key parts and demand. Some overseas orders have been scrapped as the pandemic ravages the economies of China's trading partners, with many exporters firing workers and warning about factory closures in the near future.

Italy's fashion industry urges Rome to lift restrictions on production. Leaders say not reopening shortly to produce the Autumn/Winter collections would mean missing almost a year's worth of turnover. Italy's fashion and textile industry is the second-most important nationwide with a turnover of €95 billion ($98 billion), and there are fears that the current situation could force businesses to switch to other supply chains.

Report: J.C. Penney to hire advisors as it mulls debt management options. Brick-and-mortar retailers are struggling to keep up with the shift to online shopping, and the crisis has been exacerbated by the coronavirus outbreak. J.C. Penney is reportedly in talks with lenders about its liquidity needs. The company also furloughed a majority of its hourly staff and salaried associates last month, as it was forced to extend closures due to the health crisis.


L'Oréal cosmetics | Source: L'Oréal L'Oréal cosmetics | Source: L'Oréal

L'Oréal cosmetics | Source: L'Oréal

L'Oréal sales fall in first quarter, e-commerce surges. The cosmetics maker said demand in China had begun to pick up again as coronavirus restrictions there are eased. L'Oréal said that sales in the January to March period stood at €7.2 billion (about $7.8 billion), down 4.3 percent on a reported basis from a quarter earlier.

Beauty bosses take salary cuts. Top execs at the Estée Lauder Companies are taking 50 percent pay decreases, while Coty's can expect 25 percent cuts. Estée Lauder's executive leadership team will also see their salaries reduced by 30 percent. The moves come as beauty brands try to cushion the blow of the coronavirus crisis.


Clare Waight Keller after the Givenchy haute couture Spring/Summer 2020 show in January | Source: Pascal Le Segretain/Getty Images Clare Waight Keller after the Givenchy haute couture Spring/Summer 2020 show in January | Source: Pascal Le Segretain/Getty Images

Clare Waight Keller after the Givenchy haute couture Spring/Summer 2020 show in January
| Source: Pascal Le Segretain/Getty Images

Clare Waight Keller exits Givenchy. The artistic director is leaving the LVMH-owned label after three years in the role. The Autumn/Winter 2020 womenswear collection presented in March in Paris will be her last for the house. A statement from Givenchy said a successor would be announced at a later date. The appointment may take longer than expected due to the coronavirus pandemic, which has closed down luxury operations across Europe and the United States.

LVMH cancels 2020 prize final, launches fund for previous winners. The €300,000 award will be split equally between the eight finalists, which include Ahluwalia, Casablanca, Chopova Lowena, Nicholas Daley, Peter Do, Sindiso Khumalo, Supriya Lele and Tomo Koizumi. The initiatives may prove a vital lifeline as store closures, crashing consumer demand and supply chain disruptions leave a growing number of independent fashion labels facing existential challenges.

EBay taps Walmart executive for CEO. EBay has hired Jamie Iannone as chief executive, effective April 27. Iannone joins the company from Walmart, where he was chief operating officer of e-commerce, and previously worked at eBay between 2001 and 2009. He replaces Scott Schenkel, who stepped in as interim chief executive following the departure of Devin Wenig in late September 2019.

Tapestry adds to board of directors. Coach owner Tapestry has appointed John P. Bilbrey, former chief executive of chocolate maker Hershey's, to its board of directors, bringing the total number of members to eight. Bilbrey also sits on the boards of Campbell Soup Company, Elanco Animal Health and Colgate-Palmolive.


Condé Nast and Hearst face major budget cuts amid the coronavirus crisis. But the rival publishers have so far taken different approaches to managing what's in front of them — and anticipating what's to come. Condé Nast announced furloughs and reduced working hours for some undisclosed roles. By contrast, Hearst employees with Covid-19 will be fully paid for up to 26 weeks, and those who are caring for someone with the virus can be paid fully for up to two weeks. Employees caring for kids who had school cancelled also receive an additional two weeks of 100 percent paid time off.

Warehouse workers risk Covid-19 to ship designer shades, face cream and sofas. Government stay-home orders have carve-outs for warehouses or e-commerce operations, allowing a wide array of retailers to piggyback on exemptions intended primarily to ensure the flow of necessities. The loophole means a large segment of retail workers — who often have scant benefits or sick time — must choose between their health and their paycheck.

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