LVMH & Kering follow Burberry and cut their outooks for China

Monday, 10 August 2015

ANALYSIS If less than a year ago China was the promised land of opportunities for luxury goods retailers, now, big fashion and luxury players such as LVMH and Kering, attributed their positive second-quarter performance to sales in markets excluding China, Hong Kong and Macau.

"Companies thought China was the land of opportunity, but it's not living up to that promise," Euler Hermes chief economist Ludovic Subran told FT.com. "They realise that the business environment is changing for the worse."

Actually, LVMH and Kering reported first-half profits that mainly came from Japan and Europe, although they noted that Chinese tourists shopping abroad contributed to sales there.

Austerity measures and an anti-corruption drive under President Xi Jinping have also curbed spending. Restrictions in terms of spending on lavish gifts have prompted a shift in shopping attitudes as consumers became more price-sensitive and made their purchases overseas.

"With the yen and the euro having declined against the yuan, Chinese consumers feel they are getting better value abroad," ‘Trends Journal’ publisher Gerald Celente told ‘The Straits Times’.

Aimed to get the best prices possible, tourists from mainland China have as well abandoned luxury stores in the neighbouring Hong Kong and Macau - two major destinations where travellers spent a lot of cash on luxury goods - and herded to outlets in Europe, South Korea and Japan.

Now, analysts suggest that companies have to shed old models of sales, like pricing and distribution, and embrace innovative new ways to attract young affluent customers who do not show brand loyalty, explains the ‘Financial Times’.

"In this new environment, brands must undergo a fundamental paradigm shift if they want to win in the years to come," Bain & Co partner Claudia D'Arpizio said in this regard.

"There is a shift of business to other geographies," agreed LVMH finance director Jean-Jacques Guiony.

Hong Kong sales decline for the fourth consecutive month

Hong Kong retail sales fell for the fourth straight month in June since the tourists influx continued to decrease, as a drop in tourist arrivals continued to hit sales of big-ticket items such as jewellery and watches, reports Bloomberg.

Retail sale were down 0.4 percent from the previous year in value terms to 4.8 billion dollars in in June, as published by Reuters. That followed a revised 0.1 percent decline in May, 2.1 percent drop in April and 2.9 percent slide in March. In volume terms, sales rose 4.4 percent in June, against revised growth of 4.7 percent in May.

"The near-term performance of retail sales is still subject to uncertainties, depending on inbound tourism growth and any spillover to consumption sentiment from the recent stock market volatility," the government said in a statement.

In fact, for the first six months, the value of retail sales fell 1.6 percent from a year earlier, while volume was up 1.7 percent.

Main factors for this stoppage have been China's slowing economy and volatile stock markets have hit retail spending and tourism.

Consequently, the Hong Kong Retail Management Association said the majority of its members forecast that the declining trend in retail sales will continue in the third quarter with no particularly favourable factors in sight.

Trying to find a go-around while the economic slowdown lasts, Burberry, LVMH, and Kering have initiated talks with mall owners in Hong Kong to renegotiate prices amid falling sales.

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