A new report from Deborah Aitken, a luxury consumer analyst at Bloomberg Intelligence, shares her thoughts on what China’s reopening means for luxury brands and how the country’s Zero-Covid policy impacted the sector.
China’s move toward reopening and guidance to ease its Zero-Covid policy gives a tangible luxury-goods read across, bringing a potential spending pickup and more local travel. Share prices fell sharply again this year, mainly on China fears, because lockdowns curbed H1 luxury-goods sales by about 30% domestically and over 10% globally, and reopening-driven midyear rebounds didn’t continue.
Deborah Aitken, a luxury consumer analyst at Bloomberg Intelligence, commented, “Chinese shoppers’ 35% pre-pandemic share of the luxury market may be quickly rebuilt on reopening and lighter Zero-Covid restrictions, with local pickup, favoured ahead of slower-recovering international travel. China’s luxury-goods market share could have halved in 2022 after its stores were shuttered through part of H1 and customers were reticent to return to stores beyond the initial reopening euphoria.
“Travel could first recover locally — with Hainan and Macau popular destinations — helped by local currency strength. A greater portion of sales could remain in China for longer, with other Asian countries already in recovery and Japan particularly strong on local customers. Companies with the most Asia exposure and potential to pick up include Swatch, Hermes, Tod’s, Prada and Ferragamo, among others.”
The luxury-goods market is structurally buoyant (where open), with low levels of price elasticity, and with demand due to rebuild when Chinese cities reopen, Covid-Zero rules relax, and shoppers return to stores. By 2019, Chinese customers were the largest luxury-good clients by sales, making up about one-third of global purchases — 9% at home and as much as 75% when overseas. Much of that spending moved to China in 2020. Though China may have restrictive international travel rules for longer, local travel could quickly build. Store closings in China in 1H cut luxury sales by as much as 30% locally and over 10% globally.
US consumers rank second, with their shopping in Europe boosted by dollar strength in 2022. A light softening of US orders began in 3Q amid rate hikes, though high-end luxury brands escaped the slowdown.
Demand has been most resilient in luxury jewellery and watch brands, led by Richemont and encouraged by buoyant markets. Outside hard luxury, new designs in leathers and apparel (LVMH and Hermes) and collaborations — with more investment to accelerate e-commerce — remain high on company agendas for the year ahead. Robust domestic demand in the US is intact at the high end, and a rebuild in Europe flourished, helped by tourism. China’s growth is dependent on store reopenings and Covid-Zero rule relaxation. Luxury-goods stocks gained 34% in 2021, led by watchmaker Movado (159%), Watches of Switzerland (145%), Hermes (75%) and Richemont (75%). BI’s Luxury Goods Index share price is 26% lower so far this year.
Led by H1 constant-currency growth from Hermes, Remy Cointreau, LVMH, Richemont and Kering, consensus sees the median luxury-goods sales 12% higher in 2022. That’s even after Russia’s invasion of Ukraine as of Feb. 24, and with Chinese demand tempered by short-term store closings targeted to curb the resurgence of Covid-19 since the end of March. Lower case numbers build hope for reopenings that could stimulate some repair of the forward P/E of luxury peers and apparel brands from May’s 19x low.
Bloomberg Intelligence maintains its confidence in an earnings realignment to sales-growth forecasts as a base, considering robust raw-materials agreements, relatively low costs, the proven ability to raise prices without losing volume, luxury goods clients trading up, sizable gross margins and low supply-cost ratios.
Read more business news and guides here.
You must be logged in to post a comment.