China Consumer, Talking Point

Out of fashion

Are luxury goods firms the best leading indicator of a China slowdown?

Out of fashion

Selling fewer of these: Burberry admitted to slowing Chinese sales, spooking investors

Last year Burberry, the British fashion house, booked Keane, a rock band, to perform at one of its new stores in Beijing. But Burberry will be hoping that one of Keane’s best-known songs, Everybody’s Changing, doesn’t take on unwanted meaning this year. Last week it told reporters that its sales had increased by the “mid-teens” in percentage terms in its first fiscal quarter, when previously they had been growing by up to 30% annually. No reason to panic quite yet, perhaps, but Stacey Cartwright, the company’s finance director, admitted that sales had been slower than expected. The news pushed Burberry’s shares down 7.4% to a six-month low.

“We’ve seen a slowdown in gift-giving in China. That’s small leather goods, cashmere scarves, but also trench coats. In China there is a political change later this year and we think some consumers are nervous about spending ahead of that change,” says Cartwright.

Burberry is not the only one…

Hong Kong jeweller Chow Tai Fook is also feeling the slowdown, with its own recent results providing some of the clearest evidence yet that China’s wealthier shoppers are turning more cautious. The company has become something of an unofficial economic barometer because of its reputation as a “mass-luxury” retailer, selling through a wide range of outlets across cities throughout the country.

So there was some alarm when it reported last Wednesday that its revenues rose 16% in the three months ending in June, which was about a quarter of its growth rate for the previous fiscal year.

As Chow Tai Fook is growing its retail network so rapidly, same-store sales offer a better basis for comparison. But they rose only 10% in China (well down on the 40% growth for fiscal year 2011). Same-store sales in Hong Kong and Macau, where the company makes about half its revenues, actually declined by 1% in year-on-year terms. “The affluent people in Hong Kong and China are making fewer purchases due to the weak economic sentiment,” says Kent Wong, group managing director of Chow Tai Fook. Its share price lost 11% the day after its results were announced.

What’s changed?

China is already the largest market for jewellery after the US, and for gold after India, and is gaining on both. But as the economy heads into slowdown – GDP in the second quarter rose just 7.6% compared with a year ago – the better-off are tightening their purse strings.

Cartier, owned by Richemont and much more towards the premium luxury end of the market than Chow Tai Fook, has also noticed a similar trend. “After a phenomenal year last year, there’s been a bit of a slowdown in mainland China,” its chief executive Bernard Fornas told the Wall Street Journal, adding that while sales are still increasing, they are not doing so at the same rate as 2011.

And Hong Kong is taking heed too…

The impact is also rippling through Hong Kong, where mainland visitors accounted for about 33% of the $52 billion in retail spend in the territory last year.

So May’s retail sales were another indicator, as revenues grew by only 8.8% compared to a year earlier, the weakest pace since 2009. The jewellery and watch segment declined the most steeply, from 15.1% growth in April to a 3.1% increase in May.

Tourist arrivals from mainland Chinese have fallen too. The number of visitors to Hong Kong slipped to 2.5 million in May from 2.6 million in the previous month.

According to CBRE, a property broker, that is being felt in the property market, where rates for retail space in the city have also started to slow: “The rate of growth will be significantly down on 2011 levels. There are signs that some retailers are unwilling to pay high rent,” CBRE warns.

Others are taking a wait-and-see approach. “Retailers are cautious on store expansion, due to lower consumption sentiment locally and slower growth in the number of tourists,” says DTZ’s head of retail in Hong Kong, Kevin Lam.

Is it about to get worse?

The recent crackdowns on corruption and investigations into the assets of government officials are likely to add to the sales slump. Just last week the Chinese government announced that it will bar officials from spending public money on luxury goods and lavish receptions as it attempts to burnish its image ahead of a Communist Party leadership handover commencing this year. The new rules call for more supervision of spending on vehicles, receptions and trips abroad, which the public sees “as a major source of corruption and waste,” according to Xinhua.

Earlier in June, the government also began an effort to ban consumption of shark’s fin at government expense (see WiC158).

With everyone from government officials to the middle-classes cutting back on shopping, the pipeline of retail goods is filling up. Guangzhou Daily reported this week that luxury goods retailers in the city have been offering steep discounts to offset slower sales. Luxury brands like Versace and Salvatore Ferragamo were said to be slashing prices by as much as 50%. Even in Shanghai and Beijing, higher-end retailers have been quietly cutting prices.

Stacy Widlitz of the consultancy SW Retail Advisors told the Wall Street Journal this week that China could no longer be relied on by the luxury goods industry to provide strong growth. “If you look at all the data, especially out of China, everything is decelerating,” she commented. “The trajectory is concerning. The question is, does it get worse?”

But not all doom and gloom?

It is still too premature to be overly bearish and the economy hasn’t slowed to a point at which the country’s wealthy are forgoing luxury goods altogether.

“At this stage the market is facing a drop in consumer confidence, but not a decline in purchasing power,” Zhou Ting, a luxury expert, told CBN.

Luxury retailers themselves are putting a brave face on it. Chow Tai Fook says it is sticking to its plan of opening 600 new stores over the next three years, mostly in smaller cities. Halewinner Group, a watch retailer based in Hong Kong that sells Audemars Piguet and Omega among other brands, has just opened a new store in Xiamen, a city of four million in Fujian province, and is on track to open 10 more stores in less than a year.

Louis Vuitton is also trying to look bullish and it will open its new flagship store in Shanghai tomorrow. Like other luxury retailers, it seems confident that super-luxury buyers will prove to be much more resilient shoppers than the larger ranks of the aspiring wealthy. It will be counting on China’s 1.5 million dollar millionaires to help it navigate a path through the choppy current conditions.

As Cartwright, Burberry’s chief financial officer, also reminded the Financial Times: “There is a lot to go for in the Chinese market still. You have got to remember the pace of growth there, and the rate at which the population is creating more newly wealthy.”

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