Wrapup 1: Luxury sector outlook clouded by China's slow recovery

Ermenegildo Zegna NV

24/04/2024 16:47

By Mimosa Spencer
       PARIS, April 24 (Reuters) - Sales updates from Europe's
big luxury brands have offered scant reassurance that Chinese
demand for high-end fashion is recovering, leaving a cloud over
the outlook for the industry. 
    Warning on Tuesday that its first half profit would drop
steeply, Kering  PRTP.PA  flagged low demand in Asia, and China
in particular, in addition to its struggles to turn around star
label Gucci. That sent its shares to six-year lows on Wednesday.
    Italian luxury group Ermenegildo Zegna also saw revenue fall
in the first quarter, dragged down by declining sales of its
Thom Browne label in the Greater China region.
    The exception was Italy's family-owned Prada  1913.HK ,
which reported booming demand for its Miu Miu fashion brand and
continued growth in Asia.
    Moncler  MONC.MI  will report later on Wednesday and Hermes
 HRMS.PA  on Thursday. 
    Solid reports last week from luxury bellwether LVMH
 LVMH.PA  and beauty giant L'Oreal   OREP.PA  had helped bolster
confidence but did not dispel worries about domestic Chinese
appetite for their premium goods and the wider sector.
    The luxury industry had predicted a challenging first
quarter compared to the same period last year, when business
surged after China lifted stringent COVID lockdowns.
    But a "panoply of headwinds" are keeping Chinese economic
growth slow, Deloitte's Chief Global Economist Ira Kalish told
the World Retail Congress in Paris last week, citing a property
crisis, stagnating private sector investment and trade disputes.
    The luxury goods industry has come to rely on fast growth in
China where its market tripled in size between 2017 and 2021,
according to consultancy Bain. 
    "Everybody was a winner, including the losers," said Jacques
Roizen, managing director of consulting at Digital Luxury Group.
    In an environment of slower Chinese growth, he expects the
strongest brands to widen their leads. 
    "When you're in a market that's growing at 4%, you're going
to have Hermes or Loro Piana growing double-digits, but you're
also going to have many brands with very negative year-over-year
results," Roizen said.   
    Executives are pinning their hopes on Chinese government
stimulus. 
    "We have yet to see measures that truly boost both the
Chinese consumers' confidence and, therefore, their spending,"
L'Oreal boss Nicolas Hieronimus said last week.  
    
    PATIENCE
    LVMH, which sells fashion and accessories from Louis Vuitton
and Dior and jewellery from Tiffany & Co., said first-quarter
sales in Asia, excluding Japan, were down 6%. 
    But it said Chinese shoppers had purchased an increasing
proportion of its goods outside the region, while travelling to
Japan and Europe - a view echoed by Prada on Thursday. 
    Fashion brands like Chanel, Hermes and LVMH'S Louis Vuitton
are seen by analysts as placed to reinforce their footholds in
China during a period of slow growth because their base of
older, wealthy clients is less vulnerable to economic headwinds.
    They can thus invest more in marketing events and expanded,
higher quality, retail spaces.
    "China will succeed in reboosting its economy," LVMH
chairman and chief executive officer Bernard Arnault told
journalists last week. 
    French-based LVMH is pushing ahead with plans to expand its
retail network in mainland China, although chief finance officer
Jean-Jacques Guiony said last week that doing so had been the
subject of internal debate.
    "This is a question that has been agitating us for a while,"
he said when asked if he was comfortable with the number of
projects underway in China.
    Kering has bulked up its Chinese management team, resuming
in-store training that had been paused during the pandemic and
partnering with local brand ambassadors. But such efforts would
not bring immediate results, the company cautioned.
    "It will take some time to bear fruit, and we know it
requires some patience," said Kering CFO Armelle Poulou. 
    

 (Reporting by Mimosa Spencer, additional reporting by Helen
Reid; Editing by Matt Scuffham and Catherine Evans)
 ((Mimosa.Spencer@thomsonreuters.com;))