Europe’s Biggest Luxury Brands Are Nervous About China

(Bloomberg Businessweek) -- Under the stained glass dome of the Galeries Lafayette department store in central Paris, Chinese shoppers form an orderly line outside the Louis Vuitton boutique for their turn to pick up a coveted monogram canvas bag. Next door at Printemps, shop windows are plastered with promotions for Golden Week, Oct. 1 to Oct. 7 this year, when more than 6 million Chinese travel abroad and lay out billions of euros for luxury indulgence.

Ordinarily, these scenes would make luxe purveyors rejoice—but suddenly panic has gripped the industry. Global luxury stocks are down about 11 percent since the start of October, wiping out $150 billion in combined market value—their worst showing in a decade—on concern that the Chinese appetite for high-end Western goods may wane. About one-third of luxury purchases by Chinese last year were made abroad, according to Bain & Co., making companies from Louis Vuitton to Gucci to Hermès depend heavily on globe-trotting mainlanders.

One fear is that Chinese shoppers will stop binge buying because of a crackdown by customs authorities when they return. With an official spending limit of little more than $700 per person (just about enough for a Vuitton wallet), they risk heavy fines if they’re loaded with expensive goods.

That limit has long been ignored by many travelers because of lax enforcement. But in early October, as travelers returned from Golden Week, images shared online via Chinese blogging platform Weibo and the WeChat messaging service showed dozens of open suitcases lined up for inspection at Shanghai’s Pudong airport. Jean-Jacques Guiony, LVMH Moët Hennessy Louis Vuitton SE’s chief financial officer, said on a call with analysts on Oct. 10 that lately China’s import laws “are being enforced with some more strength.” In the first half-hour of trading, shares in the world’s largest luxury maker shed some $6 billion in market value. Their performance this month is their worst in a decade.

Luxury companies are counting on China for the lion’s share of their sales growth. Chinese consumers spent €105 billion ($121 billion) on luxury purchases last year, some 32 percent of the worldwide total, a share that’s likely to hit 40 percent by 2024, according to Boston Consulting Group.

While Chinese government officials haven’t confirmed any stepped-up enforcement, shoppers have less incentive to make pricey purchases abroad. Big luxury houses used to charge prices 60 percent to 80 percent higher in China than in Europe, according to Pascal Martin, a Hong Kong-based partner at OC&C Strategy Consultants. That produced a flourishing gray market trade, with Chinese entrepreneurs flying to Paris, Milan, and other luxury meccas to stock up on items that they took home to resell.

The price differential has narrowed. China slashed import tariffs paid by luxury groups by as much as half this year, prompting brands including Vuitton, Gucci, and Hermès to lower their mainland prices. A Vuitton New Wave MM handbag that sells for €1,680 in France now costs only about 10 percent more in China. If there’s a crackdown at the border, Martin says, “it’s just shifting purchases in Europe and the U.S. back to China.”

Armando Branchini, vice chairman of Italian luxury trade association Fondazione Altagamma, says that’s likely what Chinese leaders want. “Over time, the authorities do expect Chinese customers to buy mainly in China and not abroad,” he says.

If that’s all it was, luxury companies wouldn’t be overly worried. But investors aren’t so certain it’s business as usual for China’s high-end shoppers, and their concerns have hit the stocks of luxury companies with big Chinese exposure, from New York’s Tiffany & Co. to Paris-based LVMH and Kering, to Hong Kong-listed Prada and Japanese cosmetics maker Shiseido.

The greatest risk is a broader slowdown in Chinese consumption, because the trade war with the U.S. has hurt economic growth and weakened the yuan, says Terry Hong, an analyst at Guotai Junan Securities Co. in Shanghai.

Italian menswear maker Ermenegildo Zegna Group, the seller of €1,000 business suits, which has 50 stores in China, says it’s noticed a drop in spending in recent months and will slow expansion plans in the mainland. “I am more cautious than three months ago,” says Chief Executive Officer Ermenegildo Zegna, the founder’s grandson. “For next year, we are going to plan a conservative budget, because there are many uncertainties in the air and you have to be realistic.”

Most luxury groups remain bullish on China. On Oct. 9, a day before its shares took a nosedive, LVMH reported 10 percent third-quarter revenue growth, in line with analyst estimates, with strong demand in China for products ranging from cognac to cosmetics. Zegna says it’s kept prices in China stable despite the weakening currency, helping attract local shoppers who might have second thoughts about splurging while abroad.

Besides, the industry follows its own logic, says Olivier Abtan, a Paris-based managing director of Boston Consulting Group. In most businesses, an economic slowdown penalizes companies selling the most expensive products while boosting those with lower prices. Not so in luxury goods, he says. The highest-priced brands are “anchored in timeless luxury” with their aura of exclusivity that can’t be replicated, Abtan says. “They have shock absorbers.” —With Robert Williams

©2018 Bloomberg L.P.