The China Slowdown Pinch Is Being Felt By Luxury Brands

Following the Thursday announcement by Apple of a warning for profits for the fiscal first quarter due to a drop in demand and sale of its iPhones in China and the economic slowdown in the Chinese economy, there was a hit in the stocks of European luxury brands.

stocks were hit Thursday after Apple said it sold fewer iPhones than expected in the final three months of 2018 because of a sharp economic slowdown in China.

There was a drop of 3 per cent in the shares of LVMH, the owner of brands such as Fendi and Louis Vuitton. There was a drop of 5.8 per cent in the stocks of Burberry and a drop of 4 pe r cent in the shares of Gucci owner Kering. The Swiss watchmaking group Swatch saw a drop of 3 per cent in its share value after the Apple announcement.

Despite a sluggish economy, the demand for luxury products in China was strong in the first half of 2018. But results for the complete year have not yet been reported by the European fashion houses and there are concerns among investors that the 2018 results could hold some not so welcome news for them as far as the luxury stocks are concerned.

It is being assumed that Chinese consumers would most likely not have spent on luxury products from the West based on the fact that the consumers were unwilling to spend for iPhones during the year. Apple also predicted lower than expected sale of its iPhones in China in the last quarter of the current year.

There are already some signs of troubles for the luxury brands.

There was a drop in the number of watches sold in China in November, said the Federation of the Swiss Watch Industry.

The watch makers of Switzerland have significantly lowered expectations for orders for the next three months, said the Swiss Economic Institute which added to the worries.

“The issue is not whether there is a slowdown [of luxury sales in China] … but rather the magnitude of it,” said Flavio Cereda, an analyst at the investment bank Jefferies.

In recent years, sale in China accounts for a significant amount of the yearly revenues for European luxury retailers.

A report by the consultancy Bain and Italian luxury federation Altagamma claimed that about one third of the total global sale of luxury brands is accounted for by the Chinese shoppers. According to McKinsey, that amounts to a yearly spending of more than $7 billion.

By 2025, about half of all luxury spending would be accounted for by Chinese shoppers, predicts Bain.

“China is key, hence the understandable volatility [in luxury stocks],” said Cereda.

But the reliance of the luxury industry on Chinese spending had earlier put the industry in a spot of bother.

During a government crackdown on corruption that started in 2012, Chinese shoppers abandoned luxury brands. Luxury products and watches were made off limits for Communist Party officials and corporate executives in that campaign.

This time however, the worry is weak economic growth in the Chinese economy.

It is being expected that the economic growth rate for 2018 would be the lowest for China since 1990 and the prediction for 2019 are even worse.

“Given the ongoing China-US trade tensions, consumer confidence is sliding off highs,” said Helen Brand, an analyst at UBS.

There was a 10 per cent growth in the Chinese luxury spending in the second half of last year, predicts UBS. In comparison, the first half of 2018 noted growth of 16 per cent in luxury purchase in China.

Chinese travellers are spending less while abroad because of a weaker Chinese yuan, Brand said.

(Adapted from CNN.com)

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Categories: Economy & Finance, Geopolitics, Regulations & Legal, Strategy, Sustainability, Uncategorized

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