Asia-Pacific decline and currency woes hit LVMH

France
Published:  15 April, 2015

Luxury leather goods giant LVMH has said that the strong euro and political protests in Hong Kong were major factors curbing spending by Chinese and Russian customers.

LVMH's trading update on April 9 revealed a drop in business in Hong Kong, where pro-democracy protests have deterred Chinese visitors, as well as a drop in demand from elsewhere in China, and a much-worse-than-expected slump in Japan.

Sales growth in the luxury goods industry, which rose between 2010-12 after the financial crisis, has been slowing in the past two years, hit by China's crackdown on corruption and conspicuous spending.

Many luxury brands, such as Louis Vuitton, Gucci and some watchmakers, had invested heavily in new shops in China since the mid-2000s to entice middle and upper class buyers. China had been seen as the industry's main growth engine, helping make up for lackluster demand in Europe and Japan.

But on April 10, LVMH's results confirmed that good demand from China would never return and the global luxury goods industry was entering a long period of modest growth.

LVMH published first-half sales and profits below expectations and said fewer tourists, particularly from China, were shopping in Hong Kong.

Together, Hong Kong, Macao and mainland China represent more than a third of sales for most leading luxury brands. The industry downturn has hit watchmakers hardest as timepieces are a classic “gift-for-favours” item in China.

Adding to its woes, LVMH, the world's No.1 luxury group said growth in sales from Louis Vuitton, its main earner, had dropped in China in the second quarter from the first, while revenues from Chinese tourists declined in major European markets such as France.

The strong euro has made goods and services more expensive for tourists, and LVMH was the latest luxury group to complain that numbers of Chinese tourists in shopping hotspots such as Paris had dropped due to their fears of being mugged.

Russian tourists, the world's No.2 luxury goods buyers after the Chinese, have been traveling and spending less on luxury goods in Europe due to the Ukraine crisis and the fall in the rouble, according to several luxury brands including Gucci and leather goods maker Salvatore Ferragamo.

But analysts said some of LVMH's poorer results was specific to the group. Louis Vuitton, the source of more than half of LVMH's operating profit, has been struggling to counter a feeling among emerging market customers that it has become too ubiquitous.

The brand's sales growth in the second quarter collapsed to zero from 9% the previous three months. Louis Vuitton has been trying to win back customers and regain exclusivity by strengthening its higher-end offering with leather goods and smart designs. But analysts said its latest results showed such efforts could take longer than expected to pay off.

Source: Reuters

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