Posted: Feb 20, 2020
A former LVMH chairman described this year as a "disaster" for luxury brands as the coronavirus continues to cause concern.
In an interview with Yahoo Finance, industry expert Pauline Brown said that because of the outbreak luxury brands are losing out on sales from their biggest customer base – the Chinese.
Luxury sales aren't only being impacted in China itself, travel bans have also curbed Chinese tourism, preventing these would-be customers from shopping elsewhere.
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Luxury brands should be bracing themselves for the effects of the coronavirus outbreak, according to an industry expert.
In an interview with Yahoo Finance on Tuesday, Pauline Brown – luxury goods expert and a former chairman of LVMH North America – discussed the impact of the coronavirus epidemic on the luxury goods market and said that 2020 will be a "disaster" for many luxury brands as sales within their largest customer base is slowing down.
Chinese consumers accounted for around 35% of the total spend in the global luxury market in 2019 and 90% of the growth in global luxury goods sales, according to data from Bain. This makes them a crucial pool of customers for luxury brands to win.
But as the virus has spread, several brands have been forced to shutter or restrict store opening hours in mainland China and cancel fashion shows (an important way to market the brand) putting pressure on luxury sales in the country.
Several brands have highlighted a drop in sales in mainland China thanks to the spread of the virus in recent earnings calls.
The CEO of Gucci's parent company, Kering, said the company had seen a "strong drop in traffic and in sales" in its February earnings call. And earlier this month, Burberry scrapped its guidance for the year on account of uncertainty around the coronavirus outbreak.
"The problem with luxury is that if you don't buy it in a given quarter, it's not like you come back and all of a sudden there's excess demand the next quarter... you're not going to get the sales back," Brown told Yahoo Finance.
She added: "It's a psychological purchase and the fact that people are not feeling safe and are not feeling prone to go shopping... [well] I think it is a disaster for virtually every company in the sector."
While LVMH – the world's largest luxury conglomerate – has closed some of its stores in mainland China, its executive team kept a calm exterior when probed by an analyst about the impact of coronavirus in its most recent earnings call.
"Firstly, it would appear that this virus is not as aggressive as that that was detected back when there was the SARS outbreak in Hong Kong. Secondly, the Chinese government has reacted very strongly...and given the strength of the reaction, we can assume that their reaction will have consequences," group CFO Jean-Jacques Guiony said during the call.
But Guiony cautioned that the long-term threat of the virus is still unclear: "If it lasts a couple of months, or if it's resolved over the next two, two and a half months, then it won't be that bad," he said, but "if it were to last two years, it would be a totally different matter."
Brands shouldn't only be concerned about the sales lost in China itself, however.
According to Bain, 70% of the luxury spending done by Chinese shoppers was done outside of China in 2019 and travel restrictions put in place by China and other governments to prevent the spread of the outbreak are curbing Chinese outbound tourism.
Brown added that the amount of "non-essential travel" in general across the world if also being "curtailed." And as around 10% of luxury sales are done by travelers visiting airports or on cruises, the sector can expect to take a hit in sales here too.
By Mary Hanbury
February 20, 2020
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