27 Jul 2020 21:32 IST

Chinese wallets will decide winners in bling rebound

Fashion groups will need to grow mainland China revenue by 80% in H2 to keep their spend-share stable

China is both the problem and the solution to the luxury sector’s pandemic woes. The Covid-19 crisis, which first emerged in the Middle Kingdom, will shrink sales of fancy handbags and shoes by as much as 35 per cent this year, according to consultancy Bain & Co. Now, with China’s economy bouncing back, groups with a strong mainland appeal will shake off the virus more quickly.

For fashion groups like $233-billion LVMH and Gucci-owner Kering, which report earnings this week, the quarter ending in June risks being among the worst on record. Bain & Co estimates sector sales could contract as much as 60 per cent year-on-year. How quickly companies recover will hinge on their mainland performance. Chinese sales are expected to make up half of all luxury sales this year, according to Jefferies, up from 36 per cent last year.

Consumer spending levels

The way the Chinese spend is also changing. Purchases by punters while on holiday or travelling doubled in the last 10 years to just over €80 billion in 2019, half of which came from Asian buyers, particularly Chinese. But this important sales channel will be hampered until a vaccine is found. Chinese consumers’ purchases at home will this year account for two thirds of their total spend, Jefferies reckons.

The shift from travel to domestic purchases means that fashion groups on average will need to grow mainland China revenue by 80 per cent in the second half, just to keep their share of total Chinese spending stable this year, says Jefferies. LVMH is on a good path: It reported a 50 per cent surge at the start of April in some Chinese outlets.

Not all brands are equal

Brands that resonate strongly amongst local Chinese consumers will perform better. This is true for Louis Vuitton and Bulgari — both part of Bernard Arnault’s LVMH — but also Cartier, the most coveted brand of $33-billion Swiss conglomerate Richemont, according to consultancy Gartner. Moncler and Tiffany, on the other hand, may suffer. They have been ramping up shops in airports since 2015, Bernstein analysts reckon. Their physical mainland network risks being too small to capture the rebound.

Investors are already rewarding LVMH. Its shares are down just 3 per cent this year against a 12 per cent fall in the STOXX Europe 600. Moncler and Burberry meanwhile, are down 15 per cent and 42 per cent respectively. As China rebounds, the bling divide will grow.