LVMH results send chill across luxury goods sector

The outlook for the luxury goods industry darkened on Friday as poor results from industry leader LVMH showed how the strong euro and political protests in Hong Kong were major factors curbing spending by Chinese and Russian customers.

Shares in LVMH, seen as setting the tone for the luxury goods industry, fell as much as 7.2 per cent - the biggest one-day drop since 2009, dragging down companies in the sector such as Cartier-owner Richemont, down 3 per cent and Gucci-owner Kering, which fell 3.7 per cent.

LVMH’s trading update late on Thursday revealed a marked 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, boding ill for the sector.

Sales growth in the luxury goods industry, which bounced back between 2010 and 2012 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 lacklustre demand in Europe and Japan.

But on Friday, LVMH’s results cemented the view that buoyant demand from China would never return and the global luxury goods industry was entering a long period of modest growth.

On Thursday, LVMH published first-half sales and profits below expectations and said fewer tourists, particularly from China, were shopping in Hong Kong. The former British colony is where many leading luxury brands earn more than 10 per cent of their global revenue.

For Richemont, it represents about 16 per cent of its sales and for Swatch Group, which on Tuesday expressed concern about future trading there, it is about 12 pe rcent.

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.

"It will take a few months, if not a few quarters, for the situation to normalise," LVMH chief finanical officer Jean-Jacques Guiony said on Thursday of the group's watch business in China. LVMH's watch business, which includes the Hublot, Zenith, Louis Vuitton and Tag Heuer brands, is much smaller than that of Swatch and Richemont.

Adding to its woes, the world’s leading luxury group said growth in sales from Louis Vuitton, its main cash cow, 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.

Reuters