Comment: Luxury no longer immune to macroeconomic pressures
The luxury sector has largely been a beacon of stability as the rest of the clothing sector has struggled with the shocks provided by the uncertain macroeconomic environment over the past few years.
However, the news today (11 September) that Burberry now expects its full-year profit to be at the "lower end of market expectations" following a slowdown in sales growth, gave the market the jitters. The company's share price fell more than 18% in trading on the London stock exchange.
While luxury firms like Burberry have long pinned their growth hopes on China, even here, all is not as well as it seems.
Chinese consumers are becoming more sophisticated in their tastes, as well as increasingly shopping abroad, while in the domestic market new entrants mean rising competition. And this is all happening against a backdrop of slowing retail sales growth.
In recent quarters, Burberry has talked up the potential of Asia, with CFO Stacey Cartwright recently saying it sees an "enormous opportunity" in China.
At the time, Cartwright also revealed plans to open as many as 100 larger format stores in the country.
Indeed, reports yesterday affirmed the importance of China for the luxury sector, accounting for around 25% of the sector's global sales. So focusing on China would seem like a wise move.
For a long time, luxury labels have seen China as a cash cow, with their international reputations and brand recognition (logos) key to their appeal.
But a report by the HSBC banking group believes that as Chinese consumers become better informed and more demanding, they are moving away from logo products, and looking instead for more differentiated designs that show they are "in the know".
The report adds that corporate gifting, which has been a key driver of luxury demand, may suffer as the Chinese government clamps down on conspicuous consumption and gets tough on corruption.
To complicate matters further, the Chinese government has scaled down its consumer goods growth target for the next five years. It now expects retail sales of consumer goods to grow 15% annually between 2011-2015, after recording 16.1% growth over the prior decade.
Retail growth in mainland China has been slowing since December last year, with growth falling from 18.1% in December, to 13.7% in June. In the clothing sector, sales grew 26.7% in December last year, declining steadily to 20.2% in June.
Responding to Burberry's profit warning today, Charles Stanley analyst Sam Hart said: "The luxury goods sector is probably particularly vulnerable to any slowdown in demand from China, given that it has been a key driver of growth in recent years".
However, he emphasised his belief that luxury goods remain a growth market globally.
"Key drivers of growth are rising disposable incomes amongst expanding middle-class populations in emerging markets; a growing number of high net worth individuals; the rising spending power of working women; and a growing propensity to travel," he added.
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