(Bloomberg Opinion) -- With the death toll from the coronavirus rising, the fate of high-end handbag sales still seems of minor consequence. But the $300 billion luxury industry’s over-dependence on Chinese spending was underlined again on Friday when British fashion house Burberry Group Plc said it could no longer stand by its previous financial forecast because of the spread of the illness.
Just two weeks ago, the company shrugged off disruption in Hong Kong to lift its outlook for sales growth excluding currency movements to a percentage in the low single digits, while anticipating that the operating margin would be broadly stable in the year to March 2020. Analysts at Morgan Stanley said Friday’s warning could imply a 5% cut to 2020 earnings.
Burberry is particularly exposed to the epidemic. It generates about 40% of its sales from Chinese consumers at home and abroad. That’s above the 35% for the industry as a whole, according to Bain & Co. and Altagamma. So shutting some shops on the mainland and reducing hours at others has an out-sized effect.
It’s too early to know what the end result will be for Burberry and the industry as a whole, but one key lesson is coming into sharp relief: While Chinese shoppers are a powerful force for the industry, no brand should neglect their customers closer to home, or stop trying to drum up demand in other corners of the world. When the Chinese market slumped in 2015 and 2016 because of a government crackdown on extravagance and gyrating stock markets, luxury houses all pivoted toward shoppers in Europe and the U.S. They have lost sight of the need to foster these markets since.
For Burberry, it’s a particularly sensitive time to face such uncertainty in its biggest market. The group is in the midst of trying to revive its brand, best known for its black, white, tan and red check. While new iterations, such as the TB Monogram, are gaining traction, Burberry is having to prioritize. It’s now unclear whether a fashion show in Shanghai in April, will go ahead. The first Chinese showcase under new designer Riccardo Tisci will have specially created merchandise, clearly a way to build Burberry’s profile amid its rejuvenation efforts.
Given these characteristics — high Chinese exposure plus a turnaround strategy — Prada SpA also looks to be at risk, and the Italian maker of the iconic nylon bag has already closed some stores in mainland China and Macau. The list of other luxury companies that are very dependent on China and Hong Kong is long. Swatch Group AG and Richemont are the most exposed, according to analysts at Bernstein. And Gucci, which accounts for 60% of French parent Kering SA’s sales and 80% of its operating profit, has been a hit with Chinese shoppers over the past three years. Anyone who has witnessed the proliferation of Gucci T-shirts, not all the real thing, in cities from Shanghai to Beijing would attest to its popularity.
By contrast, Bernard Arnault’s LVMH looks to be better prepared to handle such a shock. With brands including Moet & Chandon champagne, pop star Rihanna’s beauty line and soon Tiffany & Co. jewelry, it has broad diversification by both geography and product range. Last year, for example, 24% of its sales from the U.S.
But given the whole industry’s reliance on Chinese big spenders, no luxury or consumer brand with exposure to the them, wherever they shop, will be immune. Burberry said spending in Europe and other tourist destinations was less affected by the outbreak, but it expected conditions here to worsen too. This week, Coach owner Tapestry Inc., Michael Kors and Versace parent Capri Holdings Ltd. and Estee Lauder Cos. all lowered earnings guidance, citing the virus. Even luxury parka maker Canada Goose Holdings Inc., which has a strong following in the U.S. and Europe, has felt the impact of the outbreak. On Friday it lowered its full-year sales and profit guidance.
Global luxury sales could expand by just 1% this year, according to analysts at Jefferies, after what they now expect to be a brutal 20% decline in Chinese demand in the first half. Before the outbreak, they were expecting the industry’s sales to grow by 5% in 2020.
While luxury shares have fallen over the past three weeks, valuations remain close to 10-year highs. As I have noted, the stocks have proved remarkably resilient in the face of everything from trade skirmishes to protests in Hong Kong.
Burberry’s warning is a stark reminder that that could be about to change.
To contact the author of this story: Andrea Felsted at firstname.lastname@example.org
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Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.
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