For Luxury Brands, It’s Too Early to Pop Open the Champagne

(Bloomberg Opinion) -- A flagship Hermes International store in Guangzhou reportedly took in $2.7 million on its first day reopening after the coronavirus lockdown, the biggest daily haul for a boutique in China, according to fashion trade bible WWD.

The French luxury brand best known for its Kelly and Birkin bags may not be alone in enjoying the phenomenon that has been referred to as “revenge spending.” The term, coined to describe pent-up consumer demand in the 1980s after the poverty and chaos of the Cultural Revolution, is now being applied to splurging by Chinese shoppers as the virus recedes.

LVMH, hit by a 17% decline in first-quarter sales excluding currency movements and acquisitions, said late Thursday that Chinese consumers were once again enthusiastically embracing its brands, including Louis Vuitton and Christian Dior. And my Bloomberg News colleagues reported that sales at LVMH stores on the mainland were up 50% year-on-year in the past three weeks.

Cosmetics maker L’Oreal SA also pointed to a recovery in the region’s demand for beauty products. Of course, that may be a function of what’s called the “lipstick” index, where when times are tough consumers tend to buy smaller treats rather than more expensive items. But the signs do bode well for demand from Chinese consumers, who could account for 44% of luxury spending this year, according to analysts at Jefferies.

Still, none of this may be enough to rescue second-quarter trading, nor the full year.

First of all, there’s no guarantee that the rebound will be sustained. What’s more, during normal times the Chinese make the majority of their vanity purchases when they travel abroad. In this new post-coronavirus era, there has been an initial trend toward more domestic spending, and that could accelerate further. But bigger impulse purchases are still more likely to happen when people can finally visit cities such as Paris or Milan. With airplanes still grounded in many places and borders closed, travel is set to be severely constrained for some time, and that will be a drag on industry growth.

Meanwhile, stores in Europe and the U.S. remain closed. When they finally reopen, brands will find it very difficult to compensate for fewer Chinese visitors. Massive job losses and all of the other economic hardships brought by lockdowns means they won’t be able to count on local shoppers to make up the difference. Consultants Bain & Co. estimate that global personal luxury goods sales could fall as much as 35% this year, with a mid-point scenario at 22-25%. This would be the worst decline in modern luxury industry history.

Despite the inevitable industry downturn this year — one that will possibly stretch into 2021 — LVMH looks to be one of the best-placed luxury groups.

With revenue of 52 billion euros ($56 billion) in 2019, more than three times that of its nearest rivals, LVMH has significant scale and a strong stable of brands, led by Louis Vuitton and Dior but also including Fendi and Celine in fashion and the Sephora beauty stores. The 10% decline in fashion and leather goods sales, excluding currency movements and acquisitions, is better than might have been expected. The company run by billionaire Bernard Arnault also has a diverse portfolio, both geographically and in terms of products, which include spirits and beauty lines too. This gives it scope to cut costs, but also, crucially, to invest when competitors may be weakened.

There are some worries. For example, the $16 billion acquisition of American diamond-jewelry icon Tiffany & Co. will now be more of a challenge. (LVMH indicated on Thursday that it would still go ahead with the deal.) And it also has exposure to travel retail through major duty-free chain DFS, which may be depressed for some time.

So LVMH won’t be immune from the continued disruption to luxury goods sales. But as it demonstrated in the first quarter it should be more than able to hold its own.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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