As China cuts back on iPhones, LVMH handbags could be next

Bloomberg

After Apple Inc.’s shock profit warning, investors were quick to make the connection: if Chinese consumers are cutting back on iPhones, Louis Vuitton handbags could be next.
Apple’s sales revision cascaded through global markets, hitting suppliers and rivals, but also a raft of luxury-goods companies that rely on the same clientele that likes to splurge on Apple’s latest products.
Hong Kong-listed Prada SpA, Gucci-parent Kering SA, LVMH Moet Hennessy Louis Vuitton, Burberry Group Plc and Richemont, the parent of jeweller Cartier, all declined in the wake of Apple’s shortfall.
“It’s going to become significantly more challenging to do well in China because the market is tightening up,” said David Roth, chief executive of WPP Plc’s ‘The Store’ global retail practice. “This is a challenging signal that people need to button down and understand China better and prepare.”
Apple cut its quarterly revenue outlook to $84 billion from as much as $93 billion, blaming it in part on a pullback in demand within China. That set off warning bells throughout the luxury industry, as Chinese consumers account for about 30 percent of the $1 trillion in luxury-goods spending worldwide, according to Euromonitor International.
For years, companies from LVMH to Tiffany & Co have targeted China’s wealthy tourists, who sought out pricey handbags, jewellery and other luxury items while on vacation in Paris to Dubai. Investors are worried that sliding yuan, China’s trade war-hit economy and a government crackdown on overseas purchases could dent demand.
Richemont, which lost 2.8 percent, has already been feeling the heat. The Swiss watch and jewellery-goods maker signaled in November that Chinese sales growth has slowed.
Others have maintained a more bullish tone, with both LVMH and Kering citing robust China sales in October and saying they welcome as shift to domestic sales.
A key test for retailers will come with China’s celebration of the Year of the Pig, which begins on February 5. The week-long Chinese New Year holiday is traditionally a major occasion for shoppers from China to splurge. About two-thirds of those sales take place outside the country as tourists open their wallets while travelling abroad, taking advantage of better selection and cheaper prices than available at home.

Domestic Shift
But with the US trade war weighing on China’s stocks and currency, and President Xi Jinping’s government trying to bolster a faltering economy, more mainlanders are choosing to do their shopping inside China rather than on overseas trips.
“There’s clearly a shift that has started to happen in the consumption pattern: Chinese people are buying more in China,” said Pascal Martin, a partner in Hong Kong with OC&C Strategy Consultants.
Taxes on imported clothing, which had been as high as 25 percent, are now just 7.1 percent. A recent crackdown by Chinese officials on travelers returning home with undeclared goods is also encouraging local consumption.
The gap between Chinese overseas and domestic spending on luxury is shrinking and a 50/50 balance is “in sight,’’ according to an HSBC report last month. Companies are scrambling to adjust, opening more stores in China or partnering with local online outlets such as Alibaba’s Tmall. Ermenegildo Zegna, which has stores in 35 Chinese cities, in December opened a flagship store on Tmall Luxury Pavilion, following a similar move by Italian fashion house Valentino in November.