The Picture Becomes Complicated

We have already mentioned the negative impact of Chinese slowdown in the global luxury market, not only for the lost sales in the country but also because Chinese tourists are one of the largest buyers of luxury goods when traveling other areas, like Europe. Now we need to add a new negative impact for the near future of the industry, although it is still early to draw definitive conclusions. I refer to the terrorist attacks in Paris.

The increasing uncertainty and fear can provoke that tourism could be reduced to Europe and especially France, where leading luxury brands are based. Data make it clear. According to Bain & Co, France is the fourth largest market for personal luxury goods in the world, with a value of €15.3 billion. According to the consultant, Paris is the second most important city for the sector, only after New York, with €11.3 billion (75% of the country).

Other forecasts show that France is the world’s leading destination for tax-free shopping, with around 20% of the total globally. Moreover, being the headquarters of major companies, it is also one of its main markets. LVMH, for example, obtains 10% of its total sales in the country.

Hermès, another major French manufacturer, is even more dependent on this market, with 15% of its total revenue. Complicating the scenario, the terrorist attack has occurred in a bad time, just before Christmas, when many trips are booked to travel in a period which is almost 30% of annual sales in the sector.

To offset the negative news, al least partially, the sector also has some positive factors, as the European economic recovery, which can potentially cause that even if European citizens are traveling less, we can expected they buy more luxury products in their local markets, helping to mitigate the negative impact.

The problem is this new handicap comes at a bad time for the industry. Before the attacks, estimates pointed to an increase in industry sales of 1% this year (without taking into account the evolution of exchange rates), which would be the worst record since 2008. It is not suprising, therefore, that this week we have seen a significant punishment to the sector in the stock market. LVMH has fallen more than 5%, while maintaining an increase of 20% so far this year. The same has happened to Kering, which has also lost 5% but with a much more modest annual balance (5%). Meanwhile, Prada and Hermès have dropped 6% each.

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