As China Remains Under Quarantine, Luxury Sales Take a Knock

Rome is as festive as ever with its lush greenery and stately architecture, but one thing seems to be missing. The numerous boutiques of the eternal city are standing idle for lack of customers. The number of Chinese buyers who usually comprise the bulk of luxury consumers in the country have fallen dramatically since the novel coronavirus outbreak struck fear into the global community. 

“There are almost no Chinese tourists outside, which feels very odd,” says Aureliano, a local fashion stylist. He himself was planning to take up a semester of Mandarin in Beijing to court Chinese clients but was forced to abruptly cancel his plans as most schools in China went on an indefinite hiatus. 

Nike, Adidas, and Capri Holdings, owner of luxury brands Versace, Jimmy Choo, and Michael Kors, have all warned investors this week that as the coronavirus grips China, sales could take a hit.

Tapestry, the holding company behind Kate Spade and Coach said on Thursday, February 6 that it was temporarily shutting most of their stores in mainland China. The company expects sales to fall by $200 – $250 million in the second half of the month due to store closures and the coronavirus outbreak. The company said that if the epidemic keeps spreading affecting foreign demand, the financial impact could become more serious. 

Italian luxury powerhouse Prada and its British counterpart Burberry decided to temporarily close some stores in China due to the outbreak. Out of 64 Burberry stores in mainland China, 24 were closed.

Burberry CEO Marco Gobbetti said the situation in China is having a significant negative impact on luxury demand. “It is not possible to predict how long this situation will last, but we remain confident in our strategy,” he said in a statement.

Burberry also noted that Chinese tourists’ consumption in Europe and other tourist destinations has not been affected so far, but as tourism restrictions expand, the situation is expected to worsen in the next few weeks.

“My friends from the industry are flustered. A guy working for LVMH shared with me that their sales fell 60% compared to the same period last year,” says Aureliano. “My friend from Rimowa also complained that their sales were down 50%. However, for Hermes nothing seems to have changed.”

Ralph Lauren, another major fashion corporation also announced that it was monitoring the situation in China. Meanwhile, the company has closed half of its 110 stores in the country. CEO Patrice Louvet said China accounted for less than 4% of the company’s total business. 

However, it is important to note that due to high import taxes on luxury goods in the PRC, most mainland Chinese prefer to indulge their expensive tastes overseas, in Korea, Japan and often in Europe. There they can buy their desired items at a price considerably lower than in China while also enjoying tax exemptions as non-EU citizens.

These loopholes have given rise to a whole new business phenomenon known in China as daigou, or people buying items overseas on behalf of other people and smuggling them into China to avoid taxes and other costs. Daigou is by far the most popular way for Chinese to buy luxury goods. 

Thus, while for Ralph Lauren China as a market accounts only for 4% of sales, it is the purchases that Chinese buyers make overseas that make a difference. According to Bain & Co, roughly 35% of luxury purchases globally are made by the Chinese, with Americans trailing in second place at 22%.

Apart from the obstacles for fashion brands, the coronavirus outbreak put the kibosh on the latest Art Basel event in Hong Kong, one of the biggest art fairs in the world. Art Basel’s parent company, the MCH Group, officially canceled the event slated to run in the middle of March, as a number of high-profile art buyers and galleries frightened by the coronavirus outbreak canceled their participation.

Bernd Stadlwieser, CEO of MCH Group, said, “the decision to cancel Art Basel Hong Kong was an extremely difficult one for us. We explored every other possible option, including postponing the fair, and gathered advice and perspectives from many gallerists, partners, and external experts. However, today, we have no other option but to cancel the fair.”

Other major luxury events that were canceled include Swatch Group’s Time to Move showcase in Zurich, that was to present 2020 watch collections from its brands Omega, Blancpain, Harry Winston and others, as well as the F1Chinese Grand Prix and two important Asian golf tournaments in Thailand and Singapore, events that depend heavily on sponsorships from high-end brands. 

With the luxury industry becoming more exposed to and dependent on Asian customers, the coronavirus outbreak really puts a spoke in its wheel. The effects of the outbreak are expected to last for several months even after it subsides, meaning months of sluggish performance for the sector. Meanwhile, as airlines continue canceling flights to and from China, inevitably driving the number of Chinese tourists down globally, luxury brands are in for a shock.