The luxury-goods industry is bracing for fallout from the global financial crisis.Some companies, including jewelers' Tiffany & Co. and Bulgari SpA, are considering a brake on future store openings to reduce costs ahead of a likely sluggish holiday season. French fashion house Dior SA may close some boutiques in smaller U.S. cities.
Until recently, the world of luxury perfumes, leather goods, designer wedding jewelry and designer clothing seemed impervious to the retail slowdown affecting apparel and home furnishings. Their resilience was due largely to growing business in emerging markets, such as China and Russia, which offset a slowdown in the U.S., Europe and Japan.
Now, the Chinese and Russian stock markets are faltering, putting pressure on their wealthy consumers and tugging on the luxury-goods sector's safety net.
"I'm not sure [emerging markets] are able to offset the weakness in other markets," Bulgari Chief Executive Francesco Trapani said in an interview. "Everyone is going to be affected." He estimated only 10% of new Bulgari store projects now would be approved, compared with about 50% earlier.
Polo Ralph Lauren Corp. inaugurated its largest women's store in the world, in Paris, last week and is still planning new boutique openings. But Charles Fagan, the executive vice-president of the company's global retail brand, said: "We're being prudent. We're very aware of our inventory and expenses."
High-end fashion houses such as Louis Vuitton, Gucci and Polo Ralph Lauren aggressively expanded into China, Southeast Asia, Russia and India as a response to the last downturn, between 2001 and 2003. At the time, they started emphasizing very highest-priced products -- such as customized bags and jewelry -- in order to attract the wealthiest consumers.
All told, emerging markets make up about 15% of the luxury goods sector's overall sales. However, executives had counted on double-digit gains in countries such as China and Russia to buffer declining or flat business elsewhere.
At LVMH Moët Hennessy Louis Vuitton SA, the world's largest luxury-goods group and owner of fashion house Louis Vuitton and Hennessy cognac, sales in Asia, excluding Japan, account for 21% of sales in the first half of the year. Those sales grew 13% -- a much faster rate than the group's 5% average sales increase.
Luxury goods companies now fear those sky-high growth rates could decelerate as stock markets plunge. Stock and property markets have tumbled in China with the country's benchmark stock index off about 65% from its peak last October.
The effect on consumer spending will be heavy because a large swath of the population plays on the stock market "like in Las Vegas," says François-Henri Pinault, chief executive of PPR SA. As in other countries, investors' dwindling portfolios could change their "mindset," says Mr. Pinault, whose PPR group owns the Gucci and Bottega Veneta luxury houses.
Don Hanna, chief emerging markets economist at Citigroup Inc., says Chinese sales of big-ticket items such as automobiles and electronics have decelerated in the second half of the year at a faster rate than sales of mass consumption goods, like food and basic clothing.
"There is more pressure on wealthier households because those are the people who hold the assets," says Mr. Hanna.
It's a similar story in Russia. Russian retailers' orders for the collections shown on the Milan catwalk two weeks ago were flat compared with last year -- the first time in five years that they haven't increased, according to Sanford Bernstein luxury goods analyst Luca Solca.
It remains unclear how sales at some of the biggest luxury-goods companies fared over the summer. Third-quarter sales results begin trickling out this week.
However, there are some bright spots. French luxury-goods house Hermès International SA last year opened its first men's-only store on Wall Street. Chief Executive Officer Patrick Thomas said sales at the boutique were especially strong during the last two weeks of September, just as some of the store's banking neighbors were collapsing.
"Over time," says Todd Slater, an analyst at Lazard Capital Markets LLC. "There's a lot of upside."
Still, several companies are predicting softer revenue growth. HSBC analyst Antoine Belge expects sales gains at LVMH to slow to 1.6% in the third quarter, down from 5% growth in the first half. LVMH is due to report revenue on Thursday.
Compagnie Financière Richemont SA, the parent of jeweler Cartier, said last month that sales through the end of August in the U.S. were "beginning to show some signs of a slowdown." Bulgari's Mr. Trapani said July and August sales held up well globally, but that September was rockier. The company tracks sales on a daily basis.
The immediate fallout of the credit crisis on the sector will be more hesitant store expansion. Italian fashion house Prada SpA postponed an initial public offering intended, in part, to bankroll new stores in emerging markets. Tiffany, which has said it would open 12 to 15 stores overseas annually beginning next year, "would consider modestly adjusting our rate of store expansion" if conditions remain soft, Chief Executive Officer Michael J. Kowalski said in an email.
By: Christina Passariello and Rachel Dodes
Wall Street Journal; October 8, 2008
