After a horrible year, luxury fashion brands pin hopes on the return of Chinese consumers in 2017

The global fashion industry is hoping for better times ahead after 2016 added up to one of the most difficult years on record

PUBLISHED : Friday, 06 January, 2017, 10:02am
UPDATED : Monday, 24 April, 2017, 2:59pm

The global fashion industry can look forward to better days in 2017 amid signs of a rebound in the consumer markets in mainland China and Hong Kong, according to analysts.

In recent years, the likes of Prada, Burberry and Richemont have been struggling as mainland Chinese consumers scaled back spending on luxury goods amid Beijing’s anti-corruption campaign and cooling economic growth.

In fact, 2016 added up to one of the most difficult years on record for the luxury goods industry, as fluctuating currencies, a wave of terrorist attacks across Europe and the Brexit shock led to a new era of volatility.

“Indeed, this has been one of the toughest years ever for the global fashion industry,” analysts at McKinsey and news portal Business of Fashion said in a recent 92-page report.

The industry was on track for its worst operating profit result since the financial crisis in 2009, according to the study.

Luxury fashion companies were likely to see annual revenue growth of just 0.5 per cent, the report said, noting that it had surveyed responses from 400 companies.

Executives interviewed by McKinsey were pinning their hopes for a turnaround in 2017. The consultancy forecast sales growth this year of 3.5 per cent, up from 2 to 2.5 per cent growth in 2016.

“Many of them have already undertaken significant cost-cutting and restructuring exercises, and are now primed to capture the benefits,” the report said.

Richemont, known for its Piaget and IWC timepieces and Cartier diamond necklaces, announced job cuts, early retirement packages, and the abolishment of the chief executive’s position, along with the retirement of eight directors in 2016.

The retrenchment comes on the heels of Richemont’s 43 per cent plunge in first-half operating profit to 798 million euros. The drop coincides with a broad downturn in the Swiss watch industry, which suffered its longest drop in exports since monthly records began in the 1980s.

Beijing’s four-year graft crackdown has taken a heavy toll on jewellerssuch as Chow Tai Fook, as mainland consumers refrain from conspicuous gift-giving and flashy displays of wealth.

Dwindling Chinese tourist visits to Europe this year amid security concerns added to the industry woes. Milan-based fashion brand Prada attributed its 24.8 per cent drop in interim earnings this year to a slowdown in European tourism.

“The geopolitics have affected tourist growth around the world,” said Carlo Mazzi, chairman of Prada, during a conference call last week.

Luxury goods sales to Chinese shoppers, who make up roughly a third of global consumption, will shrink for the first time in modern history in 2016, according to Bain. The consultancy estimated luxury goods sales in Hong Kong fell 15 per cent for the full year 2016. The drop can be partly explained by Hong Kong’s US-dollar linked currency, which appreciated in line with the US dollar’s 6.6 per cent gain against the yuan.

Hermès, traditionally among the industry’s most resilient companies, said in September that it would abandoned its 8 per cent annual sales growth target for 2016, while German upmarket brand Hugo Boss AG in December said its 2016 operating profit would likely drop 17 to 23 per cent.

“Selected currency movements are affecting consumption in 2016. Brexit, the US presidential election and European terrorism all impacted consumer confidence and touristic flows,” Bain said.

Claudia D’Arpizio, a Milan-based partner with Bain, said that luxury brands can no longer rely on “low-hanging fruit”, adding that the downturn would likely force a wave of consolidation, with a few brands likely to emerge as winners while others may fold.

Following years of retail expansion across China, top labels such as Gucci and Louis Vuitton closed some boutiques in smaller inland cities in 2016, in a bid to trim back their retail network and restore scarcity value.

Some measures have started to bear fruit. Third-quarter sales of industry bellwether LVMH Moët Hennessy Louis Vuitton, which sells Celine bags and Tag Heuer timepieces, were up a better-than-expected 4 per cent, thanks in part to a “significant improvement” in Asia, the company said.

Meanwhile, Kering, owner of Gucci and Balenciaga, registered double-digit revenue growths across all regions excluding Japan for the third quarter.

Prada and Burberry also told investors there were signs of stabilisation in their Hong Kong sales for the second half.

CLSA analyst Mariana Kou said their channel checks point to an upswing across the luxury goods sector in the third quarter.

“Brands are now focusing more on entry-level products,” said Kou.

“As consumers look for lower-price-point products, they are also reassessing the savings from tax refunds and the costs of travelling. Hence, we are increasingly seeing some purchases shifting back to Asia,” she said.

Richemont’s Piaget recently launched a lower priced sports line to tap into shifting spending habits, while Prada has been focusing on HK$1,000 to HK$2,000 bags.

Discounts will become more prevalent in China going forward thanks to the growth in outlet malls, McKinsey said.

Macquarie analyst Daniele Gianera said luxury brands that innovate are more likely to win market share in the long run. “Once customers have bought your signature line items, they want something new,” she said.

To rejuvenate its flagship label, Kering has over the last two years reshaped Gucci boutiques with baroque-style layouts and rolled out a range of leather bags featuring painted insects and flowers mixed with their signature patterns.

But there are signs of structural shift in consumer spending habits.

Many consumers are redirecting their spending toward experiential luxuries, such as travel, entertainment, fine dining and fine art.

The trend visible among US consumers for the past half decade is becoming increasingly common in China, Gianera said.