Monday, 21 May 2012

Europe stings Asian visitors

Chinese tourists flying off in search of luxury goods that are cheaper than at home will find firms like Louis Vuitton have raised their prices

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Guanyu 道 said...

Europe stings Asian visitors

Chinese tourists flying off in search of luxury goods that are cheaper than at home will find firms like Louis Vuitton have raised their prices

Bloomberg
03 May 2012

Chinese tourists travelling to Europe to take advantage of savings of as much as 50 per cent on designer clothes and accessories are finding fewer bargains.

LVMH Moet Hennessy Louis Vuitton and its peers are raising prices to make up for lost business in China and lower profitability outside the country, even if it puts items such as €2,270 (HK$23,320) Lockit handbags further out of reach for Europeans whose disposable incomes are shrinking amid austerity. “You cannot continue to sustain the existing price gaps that have been a mainstay of the luxury goods industry for the past 20 or 25 years,” said Luca Solca, global head of European equities at CA Cheuvreux. “What we expect luxury-goods companies to have to do is progressively close the pricing gap … this is going to come from stepping up prices outside of Asia.”

With China expected to account for a third of luxury sector expansion this year, weakening revenue growth there is a risk to earnings even as the value of sales in yuan rises with currency moves. Earnings before interest and tax as a percentage of luxury sales is 40 per cent in China compared to 25 per cent in Europe, largely because of lower rents, Solca estimates. Tourists, mainly from Asia, account for between 35 per cent and 60 per cent of luxury sales in Europe, according to HSBC analyst Antoine Belge.

At Paris-based Louis Vuitton, currency shifts widened the price differential between mainland China and France to as much as 47 per cent in the first quarter, spurring more Chinese to shop abroad, according to LVMH Finance Director Jean-Jacques Guiony. While the premium propped up flagging local demand in Europe, it came at the expense of sales in the world’s second largest economy, he said last month.

“This will continue to be a feature of the industry this year unless the group rebalances pricing to discourage parallel imports,” said Barclays Capital analyst Julian Easthope.

The euro has declined 11 per cent against the dollar and 13 per cent versus the yuan in the past year.

Demand for LVMH’s products is increasing, defying Europe’s debt crisis and China’s slowing economy. LVMH and its competitors would need to raise prices by 3 per cent outside of China to compensate for about 15 per cent of mainland Chinese customers buying their products abroad, Solca said.

Burberry Group, Britain’s largest luxury goods maker, reported a similar revenue pattern to Vuitton in the quarter. Like-for-like sales growth in China slowed to about 20 per cent from more than 30 per cent in the previous three months, while retail sales in Europe were “modestly better,” the London- based company said.

“It’s the global travelling luxury consumer that is dominating,” Burberry chief financial officer Stacey Cartwright said.

Chinese global tax-free spending grew 79 per cent in March from a year earlier, the fastest increase of any nation, making them the world’s biggest tax-free spenders with 21 per cent of the total, according to tourist shopping specialist Global Blue.

The products they splurge on the most in Europe are watches, jewellery and fashion, said Manelik Sfez, head of global corporate and partner marketing at Global Blue in Nyon, Switzerland.

Lower prices are the main reason wealthy repeat Chinese travellers buy abroad, Sfez said. That doesn’t mean they scrimp. Chinese visitors reported spending an average of 11,000 yuan (HK$13,520) on shopping per trip to Europe, Hong Kong or Singapore, according to a recent Global Blue survey.

“Shopping is their preferred activity at destination,” Sfez said.

Guanyu 道 said...

Sales to Asian tourists will rise by a mid-teens percentage this year in the region compared to a mid-single digit decline for local customers, Belge estimates. Sales of high-end goods may climb 10 per cent in 2012, half last year’s rate, and 9 per cent in 2013, he said.

Vuitton, which raised prices 2.5 per cent to 3 per cent in Europe in the first quarter, hasn’t decided how it will adjust its pricing structure further, Guiony said. He doesn’t expect the shift in business from China to Europe to be permanent.

Luxury companies risk hurting local European demand or damping other tourist spending in the region if they raise prices too much, said Armando Branchini, founder of Milan-based luxury consultant Intercorporate. Still, a progressive increase is needed and austerity measures are likely to be the main obstacle to consumption in the region, Solca said.

Lowering prices in China isn’t an alternative and won’t be until Chinese authorities cut import duties, PPR deputy CEO Jean-Francois Palus told analysts last month.

As China cuts taxes on consumer goods this year, Branchini said he expects the duty on luxury goods eventually to reach between 10 per cent and 12 per cent compared with 17 per cent currently.