How Much Will China’s Yuan Devaluation Hurt Luxury?

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Ferragamo’s stock price took a hit this week thanks to China’s surprise currency devaluation. (Courtesy Photo)

After China’s surprise decision to devaluate the renminbi on Tuesday, investors went on a frenzy  of dumping luxury shares, causing stock prices of everything from Ferragamo to LVMH to tumble. But this panicked selling was “overdone,” according to experts who believe that the 2 percent devaluation won’t have a huge impact on luxury profits.

Brands with the most exposure to the China market were the hardest-hit on the stock market. Ferragamo, which counts China as its biggest market, saw the largest drop at 5.3 percent, while major conglomerates LVMH, Kering, Richemont, and Swatch were hit, and other brands like Burberry, Coach, Tod’s, Cartier, and Tiffany & Co saw drops.

One of the main fears is that for brands who sell a significant portion of their goods in China, the currency translation back into euros would be detrimental when financial results are reported. China accounts for 19.5 percent of Ferragamo’s total revenue, while Tod’s sees 15 percent of its sales in mainland China and Swatch sees 14 percent.

But some experts believe the impact won’t be so extreme given the fact that the devaluation is relatively low. “When all is factored in, moderate RMB devaluation has a very low single-digit negative impact on luxury players’ profits,” writes Luca Solca in an investor note at Exane BNP Paribas, who estimates that only significant RMB devaluation of 20 percent would cut profits by 5-10 percent for brands.

After traveling Chinese shoppers have been driving up luxury sales in Europe and Japan due to the weak euro and yen, the lower RMB value could dent their shopping budgets. We may see Chinese consumers spend less abroad because “products in Europe all of a sudden appear more expensive to them, without luxury players getting any benefit in volume terms,” writes Solca.

This might actually mean more shopping within mainland China as the price gap with the euro narrows, and Exane BNP Paribas predicts that up to a third of Chinese luxury spending that has gone abroad will return to China.

Brands that enacted price cuts in the China market to counteract the massive price gap created by the weakening euro may now be at a disadvantage with the weakened yuan. Companies such as Richemont that cut prices now have a “higher hurdle” to clear, writes Solca, while LVMH and Swatch “look better off.” Gucci, which enacted a “one-off” policy of 50 percent discounts may also benefit due to the fact that its price cuts were short-term. When considering issues like price cuts, however, currency fluctuations are only one of many factors to consider—closing the price gap also cuts down on demand for detrimental gray-market sellers, but enacting major discounts could harm a brand’s exclusivity.

 

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