Gucci and other major luxury retailers remain bullish on China
Countering recent fears among some observers about a potential slowdown in China's luxury industry, strong earnings reports from Hugo Boss and Burberry this week have reassured China retail analysts. Despite a tough few months, during which its stocks dropped about 31 percent, Burberry saw third quarter gains largely pushed by strong sales in China and the Middle East. Also noting gains in China and the US, German fashion house Hugo Boss beat third quarter forecasts and confirmed its outlook for 2011. In recent weeks, due largely to drops in China's property market, chatter about a loss of momentum in China's high-end retail market has increased. But these earnings reports, along with reports of strong spending by Chinese tourists in the Middle East, South Korea and the US, indicate that Chinese consumers continue to trade up. The question mostly remains how much of this consumption will be done at home, and how much will be reserved for overseas trips.
According to Peter Farren, analyst at Bryan, Garnier & Co, fears of a significant drop in Chinese luxury consumption are overblown. Said Farren, "Right now the reality on the ground is that the Chinese consumer is very much there and alive," adding that "‘[Burberry's] growth rates in China are probably the highest in the industry, in terms of like-for-like sales growth." Though the verdict is out whether Burberry stock is overpriced, analysts at Investec said this week that Burberry's gains indicated "the continued momentum of the group and the strength of its strategy." Reflecting similar bullishness about Chinese luxury consumption, high-end giants LVMH and PPR joined Hugo Boss in expressing optimism about the quarter ahead.
Though this segment definitely remains one to watch, with analysts at Hargreaves Lansdown saying a slowing manufacturing sector makes Chinese retail a "slight question mark," as a whole China's luxury retail market should benefit from continued expansion into inland areas. On the broader front, major luxury brands should also continue to benefit from increased spending by outbound Chinese tourist-shoppers. This week, Korea's Shilla Duty Free announced that Chinese tourists displaced Japanese tourists as its top spenders for the first time, accounting for 49.4 percent of the retailer's sales in October. This is a significant shift from only three years ago, when, in the first quarter of 2009, Japanese visitors accounted for 75 percent of Shilla's revenues, compared to only 12.8 percent generated by the Chinese.