From Plaid to Worse Burberrys recent woes show that the luxury-goods market is finally feeling the pinch of the financial crisis after years of resilience, says John Arlidge
From Plaid to Worse
Burberry’s recent woes show that the luxury-goods market is finally feeling the pinch of the financial crisis after years of resilience, says John Arlidge
THE BURBERRY FLAGSHIP store on Regent Street looks cool even on an unseasonably warm October day. The impeccably polished glass cases are full of the latest shoes. The boots come with stratospheric heels and even giddier price tags. Austere sales assistants dust, arrange, then re-arrange the black, camel and red bags. In the windows, there’s the latest Emma Watson advertising campaign. The only thing marring this chic tableau is the screaming headline on the Evening Standard newsstand outside the store. It reads: BURBERRY SALES AND SHARES PLUMMET!
Britain’s only luxury goods superbrand issued a surprise profit warning in September and reported its worst same-store sales figures since the financial crisis began. Sales at Burberry stores that have been open at least a year were flat compared with a year earlier — the worst performance since 2008. Burberry also warned that pre-tax profit for the year ended 31 March would come in at ‘the lower end of market expectations’, at £407–455 million. Its shares fell by more than a fifth on the news.
Burberry is not alone is suffering a sudden reality check — LVMH released its weakest quarterly growth since 2009 in July. The French company, a bellwether of the broader luxury industry, said that revenue rose 10 per cent in the second quarter from a year earlier to €6.38 billion (£5.1 billion) — excluding acquisitions and disposals as well as currency effects — a slowdown from the 14 per cent rise recorded in the first quarter.
In September L’Oréal, the cosmetics group, reported slower growth in the second quarter than the first three months of the year. The Swiss-based jeweller Richemont and Germany’s Hugo Boss have also signalled signs of slower demand, while falling sales forced the jewellery retailer Tiffany to cut its full-year profit forecast for the second consecutive quarter.
Emma Watson with lots of Burberry bags in her 2009 campaign
LUXURY BRANDS HAVE always been a world apart. That notion has taken on a new meaning in recent years as sales of snazzy goods have defied recession, with big maisons notching up year-on-year sales increases since 2008 and the share prices of some brands rising by as much as 800 per cent. What many are now asking is: has the $1.5 trillion luxury-goods business lost its lustre?
Yes, concede Burberry executives who are warning analysts and investors to expect more bad news across the sector. Angela Ahrendts, the firm’s smiling but quietly ruthless boss, says: ‘The external environment is becoming more challenging.’ Stacey Cartwright, Burberry’s CFO, adds: ‘We know we are not alone because in different regions we are talking to our peers.’
Analysts agree. James Lawson, a director of Ledbury Research, which specialises in the luxury sector, says: ‘The slowdown is unlikely to be a single brand issue.’ Seymour Pierce analyst Kate Calvert adds: ‘We wouldn’t be surprised if other luxury players are seeing similar trends.’
What’s behind the slump? It’s partly structural. The slowdown in spending in most economies has — finally — reached the upper echelons of the market. ‘There are problems in the global economy and with the entire luxury industry,’ says Rahul Sharma, managing director of retail analysts Neev Capital. Cartwright adds: ‘GDP is down globally. It feels more macro than anything else.’
Burberry is more vulnerable to a general slowdown because it sees itself as a purveyor of ‘democratic luxury’, with price points lower than those of competitors such as Hermès or Chanel. That means its customers are more acutely affected by macroeconomic shifts, says Luca Solca, global head of European equity research at CA Cheuvreux. ‘I cannot point a finger at something that Burberry has done badly,’ Solca says. ‘It’s just that when there’s a slowdown, Burberry slows faster than competitors. When there’s a rebound, Burberry rebounds faster.’
The slump in spending has been most pronounced in the one market that has for years buoyed the luxury goods business: China. Economic growth there slowed to its weakest rate in three years in the first quarter. Overall, retail sales rose about 13 per cent in August to 1.67 trillion yuan (£163 billion), slowing from 17 per cent growth in the same period last year. Burberry’s sales growth in China has halved in the past year.
CHANGING SOCIAL MORES and greater public scrutiny of how the Chinese well-to-do spend their money are compounding the decline in spending. The trend of keeping second wives and girlfriends appears to be on the wane, according to a recent HSBC report. Extravagant gift-giving is a common practice among Chinese business figures and officials, but in July the Chinese government banned civil servants from using government funds to purchase luxury goods, according to the state-run Xinhua news agency.
The campaign to limit gift-giving comes ahead of the change of political leadership change in China, and the results have been dramatic. ‘The gift giving part of the business in China slowed very significantly,’ says Cartwright. ‘Clearly there’s the changing of the guard coming very shortly, and we’ll have to see what comes after that.’
Burberry has been particularly exposed in China because, some analysts say, it misjudged the Chinese market. The company has been culling some of its cheaper product lines in China, such as handbags in its traditional camel, red, white and black check, and has pushed up the lowest price for its signature trench coat to about £1,000. ‘We have to ask if we have been trying to move customers too quickly up the value pyramid,’ says Cartwright.
Paul French, chief China market analyst at Mintel, also accuses Burberry of getting some of its ‘look’ wrong in China. Burberry’s latest collection was too subtle and sober for consumers who, he says, ‘still like a bit of bling and a bit of logo’.
Some analysts point to a simple explanation for the slowdown in luxury spending worldwide: after years of bucking the recession, it was only a matter of time before the bubble burst. In recent times luxury-goods firms’ shares have risen as high as the prices of their goods. S&P’s luxury goods index has outperformed the market by 13 per cent over the past five years. Burberry’s shares have been trading on 24 times forward earnings. At one point, it was worth more than venerable old Marks & Spencer. Now humble M&S is back on top.
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