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November 28, 2014 - Latest:

Burberry: Is luxury losing its lustre?

  • 12 July 2012

Burberry has never been just another retailer; it has been a bellwether for the wider luxury goods market and the development of a consumer economy in emerging markets. As such, its recent results are troubling, suggesting that luxury goods may be finally starting to feel the heat that has hit the high street or – worse – that their areas of growth, such as China, are starting to slow.

On paper, the results looked relatively strong, with revenue rising and profits firm: "The luxury retailer famed for its trench coats and plaid-patterned accessories reported an 11% rise in revenue for its fiscal first quarter, boosted by its men's division."

But the gain was much lower than a year earlier. After slowing growth from groups such as France's LVMH Moët Hennessy Louis Vuitton and Italian fashion house Prada SpA, analysts have "started to question the sustainability of the boom," according to the Telegraph article. "…a stream of bearish economic data has started to weigh on growth. In China-the key market for many luxury-goods makers-economic growth slowed to 8.1% in the first quarter, the weakest rate in about three years."

This would imply that worse times are ahead for China. Corporate results can be a leading indicator of GDP weakness.  As such, Burberry's slowdown is worrying, confirming many people's worse fears about China and the difficulties it faces. The Wall Street Journal pointed out sales in Asia Pacific slipped from 67% to 18% for the group.

However, a closer look at the results suggests that China may not the biggest problem: "(Burberry) said it saw growth in the UK, France and Germany, with ‘double-digit' comparable sales growth in China, with particular strength in Beijing, despite recent fears of a slowdown in Asia." The group maintained its full-year guidance, suggesting had no immediate concerns about the situation in Asia. The real weakness continued to be the Eurozone.

Nevertheless, it is taking steps to improve its Asian business: "It also bought back its franchises in China and is upgrading these stores – or closing the smaller ones. In the long run, China is the key. For example, although sales in Europe were up 10pc, a lot of these sales were to travellers from Asia. Should the Chinese economy implode, this would be a disaster for most luxury goods companies. However, the amount of new floor space opening in China should keep sales rising for some time."

These results do not, in isolation, spell disaster for the luxury consumer sector or for China, but it certainly suggests that no company is immune from the global slowdown.

 

More on Mindful Money

Luxury and Sustainability – Style over Substance?

Emerging markets' taste for luxury boosts British heritage brands

China's love of luxury

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