Luxury firms should stop blaming macro trends for poor sales and become more sophisticated

Karen Tso
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Gucci Launches Fifty Percents Discount In China
Chinese consumers will chase a bargain – from the right brand (Source: Getty)

The latest batch of earnings reports from the luxury giants were showstoppers – with stunning double-digit gains from Kering, the owner of Gucci, versus no growth from Burberry.

The polarised results raise the question: is it time for the luxury sector to move on from a tale of woe after the crackdown on Chinese consumption and the weak global growth which destroyed sales in recent quarters?

Kering has been revamping its core brands – a tactic which has more than paid off, with Gucci’s comparable revenue soaring 17 per cent and Yves Saint Laurent’s up by a staggering 33 per cent in the third quarter.

This compares with an underwhelming first-half report card from Burberry, with no underlying growth – the only sexy movement coming from a significant drop in sterling. The results suggest that, instead of macro, good, old-fashioned retailing is moving the needle.

In its earnings release last week, Italian luxury company Tod’s painted a picture of a “volatile and uncertain economic and financial environment”, pointing to “persistent weakness of consumption in many important markets for luxury goods”. Meanwhile, Burberry continued to blame macro drivers for its ugly numbers, citing slowing spending from Chinese customers globally and an uneven performance from the US.

Read more: The owner of Cartier has forecast a 45pc fall in profits

But the commentary jars. French giant LVMH said both the US and Europe had positive momentum while Asia Pacific ex Japan accelerated. Kering said Europe was growing but specifically noted a significant pick up in the US and Asia. The weak spot for both was Japan.

If macro is just an excuse, bottom up stock selectors may be able to extract more value.

The Bain & Co Luxury Study released last week in Milan in collaboration with Fondazione Altagamma, the Italian luxury goods manufacturers’ industry foundation, reinforced the narrative of a better backdrop for luxury.

The report described the personal luxury goods sector as steady. So what’s the missing link for those with earnings disappointments this year, from Swatch to Richemont, and where the short sellers have circled, Tod’s and Ferragamo?

Read more: Time is money: Are luxury watches a good investment?

Bain’s study pinpoints strategy as the problem – warning luxury firms they need a more sophisticated approach. “The luxury market has reached a maturation point. Brands can no longer rely on low-hanging fruit. Instead, they really need to implement differentiating strategies to succeed going forward,”said Claudia D’Arpizio, a Bain partner in Milan.

Part of the problem may lie with a fixation on geography over style. Luxury firms have pinned their hopes on Asian customers having deep pockets, setting up China expansion plans targeting store growth in first and second tier cities to patch up a black hole in spending in Hong Kong and Macau. More recently Chinese shoppers have avoided Japan because of currency strength, but the UK is being favoured by tourists making the most of a drop in sterling. The trend indicates Chinese and other global shoppers will chase a bargain, but it will again give luxury groups an excuse to blame regional volatility.

Brand revival and category expansion remain the bright spots in luxury. Exane BNP Paribas headlined Gucci as one of the hottest names in its brand temperature gauge based on editorial coverage in print versus advertising spend, back in August. Since then the creative vision of Alessandro Michele has steered the brand to greater strength, and investors are eyeing margin expansion of 1.5 percent in the second half.

On show later this week is timepiece and jewellery maker Richemont, which reports interim results, and Hermes with third quarter sales. Hermes warned recently of a hazy outlook with plans to scrap its sales forecasts from next year in light of economic and currency uncertainty.

Luxury success stories raise the bar for the industry and shine a spotlight on those that continue to trip up on the so-called macro.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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