LVMH: Luxury Brands Should Reduce Reliance on China Market
- Chaileedo Press
- May 18, 2022
- 4 min read
LVMH's board member Hubert Védrine luxury brands should reduce their dependence on China as much as possible and stop increasing or even reducing their exposure in that market. Although multiple beauty giants don’t have expected performance in China in Q1 of 2022, they still boast confidence in the Chinese market.
According to a new article published by Miss Tweed, the Chinese market has played a crucial role in the accelerated growth of luxury brands in recent years, But all good things come to an end. While the Chinese market still holds great potential, luxury sales growth over the next 20 years will not be as strong as it has been over the past 20 years. Luxury brands will need to look elsewhere in Asia as well as in Africa and North America for new growth points.
In an interview with Miss Tweed, LVMH's board member Hubert Védrine also said that the proper strategy for top luxury brands such as Louis Vuitton, Hermès and Chanel is to reduce their dependence on China as much as possible and to stop increasing or even reduce their exposure in that market.
The major beauty brands have recently issued their first quarter 2022 earnings reports, with no shortage of references to their performance in China.
Although L'Oreal's first quarter performance in China exceeded expectations, L'Oreal also confessed that the impact of the epidemic in China caused the group's revenue to decline in February and March, achieving only low double-digit growth beyond expectations.
Estee Lauder's first quarter results were less positive. For the three months ended March 31, Estée Lauder's sales rose 10% year-on-year to $4.25 billion, slightly below market expectations. The Group revenue in the Asia Pacific, where China is located, fell 4 percent to $1.203 billion and operating profit plunged 71 percent to $72 million. Tracey Travis, Estée Lauder's group CFO, noted that the group's distribution center in Shanghai has been out of service since the end of March and distribution logistics have been severely impacted as a result. In addition, the growth in the online channel was offset by a sharp decline in traffic to offline brick-and-mortar stores, despite a significant 25% increase in the group's online business in China.
In a recent report, HSBC analyst Ciara Oshea pointed out that Beiersdorf is also facing uncertainty in the Chinese market. "Currently, almost all of the challenges Beiersdorf faced in the second quarter came from the Chinese market. In addition, 75 percent of La Prairie's sales in China come from offline stores, meaning that various levels of restriction will have an impact on La Prairie's sales, such as the already declining number of travelers to Hainan, which will have a significant impact on the brand's duty-free business."
In addition to the luxury group, U.S. affordable luxury giant and Coach parent company Tapestry Group has also been affected by headwinds in China, with Tapestry noting in its Q3 FY2022 results that due to the ongoing dynamic nature of the Covid-19 pandemic, financial results could differ materially from the current outlook due to several external events, including the potential for more widespread resurgences of the pandemic globally and the resulting pressure on trends, as well as further supply chain disruptions, including potential continued production and distribution delays as well as increased costs, not contemplated in the Group's estimates. Group revenue for the period increased 13% year-over-year to $1.44 billion. Fortunately, the decline in China was offset by strong growth in Europe and the US.
Most beauty groups reported earnings in China in the first quarter citing factory closures, logistics shutdowns and store closures due to the Shanghai outbreak pandemic that began in March.
But as people get used to the regular epidemic control measures again and the normal pace of production and life resumes, brands have reason to be optimistic about future expectations for the Chinese market.
Joanne Crevoiserat, CEO of Tapestry Group, said: "We think the Chinese market will continue to face headwinds, but we expect things to improve from June onwards, especially in Shanghai. This recovery will be gradual and we will not be looking for a strong 'V-shaped rebound, but for more solid growth."
The same optimistic outlook is reflected in the earnings reports of fashion luxury and beauty groups such as L'Oréal, LVMH, Kering and Hermès.
Not long ago, L'Oréal officially announced the establishment of its first investment company in the Chinese market, Shanghai Meicifang Investment Co., Ltd, located in Fengxian District, Shanghai, dedicated to investing in innovative beauty technologies and promoting the high-quality development of open innovation in China. L'Oréal's Chief Financial Officer said: "China is strategically important to the L'Oréal Group. 25 years of development in China have proven that China is not only a key growth engine for the Group but also that its unique technological innovation development and digital marketing ecosystem have become one of inspirational places to lead the Group's future innovation. In our 25th year in China, we are bringing our open innovation investment to China, demonstrating our commitment to the Chinese market and our determination to further enhance and empower the Chinese innovation ecosystem and accelerate open innovation and result in a transformation in China."
Although the global macro environment is still affected by the war in Russia and Ukraine, the supply chain crisis and inflation, China, one of the most important fashion consumer markets, is still confident in the brand's future development despite the brief epidemic prevention.
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