Big bling is now looking for a strong rebound after China abandoned its Zero Covid policy. That has driven luxury valuations sharply higher. But these performances — the first this reporting season — underscore the fact that any recovery will be volatile. The rally in luxury stocks, with LVMH Moet Hennessy Louis Vuitton SE hitting another record high on Tuesday, looks too far, too fast.
At both Burberry — best known for its black, white, tan and red checks — and Richemont, the spike in Covid cases hurt foot traffic to stores. Richemont added that with many staff sick, it was forced to cut opening hours or temporarily close its boutiques.
However, both are starting to see some encouraging signs as stores have reopened and shoppers have returned. Analysts at Bernstein also reported a 52% increase in luxury foot traffic in Shanghai at the weekend compared with Golden Week in October, and almost three times as much as last June. Add in the fact that Chinese consumers have amassed almost 6 trillion yuan ($887 billion) in excess savings and are rushing to apply for tourist visas to travel overseas once more.
But it is still early days. Burberry said the pace of recovery was likely to be unpredictable. The upcoming Lunar New Year — which begins this weekend — will be the next key test.
Over the past two years, China has vacillated between reopening and restrictions. This time around, lifting Covid curbs has been complicated by soaring cases. For consumers to spend with abandon, they must be convinced that the worst is really over.
Some countries are also requiring Chinese travelers to prove they are free from the virus before entering. Destinations such as Japan, South Korea, the US, France and Italy all have imposed rules for entry. This could be a drag on luxury spend. Chinese shoppers tend to splurge most when they are traveling, taking advantage of cheaper prices than at home.
Burberry said it was seeing some “early green shoots” in terms of Chinese consumers traveling to Hong Kong and Macau. Even so, it is likely to be in the second half of this year or into next before Chinese international travel rebounds.
Demand is also slowing in the US, which picked up the bling baton from China to become the main driver of top-end demand over the past two years. However, Burberry said sales to Americans were stronger in December.
Even if these setbacks are overcome, the benefits of recovery in China may not be felt equally. The biggest players LVMH, Hermes International and Richemont, which have continued to invest over the past three years, look best placed to weather the volatility.
The environment looks far more challenging for those in turnaround mode, such as Gucci-owned Kering SA and Burberry. The British luxury brand currently generates about 25% of sales from Chinese consumers. This was 40% before the pandemic so there is plenty of room for growth if China bounces back. It has also recruited a top-notch creative director in Daniel Lee. Both bode well for Burberry’s performance, but it will take time for Lee’s designs to gain traction. In the meantime, it faces competition from the mega-brands that have the resources to keep their products at the forefront of consumers’ minds.
That may explain why its valuation lags rivals. To close the gap, Burberry must create the sort of buzz about the brand that Gucci achieved in the early stages of its renaissance under former creative director Alessandro Michele. Throngs of Chinese shoppers reaching for Burberry’s namesake check should help.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry. Previously, she was a reporter for the Financial Times.
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