Asian turmoil is hitting luxury goods in the wallet … and the handbag and the shoes, writes Sarah Ryle
Patsy from Absolutely Fabulous might have said: “You can never have too many accessories.”
If only it were true. The sad reality, from the viewpoint of fashion’s most prestigious houses, is that when the economic climate turns cold, accessories are the first luxuries to be frozen out.
This is the conclusion drawn by market analysts who have watched the dramatic slide in the share prices of Gucci and LVMH (one of the largest fashion holding companies, which owns Louis Vuitton, Christian Dior, Givenchy, Christian Lacroix and Kenzo).
Europe’s finest fashion names are suffering from the financial turmoil in the Far East. Their American sisters are hurting, too. The fashion houses argue that they are suffering, through no fault of their own, from the withdrawal of Asian and, more particularly, Japanese trade.
This is true up to a point. Certainly a visitor in February to Rome’s designer shops would have seen Japanese tourists grappling with dozens of packages from Armani, Prada and Gucci.
By April, however, a visitor to Paris would have meandered through the Louvre without encountering more than one coachload of shoppers and sightseers from the Far East.
The Japanese are staying at home because the yen is so weak against the dollar – and Japanese consumers account for between 40% and 60% of the European fashion houses’ sales.
Natalie Saleur, a specialist in luxury goods at Dresdner Kleinwort Benson, points out that sales have collapsed in other Asian markets.
But she notes that home-bound Japanese consumers are still spending. “It’s fairly difficult to have a true picture. All the companies are suffering. Prada has suffered even more than most and has reduced its prices in Asia.”
Cedric Magnelia, a luxury goods analyst at investment bankers Credit Suisse First Boston (CSFB), says: “When the Japanese are not spending overseas, they tend to stay at home and spend there. But there has to be a question mark over sales of prestige items.”
He believes it will be difficult to maintain the double-digit growth fashion houses have enjoyed in Japan in recent years.
The key Japanese market is divided into the buyers at home (roughly 20% to 25% of sales) and the travellers (another 30%).
There is also duty-free: although in Western Europe duty-free tends to do best in cosmetics and fragrances, Asian consumers are more likely to buy luxury accessories and clothes.
Magnelia points out that LVMH’s duty- free vehicle, DFS, has experienced a 30% decline in dollar- denominated sales during the first half of this year.
But some fashion companies are viewing the crisis elsewhere in Asia as an opportunity to buy out their franchises, gaining more control over their business, as well as expanding. Este Lauder has spoken of the crisis as an opportunity.
Prada decided the time was ripe to take a 9,5% chunk out of Gucci – a tactic that frayed tempers but has not progressed into the all-out bid for control that some predicted. It is doubtful that Miuccia Prada has the muscle to pull off such a coup.
Some groups are shutting stores in the Far East to save on their costs, says Saleur.
Another obvious strategy for achieving cost savings would be consolidation. Why should fashion be any different from other sectors such as banks and hotels? Why should we not anticipate the coming together of Donna Karan with unlisted Calvin Klein?
Analysts say the key difference is the strength of the brands. A fashion house has nothing without its label.
And then there is the distinctive structure of fashion companies. They are low on capital investment and high on cash generation. Therefore the potential for cost saving through synergies is relatively low. Selling out or going to market is not something that fashion supremos do lightly.
The main issue, however, is the way companies have allowed themselves to become dependent on Asia for their success. Saleur says: “Most of the companies will probably report a drop of between 10% and 30% in Asia, excluding Japan.”
This is an industry notorious for its fads and unpredictable characters. Yet analysts maintain that the market reaction has been extreme.
“In my view there had been over- discounting by the market,” says Saleur. She highlights Gucci, whose share price is about $37, compared with $57 in January. “The price- earnings ratio is a nonsense. It is cheap. This company does not deserve such a poor rating. The market is assuming that there will be no growth for the next five years. It’s a little extreme.”
CSFB has a buy recommendation on Gucci and has not written off Hermes, Bulgari or even LVMH (on which it is more cautious). But too many accessories is not an option.
ENDS