Bloomberg News

LVMH Skips European Austerity Raising Prices for Chinese

May 01, 2012

A woman looks at a Louis Vuitton display on Hollywood Boulevard, in Hollywood. Photographer: Joe Klamar/AFP/Getty Images

A woman looks at a Louis Vuitton display on Hollywood Boulevard, in Hollywood. Photographer: Joe Klamar/AFP/Getty Images

Chinese tourists traveling to Europe to take advantage of savings as much as 50 percent on designer clothes and accessories are finding fewer bargains.

LVMH Moet Hennessy Louis Vuitton SA (MC) and its peers are raising prices to make up for lost business in China and lower profitability outside the country, even if it puts items like 2,270-euro ($3,000) Lockit handbags further out of reach for Europeans whose disposable incomes are shrinking amid austerity.

“You cannot continue to sustain the existing price gaps that have been a mainstay of the luxury goods industry for the past 20 or 25 years,” said Luca Solca, global head of European equities at CA Cheuvreux, in an interview. “What we expect luxury-goods companies to have to do is progressively close the pricing gap and, more likely than not, this is going to come from stepping up prices outside of Asia.”

With China expected to account for a third of luxury sector expansion this year, weakening revenue growth there is a risk to earnings even as the value of sales in yuan rises with currency moves. Earnings before interest and tax as a percentage of luxury sales is 40 percent in China compared to 25 percent in Europe, largely because of lower rents, Solca estimates. Tourists, mainly from Asia, account for between 35 percent and 60 percent of luxury sales in Europe, according to HSBC analyst Antoine Belge.

Widening Gap

At Paris-based Louis Vuitton, currency shifts widened the price differential between mainland China and France to as much as 47 percent in the first quarter, spurring more Chinese to shop abroad, according to LVMH Finance Director Jean-Jacques Guiony. While the premium propped up flagging local demand in Europe, it came at the expense of sales in the world’s second- largest economy, he said on a conference call last month.

“This will continue to be a feature of the industry this year unless the group rebalances pricing to discourage parallel imports,” said Barclays Capital analyst Julian Easthope.

The euro has declined 11 percent against the dollar and 13 percent versus the yuan in the past year.

Demand for LVMH’s products is increasing, defying Europe’s debt crisis and China’s slowing economy. LVMH and its competitors would need to raise prices by 3 percent outside of China to compensate for about 15 percent of mainland Chinese customers buying their products abroad, Solca said.

Big Spenders

Burberry Group Plc (BRBY), the U.K.’s largest luxury goods maker, reported a similar revenue pattern to Vuitton in the quarter. Like-for-like sales growth in China slowed to about 20 percent from more than 30 percent in the previous three months, while retail sales in Europe were “modestly better,” the London- based company said April 17.

“It’s the global traveling luxury consumer that is dominating,” Burberry Chief Financial Officer Stacey Cartwright said at the time.

Chinese global tax-free spending grew 79 percent in March from a year earlier, the fastest increase of any nation, making them the world’s biggest tax-free spenders with 21 percent of the total, according to tourist shopping specialist Global Blue. The products they splurge on the most in Europe are watches, jewelry and fashion, said Manelik Sfez, head of global corporate and partner marketing at Global Blue in Nyon, Switzerland.

Lower prices are the main reason wealthy repeat Chinese travelers buy abroad, Sfez said. That doesn’t mean they scrimp. Chinese visitors reported spending an average of 11,000 euros on shopping per trip to Europe, Hong Kong or Singapore, according to a recent Global Blue survey.

Preferred Activity

“Shopping is their preferred activity at destination,” Sfez said in response to e-mailed questions.

Sales to Asian tourists will rise by a mid-teens percentage this year in the region compared to a mid-single digit decline for local customers, Belge estimates. Sales of high-end goods may climb 10 percent in 2012, half last year’s rate, and 9 percent in 2013, he said.

Vuitton, which raised prices 2.5 percent to 3 percent in Europe in the first quarter, hasn’t decided how it will adjust its pricing structure further, Guiony said. He doesn’t expect the shift in business from China to Europe to be permanent.

Luxury companies risk hurting local European demand or damping other tourist spending in the region if they raise prices too much, said Armando Branchini, founder of Milan-based luxury consultant Intercorporate. Still, a progressive increase is needed and austerity measures are likely to be main obstacle to consumption in the region, Solca said.

Unfortunate Combination

“The combination of the two is unfortunate because what you’ll find is higher prices and at the same time lower disposable income for domestic European customers,” Solca said.

Lowering prices in China isn’t an alternative and won’t be until Chinese authorities cut import duties, PPR SA (PP) Deputy CEO Jean-Francois Palus told analysts last month. As China cuts taxes on consumer goods this year, Branchini said he expects the duty on luxury goods eventually to reach between 10 percent and 12 percent compared with 17 percent currently.

LVMH’s first-quarter fashion and leather goods sales in the Asia Pacific region grew about 10 percent, slowing from 18 percent the last three months of 2011. At Vuitton, where prices in China are 30 percent more expensive than in the rest of Asia, sales on the mainland rose less than 10 percent in the quarter, Guiony said. That contrasts with double-digit growth in sales to American, Japanese and Chinese consumers globally, he said.

“By no means do we feel that this is a permanent move,” Guiony said. “Overall, no reason to be pessimistic, but at the same time, keeping flexibility and agility are the two key words in any uncertain environment.”

To contact the reporter on this story: Andrew Roberts in Paris at aroberts36@bloomberg.net

To contact the editor responsible for this story: Sara Marley at smarley1@bloomberg.net


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