China's slowdown

China's reopening made the fashion & luxury sector finally breathe a sigh of relief this week. On European stock markets, high-end stocks started Monday's session with newfound momentum, enthusiastically welcoming the confirmation that the closures which have shut down the country's major metropolises since last March will end in early June. According to analysts, however, the lockdowns are likely to leave economic scars. «After being the industry's growth engine over the past decade, China is currently a hotspot due to prolonged closures, especially in the fashion capital Shanghai, and due to travel restrictions, which have also impacted on tourist destinations such as Macau, Hong Kong and Hainan», experts at Mediobanca explained.

However, the exposure of Western brands in the country varies greatly from brand to brand. Swatch is the most exposed one, with over 40% of sales from Greater China, followed by Tod's with over 35% and Burberry and Richemont with nearly 30%, while other companies such as Brunello Cucinelli, Aeffe or Hugo Boss have limited exposure of 10-15%. French luxury giants Kering and Lvmh generate about 25% of their revenues in the country. As for fast fashion, Spanish giant Inditex has been impacted less because, according to Canadian investment bank RBC Capital Markets, it sources only 15% of its production from China compared to 35% of H&M and 50% of Primark.

«We foresee a challenging ride as the government is unwilling to risk the epidemic getting out of control again. Our basic assumption is that now luxury goods sales will quickly return to growth as they had on previous occasions», Mediobanca’s analysts continued. «In the medium term, China’s economy risks remaining under pressure, given that the shift to domestic consumption as the economy’s engine is proving challenging and will likely require even more fiscal stimulus». There have been severe economic implications due to the zero-Covid policy, driving key macroeconomic indicators into negative territory and putting at risk this year's Chinese GDP growth targets, set at 5.5%. Official data in April confirmed a sharp decline in activity, with retail sales decreased to 11% year-on-year and industrial production dropping for the first time since early 2020.

According to a Barclays survey conducted last month on about 125 respondents, sentiment among Chinese luxury goods consumers, however, is holding up overall. «So far, the largest group in our sample (33%) expects to keep their spending level unchanged once the market reopens, and another 13% expects to increase it, which seems reassuring to us», the investment bank's experts stated, specifying, however, how macroeconomic headwinds could push the undecided group (25%) and others to reduce their luxury budgets. In addition, 24% of respondents have already claimed that they expect their spending level to decrease. Despite these indicators showing substantial optimism for the future, the fashion & luxury sector is still heavily dependent on Mainland China, as well as on fears that the global economy could fall into recession.

Signs of luxury sales rebound are expected over summer. «Since watches and jewelry are more exposed to China and have a more limited digital penetration, we expect the rebound to be a bit more prominent. We have a strategic preference for soft luxury, as it is more digitally developed and exposed to impulse buying, so we expect a faster rebound than hard luxury», Mediobanca’s analysts pointed out, stressing that a much larger fiscal stimulus will be needed to revive economic growth and support the wealthy middle class that is the high-end brands’ target in order for the Chinese cluster to become the driver of luxury demand at a global level again.

Based on comments from industry players, the lockdowns in the country over the past month have impacted about 40% of the distribution network and potentially an even larger percentage in terms of sales, considering that the affected stores include some of the most well-known ones, such as Plaza 66. In addition, most operators manage local logistics through distribution centers in Shanghai, which has prevented them not only from serving customers but also from partially compensating for the shortcomings of physical retail by supporting it with digital retail. (all rights reserved)