Crisis Facing Luxury Industry

The luxury Research Department of Paris Bank of France recently released a report entitled "the ten major crises in the luxury industry", telling us what is wrong with this hot investment paradise.

The operation of luxury goods is cyclical and cost fixed: brand promotion, flagship stores, employees, sample series, and other important elements in the operation of luxury goods are all very small expenditures.

A slowdown in sales is likely to result in shrinkage of operating expenses, resulting in a compression of profits, especially a price earnings ratio.

Luxury is a symbol of people's desire for upper class. It is usually regarded as a way to reflect personal financial resources.

Since 1970, with the widening of the global income gap, luxury consumption has shown an obvious upward trend.

On the contrary, because marginal tax rates have been raised and the growth of income gap has slowed down or even stagnated, it is likely to reduce the consumption of luxury goods.

Whether wage increases, asset appreciation or loans are more convenient will make people feel richer and have a desire to spend.

However, the endless fiscal tightening in the eurozone and falling prices in China are restraining people's desire to buy.

"Sneezing in China, the global luxury market is getting pneumonia."

This sentence in the report is no exaggeration.

In 2014, 30% of the world's luxury consumption was contributed by Chinese customers, compared with 3% only 10 years ago.

However, the Bank of Paris observed that the Chinese market is becoming more and more complicated.

The government has taken active measures to reduce the gap between the rich and the poor, so that millions of people can get rid of poverty.

This move has increased the population of China's middle class. They will become the main consumer of luxury goods in the next 5 years in -10.

However, the middle class also has to face higher property taxes in China, such as property and inheritance tax.

At the same time, the government led anti corruption campaign may spawn calls for fiscal austerity and hatred.

The negative effects of rising marginal tax rates in Europe and the United States can be offset by rising sales in other markets such as Russia and China.

However, Luca Solca, director of luxury research at Paris bank, believes that China may raise the tax on luxury goods and customs duties on foreign purchases.

At present, European countries are the biggest beneficiaries of Chinese consumers' overseas shopping.

According to research data, 40% of Chinese luxury goods purchased from abroad are from France, 35% from Italy and 25% from the United Kingdom.

Chinese tourists will spend 80% of their budget (about 81 thousand yuan) for shopping when they visit Paris.

European luxury market spending is mainly in the form of euro, Swiss franc or pound sterling, and most of it is US dollars.

In the first 9 months of 2014, the euro became a persistent resistance in the luxury sector. Fortunately, the dollar strengthened at the end of 2014, giving the industry a shot in the arm.

Similarly, the Japanese market still accounts for the sale of European luxury brand 10%-15%. The collapse of the Japanese yen has caused a heavy blow to luxury goods.

In January 15th, the Swiss central bank announced its termination of the lower limit of the Swiss Franc to Euro 1.2, set in 2011, allowing the Swiss Franc to rise in value, which has brought direct and tremendous pressure on the export of all goods in Switzerland.

French luxury group LVMH recently released 2014 earnings report: exchange rate fluctuations have brought great negative effects, the loss reached 282 million euros (about 2 billion 22 million yuan), for fashion and

The impact is especially strong.

Luxury consumption depends on travellers.

According to the Swedish data analysis firms Generation Research AB forecast in 2013, global tourism retail consumption will double to $100 billion by 2023.

Therefore, any impediment to travel, such as epidemics and terrorist attacks, is a serious blow to luxury goods.

Due to the fixed cost characteristics of luxury goods mentioned earlier, travel panic can lead to a chain effect such as sales decline, operational cost crisis and company valuation shrinkage.

Luca Solca observed that in the past 20 years, the 4 opportunities for financial investors to bargain for luxury goods were: "9 11", the Asian financial crisis in the late 1990s, SARS in 2003, and the bankruptcy of Lehman brothers in 2008.

Hongkong may be the most concentrated luxury market in the world, accounting for 10% of the sales of soft luxury goods, and 20% of hard luxury brands.

In 2014, Chinese tourists reduced consumption last year due to Hongkong's "Chung Chung" action.

Chief of British luxury brand Burberry

Carol Fairweather recently mentioned in a conference call after the quarterly bulletin that the local sales performance was hit by the "traffic failure" caused by Hongkong's "traffic failure". The sales growth of the Burberry Asia Pacific region dropped from two digits to single figures.

Similarly, a week after the attack of the French Charlie weekly, the lives of French people gradually returned to normal, but Paris, a luxury consumption center, was hit hard.

The high-density discussion of terrorism by media and public opinion has made international tourists slowly grow on the security concerns of the French capital and choose to avoid the city.

With the excessive expansion of the brand, the risk of falling prices also follows.

It's like Coach's wild expansion and sales promotion in the past few years, resulting in market saturation, brand value being diluted, and sales and profits both slipped.

According to the report, in the increasingly crowded luxury market, when sales decline, it is very important to know how to maintain "reserve" and stimulate customers' desire to buy.

Hermes CEO once said, "when a product sells too well, we will stop producing it."

Just like the senior manager of luxury industry Vincent Bastien wrote in the luxury strategy, "just as supply shortage will hinder growth, the loss of rarity will also cause people's desire to diminishes."

enterprise

There is a natural reason for the takeover, but this behavior may also result in a satisfactory return on capital due to the acquisition of a huge premium.

Kai Yun group faced this problem when purchasing Puma.

In 2007, the luxury group opened its sports brand Puma with 5 billion 200 million euros (37 billion 95 million yuan). Soon after that, the brand will be dragged into the mire.

Because of the fierce competition, the gross profit margin of sportswear is much lower than that of luxury goods. Puma has dragged down the overall valuation of Kering.

In view of the ambitions of the two luxury giants, Kai Yun and LVMH, the Bank of Paris believes that they will also take the biggest risk.