The coronavirus outbreak in China is threatening the luxury goods industry with a significant sales hit after a decade of relentless growth fueled by Chinese shoppers.
The industry's most important clientele, Chinese consumers are quarantining themselves at home and canceling trips abroad, where they often splurge on Louis Vuitton, Gucci, Cartier and other high-end brands. In Paris, luxury boutique staff are reporting a sharp drop in Chinese shoppers.
And on social media platform WeChat, some of the world's "daigou"--Chinese professional shoppers who buy luxury goods abroad for others back in China--switched overnight from advertising high-end purses and luxury products to advertising disinfectant.
Luxury brands have closed their boutiques in Wuhan, the outbreak's epicenter, and are restricting staff travel to mainland China.
The outbreak represents the biggest threat to the industry since the financial crisis of 2008. Since then, Chinese have propelled luxury brands to year after year of record revenue. The country's wealthy and emerging middle class are far more likely to spend their disposable income on luxury goods than their counterparts in the West, analysts say.
Global spending on personal luxury goods--high-end fashion, watches, jewelry and apparel--hit an estimated €281 billion ($310 billion) in 2019, up from €116 billion ($128 billion) at the beginning of the century, when Chinese consumers emerged as major purchasers of luxury goods, according to Bain & Co.
They now account for 35% of global luxury goods sales, with most of that buying happening on trips outside China. Now, Chinese shoppers' high spending abroad is threatened by airlines' suspension of service to the country. That curtailed travel comes on the heels of Beijing's push to bring luxury buying back to China, which has led luxury brands to ramp up investments in the market in recent years.
The industry took a significant hit in 2002 to 2003 when SARS, or severe acute respiratory syndrome, emerged in China and became a global health crisis. China has become far more important to the industry since then.
"Our concern is that the luxury goods sector is significantly more exposed to Asia and Chinese consumption today than in at the time of the SARS outbreak in late 2002," said Citigroup analyst Thomas Chauvet.
The U.S. had about three million Chinese visitors who contributed roughly $17 billion in travel spending in 2018, according to the U.S. Travel Association.
Forrester Research Inc. retail analyst Sucharita Kodali said she expects a worst-case scenario of a $1 billion to $2 billion decrease in Chinese tourist spending in the U.S. over the next six months if disruptions from the outbreak continue.
Most luxury spending still occurs offline, making it particularly vulnerable in a nation of consumers who are now reluctant to leave their homes. Though luxury e-commerce has been growing strongly, analysts say it is unlikely Chinese buyers would suddenly shift all their spending online. Chinese luxury shoppers, like many elsewhere, value the experience and the perception of authenticity that comes from buying in a physical store.
The Lunar New Year holiday is typically when Chinese spend disproportionately, with overall spending estimated at $150 billion to $160 billion. Global luxury brands spend the year leading up to the holiday developing merchandise designed specifically to lure Chinese buyers. For instance, Kering SA's Gucci linked up with Walt Disney Co., and specifically Mickey Mouse, to develop a co-branded collection celebrating the Year of the Rat; the Chinese word for rat is the same as the term for mouse.
"This is a bad period for this to happen," said Martin Roll, an independent brand adviser.
A key question is how long the outbreak will last. Nick Hayek, chief executive of Swatch Group AG, which owns luxury watch brands such as Blancpain and Omega, told analysts Thursday that if the outbreak fades after a few months, the lost sales can be made up in the run-up to summer.
That echoed Bernard Arnault, chief executive of luxury-goods maker LVMH Moët Hennessy Louis Vuitton, who said earlier in the week that if the consequences of the outbreak last only through March, "that wouldn't be terrible." He unveiled record profits earlier this week, thanks in large measure to Chinese shoppers, and added: "If it lasts two years, that would be another story."
Dave Sebastian contributed to this article.
