MILAN (Reuters Breakingviews) - The new Chinese coronavirus, coupled with LVMH’s decent end to 2019, has handed the luxury conglomerate a tough start to the Year of the Rat. Revenue at the $230 billion French behemoth grew 10% organically to 53.7 billion euros in 2019. Matching that while a deadly virus dissuades its key People’s Republic constituency from shopping and traveling will be tough. That makes smooth progress towards closing its $16 billion acquisition of Tiffany even more important.
Bernard Arnault’s group is the first in its sector to report earnings since the outbreak of a new respiratory virus centered on the city of Wuhan. It brings back memories of Severe Acute Respiratory Syndrome, which killed nearly 800 and pummeled luxury shares in early 2003. This time, the consequences for LVMH, Kering, Prada and others could be worse. While Chinese consumers represented just 2% of global luxury demand in 2003, they now make up a about a third, says Bernstein.
The proximity to the traditional Lunar New Year buying spree will compound the pressure. LVMH gave no indication of how sales have been affected by the health emergency, which erupted only after the end of 2019. But Chinese spending could in normal times be 50% higher during the holiday than in a regular month, investment bank Equita reckons.
LVMH’s size means it can afford to cut marketing and other costs to defend margins. And its purchase of U.S. household name Tiffany could provide a hedge. It will nonetheless be harder to recover any lost consumption in the same way LVMH did in the smaller Hong Kong market, where protests shrunk sales 40% last quarter. UBS estimates that a 20% contraction in quarterly Chinese spending could knock 3% off LVMH’s 2020 earnings.
How the coronavirus danger and consequences like travel bans play out is unpredictable, and developing a vaccine could take months. Yet it won’t ultimately change the underlying forces that power luxury spending. China’s affluent class is expected to almost triple to 65 million people by 2025, says McKinsey. Once the virus is contained, eager Chinese luxury shoppers are likely to go back spending as much as before.
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