China’s outbreak of a new strain of coronavirus is having ripple effects beyond its upending of daily life in the country. For the international luxury industry, which relies heavily on Chinese shoppers, it’s already taking a financial toll.
The outbreak has dramatically reduced the number of shoppers in Chinese cities and forced companies to close stores. Travel restrictions are also curtailing the normal flow of tourists to other destinations that usually host plenty of visitors buying luxury goods. Chinese shoppers make up about a third of global luxury spending, counting their spending inside and outside the country, according to management consultancy Bain & Company. That’s more than any other nationality.
The conditions prompted Britain’s Burberry to scrap its previously announced outlook for the year through March. Of its 64 stores in mainland China, 24 are closed, the company said in a statement (pdf). Those that remain open are working on reduced hours and have seen “significant” drops in traffic. While it said its business with Chinese tourists in Europe and other destinations had suffered less so far, it added, “given widening travel restrictions, we anticipate these to worsen over the coming weeks.”
The update comes a day after Tapestry Inc., the owner of Coach, Kate Spade, and Stuart Weitzman, said it could see a hit of $200 million to $250 million in sales for the second half of its fiscal year as a result of the coronavirus.
On Feb. 5, Capri Holdings, the parent company of Michael Kors, Versace, and Jimmy Choo, said it was reducing its sales outlook for the quarter by $100 million based on what it knows about the situation. “Currently, approximately 150 of our 225 stores in mainland China are closed,” CEO John Idol said on a call with analysts. “Additionally, for those stores remaining open, both traffic and sales have been severely reduced.”
Some brands are more vulnerable than others. Investment bank Jefferies pointed out in a research note today that Burberry is particularly reliant on China, and much of its business there is clothing, a category that could feel more of an impact because it’s seasonal. Shoppers who don’t buy now might not buy later either when the weather changes. Other categories, such as watches, might be more resilient. Nick Hayek, CEO of the Swatch Group, told analysts his company could make up any lost sales ahead of summer if the outbreak resolves in a few months, according to the Wall Street Journal.
Still, Jefferies predicted more announcements like Burberry’s are still to come as more companies report to investors. Kering, which owns brands such as Gucci and Saint Laurent, is set to release results on Feb. 12, for instance.
The coronavirus stands to have a greater impact on luxury than the SARS epidemic did in 2003. The effects then were contained more within China, but since the country’s stature in the global economy has grown significantly. “Our concern is that the luxury goods sector is significantly more exposed to Asia and Chinese consumption today,” Thomas Chauvet, an analyst at Citigroup, told the Journal.
The question now is how long it will last. It’s difficult to predict when the spread of a virus has peaked. The World Health Organization has said it’s too soon to declare a peak for the current coronavirus outbreak. It could be months before life in China and the business relying on it returns to normal. In a Feb. 5 note, Jefferies said there would probably be no return to full operations before some time in April.