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China’s slowdown casts a long shadow over luxury groups

General Retail Images During The Lunar New Year HolidayGeneral Retail Images During The Lunar New Year Holiday
A pedestrian carries shopping bags in Hong Kong, China.Photograph by Jerome Favre — Bloomberg via Getty Images

China’s economic slowdown is casting a long shadow over Europe’s luxury goods makers.


U.K. fashion group Burberry Plc (BURBY) saw its shares fall 12% Thursday after reporting a sharp sales slowdown in the three months to September in China and Hong Kong, which account for around a third of its global sales.

The British firm said it would accelerate cost cuts and slash bonuses across the group in order to restore profits in what it warned was “an increasingly challenging environment for luxury consumers.”

Revenue (on a like-for-like store basis) grew a meager 1%, down from 8% in the previous quarter and over 5% short of analysts’ forecasts, according to Reuters.

The company now expects pretax profit in its fiscal year ending next March to be around 445 million British pounds ($689 million), down 2.4% from its 2015 fiscal year.

Luxury goods producers have bet heavily on China as two decades of stellar growth produced a market of high-spending nouveaux riches, but the bet has turned sour in the last two years. At first, that was due largely to a clampdown by Beijing on conspicuous consumption by its elite as part of a high-profile anti-corruption campaign, but the problem has spread this year as the broader economy has slowed down. Spending power has been crimped as the central bank to allowed the Chinese currency to fall for the first time since the financial crisis.

Earlier this week, French luxury goods group LVMH SA (LVMHF) had announced similarly disappointing results, at least in its fashion and leather goods business, where Chinese sales went from 10% growth in the second quarter to flat in the third.

Both LVMH and Burberry were partially able to compensate for weakness in China with strong performances in the U.S. and, especially, Japan. Burberry said comparable store sales in Japan was up 50% on the year. The trouble is, it still only accounts for 2% of global revenue–a small fraction of what the Greater Chinese market generates.