The sale of luxury goods were hit hard, if fleetingly, by the 2003 SARS epidemic. After a few-month hiatus, Asia’s well healed consumers were once again stocking up on $2,500 Gucci handbags and $300 Hermes scarves.
Today’s investors are hoping for a sort of SARS replay. That may be too much to ask.
That’s because a lot has changed in the past 17 years. Free-spending Chinese tourists festooned with shopping bags from Chanel or Louis Vuitton are now a common sight from New York to Rome. And they’re buying even more back home. That trend is showing up on the balance sheet, and it’s defining growth strategies in board rooms around the world.
The Chinese consumer is now a force in the $300 billion luxury goods market, accounting for 35% of the global market—and most of its growth. It was just 2% at the time of the SARS epidemic.
The insatiable appetite of newly affluent Chinese for luxury items has helped deliver bumper profits for companies such as France’s LVMH, the world’s biggest luxury goods company, and Gucci-owner Kering, driving their shares to record highs in January just before coronavirus fears led to a correction.
“Switched off this growth engine”
The impact of the coronavirus outbreak on the luxury goods sector could be more severe than that of the SARS epidemic because the sector is much more exposed to China nowadays, according to Tristan d’Aboville, a London-based executive director with investment advisor William O’Neil & Co.
“Two thirds of the growth of the luxury sector globally is provided by Chinese tourists and China. So basically you’ve just switched off two-thirds of this growth engine,” d’Aboville told Fortune.
He expected analysts to cut their earnings estimates for the likes of LVMH, Kering and Moncler by an average of around 10% for this year. For now, all is not lost. He expected that their 2021 their businesses would have returned to normal.
He had already been anticipating a “soft landing” for some luxury brands in 2020 after two strong years. “Now the soft landing is moving into a little bit of a hard landing because of this coronavirus,” he said, adding that could create a buying opportunity for fearless investors.
By the numbers
When it comes to measuring the impact on the luxury sector, of course, the question on everyone’s mind is how long will the outbreak last?
The coronavirus outbreak, as of today, has killed more than 1,100 people, far more than the 774 deaths inflicted globally by the 2002-03 SARS (severe acute respiratory syndrome) epidemic.
The coronavirus crisis led to the lockdown of Wuhan, the city where the outbreak began, and disrupted the Chinese Lunar New Year holiday, a popular time for giving luxury items as gifts. Chinese buyers are staying at home, leaving luxury stores nearly empty, while travel restrictions imposed by some countries due to the coronavirus outbreak have limited consumers’ ability to shop overseas.
Italian down jacket maker Moncler said this week that the number of shoppers visiting its stores in China was down 80% while British luxury firm Burberry said last week that 24 of its 64 stores in China were closed. On Wednesday, Kering brass gave few details about the impact it’s feeling so far, but warned things could get worse.
After a big recovery today, Kering shares are down 5% since the mid-January cornavirus outbreak emerged; LMMH shares are down 7% in the same period.
The New York City-based cosmetic firm, the Estee Lauder companies, said last week the coronavirus outbreak would affect its financial results in the near term and that it was updating its fiscal year outlook.
To make matters worse, hundreds of buyers for Chinese department stores may reportedly miss crucial fashion weeks this month in London and Milan as infection fears grow. Meanwhile, luxury sales in Hong Kong were already suffering because of months of anti-government protests.
“Our understanding is that luxury consumption in China has ground to a sudden stop,” analysts at brokerage Bernstein said in a report last week that compared the current crisis with the SARS epidemic of 2003.
It said that SARS precipitated the second worst plunge in price earnings multiples in the history of the sector. Only the 2008 financial crisis had a more severe impact. For example, Gucci’s net profit dropped 97% in its 2003 first quarter due to the SARS epidemic.
How to measure a blip
2003 was a rough period in general for the sector. The U.S.-led invasion of Iraq was in full swing and with a sharp appreciation of the euro against the dollar also impacted sales, Bernstein pointed out.
With all that in mind, Berstein predicted the coronavirus impact on luxury goods firms this time around “should be a temporary blip – the epidemic goes and we are back to normal – yet, the dip could be material.”
To get an idea for how long the uncertainty could linger, Bernstein polled asset managers who told them they saw that “blip” lasting a full year.
RBC Capital Markets also ran the numbers. It looked to the 2002-03 SARS epidemic for pointers to the fallout from the current crisis. The SARS epidemic reduced international traveler flows in 2003 by 20%. If Chinese consumption were to fall by a similar amount in the first half of this year, luxury firms would then see a reduction of 4% in 2020 revenues and a 7-8% drop in earnings, it said.
The stocks most exposed to China include Swatch Group, Richemont and Burberry whilst. The least exposed were Franco-Italian eye-glasses-maker EssilorLuxottica, Puma, Pandora and Hugo Boss, it said.
The global market for personal luxury goods—including shoes, jewelry, leather goods and beauty products—rose 4% last year to a record 281 billion euros ($307 billion) last year. The luxury sector is one of the brights spots in retail, expected to grow to $365-410 billion by 2025. By then, the Chinese consumers will account for 46% of the global market.
More must-read stories from Fortune:
—The strange tale of Jeff Bezos’s $16,840 parking ticket bill
—Stock scammers are using coronavirus to dupe investors, SEC warns
—Credit Suisse braces for an awkward earnings call
—Stock scammers are using coronavirus to dupe investors, SEC warns
—WATCH: Biggest investing opportunities and risks for 2020
Subscribe to Fortune’s Bull Sheet for no-nonsense finance news and analysis daily.
