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Luxury Brands Are Betting Their Future On China 
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Dołączenie: Nie Kwi 18, 2021 12:02 pm
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Post Luxury Brands Are Betting Their Future On China
Luxury Brands Are Betting Their Future On China, But It May Be A Risky Gamble

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LVMH just came out with a strong first quarter 2021 report, reassuring industry watchers that the Covid pandemic is finally in the rearview mirror for the luxury market.

Total revenues reached €14 billion, nearly equal to $17 billion, with organic revenue growth over same period last year up 30%, excluding currency fluctuations and its acquisition of Tiffany. Fashion and Leather Goods were the company’s primary mover, showing 52% year-over-year organic growth.

Since 1Q2020 was such an unprecedented year, the company also provided comparisons to first quarter 2019 and the results were impressive too.

Overall organic growth was reported at 8%, with Fashion and Leather Goods up 37%, followed by Wine and Spirits rising 17%. Selective Retail, under which Sephora and its travel-retailer DFS Group reports, were still underwater compared to 2019, down 30%.

All eyes on China
Assessing LVMH’s continued leadership in the global luxury market, Cowen luxury analyst Oliver Chen explained strength in China, along with the rest of Asia excluding Japan, was a key driver of success. Demand there rose 86% in the first quarter 2021 compared to same period last year.

Such strong growth is even more impressive since Asia is LVMH’s single biggest market, accounting for 34% of total revenues in 2020, with the U.S. trailing at 24% of sales. And further, since the second half of 2020, Asia has been in full recovery mode for LVMH, posting growth in the second-half 2020 of 17%.

The Chinese appetite for luxury is so hot that Bain & Company predicts China is on track to become the world’s leading luxury market by 2025.

With prospects like that, is it any wonder that luxury brands are all in to get their share of the Chinese business. But while China presents the greatest opportunity for growth, luxury brands face a real and present danger by putting all their eggs in the China growth basket. They risk sacrificing their long-term future for short-term gain.

“If the Chinese sneeze, the luxury sector gets pneumonia,” said Luca Solca, senior research analyst for luxury goods at Bernstein, to Jing Daily, in describing luxury brands’ over-dependence on China.

Out of balance
"China is a place where brands risk to get lost in their quest for easy success,” shares Susanna Nicoletti, author of Luxury Unlocked and management lecturer at Instituto Marangoni. She also boasts a resume that reads like a who’s who in luxury, including leadership roles with the top three luxury groups along with several independent luxury fashion brands.

“China’s become a ‘honey trap’ for luxury businesses. Ever since the crisis of 2008, that was the place where most of the growth was for luxury brands,” she states.

Acknowledging that the prospects for making money in China are overwhelmingly attractive – the “honey” – Nicoletti is very clear about the trap too.

“Brands have to make a huge effort to understand the Chinese culture and market. It takes enormous energy and investments,” she states and continues, “Once you are totally focused on one market, the result is you neglect other key markets that have a different approach to luxury, like the United States and Europe.”

In a global luxury market approaching €300 billion, a balanced approach is needed but many companies are failing in that regard.

“Brands are obsessed with margins, SKUs and things like that in their search for potential sales. But the luxury brands have become lazy in finding new solutions and trying to reinvent their business model,” she says.

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Śro Kwi 21, 2021 12:02 pm
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