Luxury Loses as China Slowdown Reinforces Regime Change
Vivian So, a 38-year-old owner of beauty salons in Shanghai, said she had been giving Rolex watches to business contacts and is shifting to wallets. William Li, manager at Hong Kong’s King’s Watch Co., who used to see mainland customers buy HK$100,000 ($12,900) watches for official gifts, said many are picking brands that cost 40 percent less.
Their pullback shows how the slowest economic expansion in three years and an effort to curb corruption are starting to ripple through China’s 22-billion euro ($27 billion) luxury market, where CLSA Ltd. estimates that almost a fifth of spending is on corporate gifts. That will likely hurt makers of pricey brands such as Cartier seller Cie. Financiere Richemont SA (CFR), Swatch Group AG (UHR) and Hong Kong jeweler Luk Fook Holdings International Ltd. (590)
“Lower earnings resulting from China’s economic slowdown may lead to companies spending less on business gifts,” said Luk Fook Chief Financial Officer Paul Law. “Corporate gifting helps foster business relationships: You can cut the red tape and speed up approval processes when you have good relations.”
Law said gold bars carved with “lucky” characters, some costing at least HK$20,000, are among top picks for business shoppers at the jeweler’s stores.
The website for Luk Fook, based in Hong Kong, which gets about 10 percent of China sales from corporate gifting, lists basketballs, poker cards and chess sets made of gold as options for those looking to “tighten the co-operation” with business partners. Prices of the items can vary based on the amount of precious metal used, and the size and carvings requested by the buyer, Law said.
A once-in-a-decade leadership transition later this year and the March ouster of Bo Xilai, party chief of the country’s biggest municipality, in an alleged graft and murder scandal have put the spotlight on influence and corruption in business and public life.
Warning that corruption may endanger the ruling Communist Party’s survival, Chinese Premier Wen Jiabao in March pledged to ban the use of public funds to buy cigarettes and “high-end” alcohol.
The official Xinhua News Agency reported in July that China will prohibit government agencies from buying luxury goods starting Oct. 1. The eastern Chinese city of Wenzhou this month banned government banquets from serving premium liquor such as that made by Kweichow Moutai Co. (600519), based in Guizhou province in China, whose half-liter bottles can sell at about $300.
Such anti-graft measures could restrain people from “giving away luxury goods in a business context,” said Aaron Fischer, head of consumer and gaming research at CLSA Asia Pacific Markets.
China’s spending on Swiss watches on a gross domestic product per capita basis is about six times that of the U.S. and almost double that of France partly because of gift-giving “to facilitate business with the Chinese government or other companies,” MainFirst Bank AG said in a July report.
“Hence, a slowing economy, sluggish housing market and changing government clearly puts pressure on corporate sales,” said Matthias Eifert, an analyst at MainFirst.
Gross domestic product expanded 7.6 percent in the three months ended June, in a sign the government is yet to get the economy firing as quarterly growth cooled to the slowest pace in three years.
Growth in the global luxury market is expected to fall by half to 5.5 percent this year and 3.7 percent next year because of the slowdown in Greater China, hurting Swatch, whose brands include Omega watches, and Richemont, according to Eifert. He cut per-share earnings estimates on Richemont for the year ending March 2014 by 7 percent and on Swatch by more than 5 percent for the year ending December 2013.
Virginie Chevailler, a spokeswoman for Rolex Group, which is owned by the Hans Wilsdorf Foundation, declined to comment.
Alan Grieve, a spokesman for Geneva-based Richemont, declined to comment on specific markets. Beatrice Howald, a spokeswoman for Biel, Switzerland-based Swatch, cited an interview in May with Finanz und Wirtschaft, a Swiss business publication, in which Chief Executive Officer Nick Hayek said China’s potential is still “enormous” and Chinese are buying more abroad.
At Swatch’s China retail partner, Hengdeli Holdings Ltd. (3389), Vice President Tan Li said this month demand for luxury watches is slowing and sales growth for high-end watches has come down to “single digits.”
Mainland shoppers “are not splashing out as much,” Wong Wai Sheung, Luk Fook’s chief executive officer, said at a June briefing. “I’m not too optimistic about the jewelry market this year.”
Rival Chow Tai Fook Jewellery Group Ltd. (1929), based in Hong Kong, this month said sales rose 16 percent in the first quarter ended June, a slower pace than 61 percent growth in the fiscal year ended March.
Outside of the mainland, Chinese shoppers spend 44 billion euros on luxury goods while traveling to locations such as Hong Kong and Europe, CLSA estimates.
Hong Kong this month reported its slowest retail sales growth since 2009 as demand for high-end jewelry and watches weakened.
“Clearly, a lot of other players have been calling out the reductions, the softening when it comes to gift-giving, and I don’t think we’re sort of any different to that,” said Burberry (BRBY) Group Plc Chief Financial Officer Stacey Cartwright, when asked about Hong Kong on a conference call after the results, according to a Bloomberg transcript of the event.
Burberry, based in London, when reporting results on July 11, said China’s comparable-store sales growth climbed by a mid-teen percentage in the first quarter from more than 20 percent expansion last year.
Gifting is important in Chinese personal and professional life and is centered around the idea of reciprocity. Even though companies and government officials may be under public scrutiny there will still be demand for gifts because “corporate gifting is so prevalent in China’s business practices,” said Law, who sees economic pressures as a bigger threat than the anti-graft measures, which can be hard to enforce.
Vivian So, the beauty-store operator, said her past purchases included a HK$30,000 Longines watch for a real-estate agent who helped her find a prime location for her outlet. As business has slowed, she has cut back to wallets for HK$3,000 to HK$6,000 from LVMH Moet Hennessy Louis Vuitton SA. (MC)
Li, the watch-shop operator, said his customers see pricey watches as “a good investment for business relationships.” They’ve pulled back on gifts, he said, because “they don’t think the watch is as worthwhile as a year ago because business activities have slowed down.”
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