The global economic slowdown, especially in China, is impacting global luxury brands. Burberry’s reported a 20% drop in shares this week. From Forbes:
It comes as no surprise to anyone following global markets that China is slowing down, along with most of the global economy. Economic indicators for August revealed a deceleration in industrial production, a tick down in nominal fixed investment, and a negligible increase in nominal retail sales (below inflation); imports for consumption dropped 7.5% in August, indicating a significant weakening in domestic demand, Nomura’s economic research team explained.
China’s explosive growth, along with the rest of Asia and many of the so-called emerging markets around the world, helped luxury brands buck the trend and perform well despite the troubles facing the global economy. Burberry, for example, was up 10.6% to Monday’s close in 2012, before disclosing its latest sales numbers.
On Tuesday, the iconic British brand revealed that its retail sales at constant exchange rates grew only 6% in the ten weeks to September 8. More troubling, same-store sales showed no growth, meaning all of the 6% they saw came from new space. “Burberry currently expects adjusted profit before tax for the twelve months to 31 March 2013 to be around the lower end of market expectations,” read the release; the FT put those expectations between £407 and £455 million ($653 million and $730 million).
This slowdown may be partially linked to a crackdown in China on officials’ displays of conspicuous consumption and gift-giving. From the Wall Street Journal:
Burberry Chief Financial Officer Stacey Cartwright said typical gift giving has slowed following new scrutiny of public displays of wealth.
“Clearly that’s having an impact,” Ms. Cartwright said in an interview Tuesday. “We called out in the last release the fact that the gift giving part of the business [in China] had slowed very significantly. Clearly there’s the changing of the guard coming very shortly, and we’ll have to see what comes after that.”
Adrian Cheng, chief executive of Chow Tai Fook Jewellery Group Ltd., 1929.HK +0.52% one of the world’s largest jewelry companies, cited similar concerns in an interview, saying uncertainty surrounding a coming political leadership transition expected to begin this fall has thrown a pall over the attitudes of some consumers. Demand will return “when there’s more clarity,” he said.
The backlash against officials’ penchant for flashy clothes and accessories points to deeper issues in Chinese society, notably corruption, the growing gap between rich and poor (which even extends to prison), and the abuse of power. The Guardian reports on recent cases of official displays of wealth which have generated public outrage:
There is no shortage of cases. In recent days one official, Yang Dacai, faced scrutiny online for obtaining watches worth tens of thousands of pounds on a salary estimated at about £1,000 a month. That was followed by reports this week that the victim of a fatal Ferrari crash in March had been the son of one of President Hu Jintao’s key allies.
“Cases like the Ferrari and Yang cases hurts the regime’s legitimacy terribly,” said Xiaobo Lu, an expert on corruption at Columbia University. “The government has a huge challenge with the ‘trust deficit’.”
At best, such images highlight the growing gulf between China’s rich and poor, and the extent to which officials and their families appear to be aligned with the winners.