LV Is The Boss Really Not Worried About The Chinese Market?

LVMH boss BernardArnault's 2019 was a triumphant day.

Within one year, the market value of LVMH doubled by more than 200 billion euros, boosting its personal value to a peak of 117 billion dollars in mid January 2020, catching up with the 115 billion 600 million of Amazon founder Bezos to become the world's richest man.

However, analysts who had been forecasting the market in 2020 a month ago did not expect that the LVMH, who had been advancing all the way, hit the black swan. In just a few days, Luxury Retailing changed suddenly, especially in the Chinese market, making these Western Luxury giants sweat.

After the outbreak of the new crown pneumonia, the stock price of LVMH dropped nearly 10% from the high point in January 17th, evaporating nearly 20 billion euros, and other business partners, Kai Yun group and Hermes also fell to varying degrees. Those who choose to use holiday marketing to compete in the fierce competition have suffered the most direct loss during the Spring Festival.

Although most of the major luxury brands have online shopping channels in China, they can not reverse the short term consumption intention of the trapped customers.

The epidemic takes place in the Chinese market, which is most reliant on the luxury goods industry. Compared with Chinese consumers who have little impact on the global luxury industry 17 years ago, Chinese consumers now contribute 35% of the sales of luxury goods.

UBS expects that China's consumer spending in the first quarter of 2020 will be reduced by 20%, which will reduce LVMH2020's revenue by 3%.

In January 28th, LVMH released its 2019 performance report. Compared to the Hongkong market, which is unable to return to the sky in the short term, the new outbreak is clearly one of the focuses that people pay most attention to.

According to Reuters analysts, the crackdown on the Hongkong market has not yet ended. Consumers in mainland China are unable to consume the new pneumonia. LVMH will need to reduce its marketing and other costs this year to maintain its profits, even if the acquisition of Tiffany may provide hedging. According to the financial data, the marketing expenditure in LVMH2019 increased by 11% over the previous year. UBS expects that the Chinese consumer spending in the first quarter of 2020 will be reduced by 20%, which will reduce LVMH2020 revenue by 3%.

However, BernardArnault's attitude towards the current epidemic seems to be cautiously optimistic, which is quite surprising to the industry. He said in a conference call after the financial report that he had passed the air with the Chinese team after the outbreak. According to his information, the epidemic will be controlled in a few weeks. "Our first response is not to panic and analyze calmly. We think it is too early to predict the development of the epidemic.

"French flu causes about 10000 deaths each year. I am not an epidemiologist and I have no intention of comparing influenza with new-type coronavirus pneumonia, so I can not answer the impact of the epidemic on our performance. If the epidemic is controlled within two months, the problem is not big, but if things continue to last longer, that's another matter. "

This actually extends the consistent attitude of LVMH and BernardArnault to the crisis.

When LVMH released its third quarter results in 2019 last October, the luxury industry was in deep water in the recession of the Hongkong market. However, the earnings report revealed that LVMH was not afraid of Hongkong's market recession, and it also injected a shot in the arm for the panic market at that time.

In its earnings report, the group stressed that despite the sluggish retail environment in Hongkong, sales of its brands in the US and Europe and elsewhere in Asia are still significant. Reuters analysts believe that LVMH's performance report shows that consumer demand for luxury leather goods and accessories is still strong, including other rival luxury brands such as Gucci's parent company, Kai Yun group, which will also be able to withstand losses in the Hongkong market.

Another LVMH executive later said in a Paris event that the closure of luxury stores would become a norm and Hongkong could eventually become a three tier city in China. This view was also sparked heated debate in the industry.

More important than the short-term changes in consumer willingness, it is more important that the 2020 year's experience reinventing the values of Chinese consumers.

It is noteworthy that LVMH's position is not based on the fact that the share of Hongkong's market share is insignificant, or that it has completed the transfer from Hongkong to other markets. In fact, up to 6% of the group's revenue came from the Hongkong market. The core brand LouisVuitton has eight stores in Hongkong, while only three in Shanghai and four in Beijing.

According to the 2019 annual performance report released by LVMH, the group suffered huge losses in the Hongkong market. In the fourth quarter, Hongkong's sales fell by 40%, which is the first time that LVMH has disclosed the impact of the Hongkong market since last year.

Combined with the impact of Japan's consumption tax increase and the deteriorating retail environment in Hongkong, LVMH's sales in the fourth quarter increased by 12%, while same store sales increased 8%, slower than the 11% in the previous quarter, less than analysts expected. Predictably, the impact of the epidemic will soon be reflected in the first quarter 2020 earnings report a few months later.

But isn't BernardArnault really worried about the Hongkong market? Is he really not worried about the Chinese market affected by the epidemic?

This time, it is possible for BernardArnault to belittle difficulties, which is naturally related to their strong personality and perhaps self expansion after the successful establishment of the LVMH empire in the past year or even in the past thirty years.

But he is more likely to realize clearly that excessive optimism and excessive fear are useless, and even predict that the behavior itself is useless. In the past earnings press conference, BernardArnault has basically reservations about the outlook. Even at the beginning of 2017, the global luxury industry gradually recovered with the outbreak of the Chinese market and the market sentiment began to soar. BernardArnault also called the group performance in line with expectations, and cautiously optimistic about the 2017 fiscal year.

Compared to the direct and harsh decision making, BernardArnault has always been cautious in judging the macro environment. Now, BernardArnault, whose influence has reached the top, will have an important impact on the decision-makers of related industries.

One possibility is obvious, that is, in 2020, in the face of the signal of great uncertainty and slow growth in 2020, 2019 is likely to become the last Carnival of luxury goods industry and Chinese consumers.

More importantly, compared to the short-term changes in consumption intention, the 2020 year old experience has remolded the value of Chinese consumers, which is likely to completely change the minds of Chinese consumers, making it necessary for the global consumer industry to spend more time re understanding Chinese consumers.

After the outbreak, consumers will turn to a happy attitude, which leads to a strong rebound in luxury consumption, or a tendency to tighten their belts, reduce the budget of luxury goods, and invest in risky assets. It is still uncertain that the consumer market will continue to polarize. Whether the narrowing of the price gap will bring more luxury consumption back to China is also a big variable.

However, even if the epidemic has seriously damaged the Chinese luxury market, it has directly reduced the consumption of Chinese tourists. Even if the luxury brands had to give up the first quarter of the first half of the year, luxury brands could only control risks. This is not a new topic for the global market of black swans in recent years.

As early as the beginning of 2019, the market had questioned how long the luxury brands could continue to rely on the Chinese market. The luxury industry actually has enough time to make countermeasures.

Over the past two quarters, the strategic adjustment made by LVMH is becoming clearer. Due to the fact that the landlord did not grant the rent reduction, LouisVuitton decided to close the store on the second floor of the Hongkong Times Square Shopping Center after the end of the lease. The other 7 stores will continue to operate, but the brand still plans to open a new store in Hong Kong International Airport in 2021.

Meanwhile, LouisVuitton is putting eggs in different baskets. In October last year, LouisVuitton reopened its flagship store in Seoul, South Korea, and opened its largest flagship store in Osaka in February. The first Cafe named "LeCaf e V" and the restaurant named "SugalaboV" will also open in the flagship store. This summer, LouisVuitton will also open its first large flagship store at Yorkdale shopping center in Toronto, Canada.

This also proves from the side that LouisVuitton will not abandon Hongkong market completely, but dilute the proportion of Hongkong market through expansion of other markets.

Capital veterans know that when others fear, greed and fear when others are greedy. For LVMH and other industry tycoons, it is more important to look at long-term fundamentals rather than short-term effects, because in the long run of history, both Hongkong market and epidemic situation are only small waves. BernardArnault has said that he cares more about LouisVuitton's development after ten years than sales.

Over the past few years, the oligarchic tendencies of the luxury goods industry have enabled LVMH, Kai Yun group and other collectivize enterprises to integrate their resources with higher risk tolerance capabilities, so that they can maintain their bottom line in the crisis. And the luxury brands that are fighting alone must take greater risks. Under the adverse wind, the brand that wants to climb up and turn over will be more difficult.

Instead of worrying about the impact of the epidemic in the short term, luxury brands seem to be more prepared for a more profound long-term trend, and brands with strong risk tolerance are clearly more capitals for trial and error.

At the 2019 performance press conference, BernardArnault talked about his views on online sales. He rarely mentioned the existence of a weak and tardy business in the group. 24S even suggested that 24S would never be profitable, but it had little impact on the group.

He believes that almost all of the electricity providers on the market are living on sale by discount, and low price becomes the only way for brands to retain customers, and frankly, "we have been cautious in developing online businesses. We may someday find a way to make money for 24S, but so far, we have not found a way yet."

Combined with the challenges faced by luxury e-commerce websites such as YooxNet-a-Porter, Farfetch and Matchesfashion recently, LVMH's discussion of luxury online sales may be more related to the actual situation and specific decisions of the current luxury brands. After a series of radical digital transformation, the luxury industry has urgently needed to reconsider the business model of online sales.

People look forward to the turning point, and also fear the turning point. Looking forward to signs of crisis contraction, fear that the best time has passed. But the frequent occurrence of the black swan incident suggests that turbulence is the norm. When trapped in the fog of crisis, we should not forget to find the real way out.