by D'Arcy Doran
As Europe's economies wrestle with deep uncertainties, its iconic luxury brands are posting record revenues, largely thanks to Chinese consumers traveling to Europe to buy the latest fashion.
Boutiques on London's Bond Street don't need to advertise that they take plastic, but small red, blue and green-striped signs are popping up in windows alongside De Beers' diamonds, white gold Chanel necklaces and $25,000 Audemars Piguet watches. The signs bear the logo of UnionPay, China's bank card system, and are a not-so-subtle invitation to the world's largest group of high-rolling tourists.
Inside, Mandarin-speaking sales assistants await, often ready to offer a cup of green tea while they exhibit expensive goods, like the latest $40,000 alligator-skin handbags.
"Go into any store and the rich people are all Chinese," Xu Peidong, 58, says with a laugh outside a row of shops, while both he and his wife carry bags filled with new purchases.
Xu and his compatriots have helped Europe's luxury brands post record growth, defying the economic gloom in their home markets. The sector saw an 18% growth on average last year, Credit Suisse luxury goods analyst Rogerio Fujimori says. He forecasts slower, but still relatively healthy, 9% growth this year.
The world's largest luxury group, Louis Vuitton Moet Hennessy (OTCPK:LVMHF), saw group sales rise 25% in the first quarter of this year to €6.58 billion. The company's 60 brands cover everything from champagne to perfume and watches. Asia, led by China, generated a larger share of sales than ever before at 39% - taking a percentage point from Europe, which fell to 29%. Tourist spending accounted for half of European sales, LVMH Chief Financial Officer Jean-Jacques Guiony told analysts and journalists recently. He credits rebounding European sales to customers like Xu.
"Prosperity is a very modern phenomenon for China," says Xu, a well-known Chinese composer who is a musical director and was in London for a concert at the Royal Albert Hall. "It's very easy for Chinese people to travel now and when they travel, they spend."
The Chinese have topped the tables for duty-free spending since 2010, last year buying more than $2.4 billion worth of goods. That figure was up 57% from the previous year, according to tax refund service Global Blue. The average Chinese duty free claim in 2011 was $1,073.
"They are enticed by the prestige value of luxury brands, and often identify with affordable luxury as a 'status' stepping stone in their upward social mobility," says Fflur Roberts, head of global luxury goods for market research firm Euromonitor.
While Louis Vuitton flagship stores have sprouted up in Beijing, Shanghai and other Chinese cities, Chinese prefer buying abroad. "The selection is newer, there's more," Xu says, "And it's cheaper."
The 30% luxury tax China levies on purchases, combined with the weak euro mean a Chinese customer saves 45-47% by buying on Bond Street or the Champs d'Elysée instead of at home, says Guiony, the LVMH CFO.
Other luxury brands, such as Britain's Burberry (OTCPK:BURBY), are noticing the same phenomenon. Burberry has said it has adapted to better serve Chinese consumers in London, Paris and New York. "It's the globe-traveling luxury consumer that is dominating," Burberry Chief Financial Officer Stacey Cartwright recently told analysts and journalists.
But China's slowing economy casts a shadow on the sector. Beijing has cut its growth forecast to 7.5% this year, after a decade of annual growth exceeding nine percent.
"Will the Chinese keep buying? That's the main question today," Credit Suisse's Fujimori says.
Observers are bullish on luxury brands. In a Credit Suisse survey of 21 luxury companies, the vast majority said they saw no slowdown or only a small one. One expert said about 40% of Chinese luxury spending is now overseas and the proportion is still rising.
Even slower Chinese growth remains attractive against the International Monetary Fund's forecasted 3.5% growth globally and a 0.3% contraction for the Eurozone.
The boom in China has not only created a new generation of wealthy consumers, it's also allowed brands to finance their global expansion. Prada listed in Hong Kong last year and used the capital it raised to open 75 new stores, eight of them in China. The company plans to open 160 additional stores worldwide over the next two years, expanding its retail footprint to 548 stores.
While recent market uncertainties forced London's family-owned jeweler Graff Diamonds to put its Hong Kong IPO on hold, the delay is likely only a temporary setback. Indeed, Asia is a pivotal market, accounting for a third of the company's business. China alone helped drive growth in demand for diamonds up 6% last year to twice the available global supply.
Asia and China are responsible for much of the growth experienced by luxury brands these days. However, over the long-term, the likes of Prada (Hong Kong: 1913) or Louis Vuitton can't rely solely on Chinese consumers to feed their bottom lines, Fujimori explains. That's why companies are looking beyond China and are busy opening stores across Latin America, the Middle East and other relatively modest markets. It's these regions, which the luxury brands hope will provide the fresh growth driver over the coming decade in the way that the Asian and Chinese are doing now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.