FT : ECB must follow the Fed’s embrace of a second mandate

ECB must follow the Fed’s embrace of a second mandate
It is wrong to think central banks must stick to monetary concerns and avoid economic policy

One word can move a mountain. Last week US Federal Reserve chair Jay Powell announced that the Fed’s updated policy strategy will no longer worry about “deviations” but only “shortfalls” from full employment so long as inflationary pressures are absent.

In other words, it will not tighten monetary policy to prevent “overheating” just because more Americans get jobs than economists thought was possible.

This is excellent news, and a great credit to Mr Powell and his colleagues. They have listened with empathy to those on the margins of the labour market, who are the last to benefit from economic expansions and the first to suffer from slowdowns. They have believed their eyes more than models predicting tight labour markets must push inflation up. In practical terms, it signals a big dovish shift by the Fed. American workers and investors all have reason to thank Mr Powell.

But let us temper the acclaim: the Fed is merely catching up with its own legal duties. The Federal Reserve Act mandates the US central bank “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates”. The instructions never called for preventing employment from going too high (or unemployment too low) in its own right. Yet that is how the Fed, with the approval of most economists, behaved for too long, reining in recoveries long before any inflation was ignited.

Europeans should pay close attention. For the European Central Bank has also treated its own legal mandate far too narrowly. There is a widespread misperception that the ECB is treaty-bound to the single duty of ensuring price stability. The central bank shares the blame for allowing this error to proliferate, sometimes seeming to believe it itself.

In fact, EU treaties mandate not one but two objectives for the ECB. The first is price stability. But beyond this, the ECB has a legal obligation to “support the [EU’s] general economic policies” and contribute to the objectives “laid down in Article 3 of the Treaty on European Union”. Article 3 calls for full employment, improvements to “the quality of the environment”, economic and social cohesion and social justice and protection, among other goals.

True, price stability is the primary mandate. But the popular idea that the ECB is charged with monetary policy only and must stay away from economic policy has no foundation in the treaties. On the contrary, the ECB is obliged to promote specific policies, namely those of the EU as a whole, so long as that does not conflict with its pursuit of price stability. This neglected fact has a number of far-reaching implications.

One is that when the German Constitutional Court ruled against the ECB’s bond-buying programme in May, it got things exactly wrong. While the judges argued the ECB must consider the economic policy consequences of its monetary decisions, they posited their own such policy priorities, largely reflecting the interest of savers, and ignored the very different economic policy goals explicit in the treaties.

Another is that the ECB is not only allowed to incorporate climate change considerations into its monetary policy framework, as its president Christine Lagarde clearly favours, but it is legally required to do so. After all, the environment is a treaty objective, and the European Green Deal is a flagship economic policy of the EU.

A third is that the ECB erred badly a decade ago in its participation in the “troika” of creditors in the fiscal rescue programmes for countries hit by the eurozone sovereign debt crisis. On many occasions the central bank pushed for fiscal and structural policy changes that ostensibly favoured debt sustainability (in fact they were often counterproductive) over such treaty-mandated goals as social protection, cohesion and full employment.

But most importantly, taking its full legal obligation seriously means the same for the ECB as for the Fed. While the ECB must strictly prioritise inflation, unlike its American counterpart’s more balanced dual mandate, it has no more right than the Fed does to rein in “excessive” growth if inflation remains under control. And yet the ECB’s own explanation of its second mandate still says it should avoid fluctuations — not just shortfalls — in output and employment.

In practice, the ECB has been taking much better care of its employment mandate in recent years. Some of its policymakers are becoming more outspoken about its legal obligations beyond inflation. But old ideas die hard. The ECB would do well to follow the Fed’s lead, even if it comes down to a single word.

>>> US Gapping down

Gapping down

In reaction to earnings/guidance:

  • RGS -0.9%

Other news:

  • LPCN -18.8% (provides regulatory update for TLANDO; FDA needs additional time to complete review of NDA)
  • PRVB -9.4% (initiates Phase 2b PROACTIVE (PROvention Amgen Celiac ProtecTIVE) study of PRV-015, an anti-interleukin-15 monoclonal antibody, in adult celiac patients)
  • NIO -8.2% (prices offering of 88,500,000 American depositary shares at a price of $17.00 per ADS)
  • AVYA -4.8% (files for 22,123,022 share common stock offering by selling shareholder)
  • ABUS -4.3% (files for $200 mln mixed securities shelf offering)
  • MYOK -1.2% (presents results from Phase 3 EXPLORER-HCM clinical trial)

Analyst comments:

  • BIGC -12.3% (initiated with an Underweight at Morgan Stanley; tgt $52)
  • NPTN -2.3% (downgraded to Hold from Buy at Needham)
  • MTN -0.6% (downgraded to Sector Weight from Overweight at KeyBanc Capital Markets)

>>> US Gapping up

Gapping up 

In reaction to earnings/guidance:

  • CTLT +2.8%

M&A news:

  • AIMT +170.7% (to be acquired by unit of Nestlé Health Science (NSRGY) for 34.50 per share) 

Other news:

  • AKCA +59.1% (presents Phase 2 clinical data of AKCEA-APOCIII-L)
  • CRMD +13.7% (FDA has accepted its NDA for Defencath for the prevention of catheter related blood stream infections; PDUFA goal date of February 28, 2021)
  • GME +11.3% (indicated higher after RC Ventures disclosed 9% active stake)
  • NGM +8.3% (presents comprehensive findings from 24-Week Phase 2 study (Cohort 4) of Aldafermin)
  • BCRX +5.5% (granted Orphan Drug designation for its oral Factor D inhibitor, BCX9930, for the treatment of paroxysmal nocturnal hemoglobinuria)
  • AMRN +5.3% (reports results of the EVAPORATE Trial met primary endpoint)
  • DISH +5.1% (WSJ report that AT&T is in early talks to explore a deal for its DirecTV business)
  • KOPN +4.6% (announced that its BDM WVGA LCD module and A912 Driver IC have been chosen by Medisim Ltd. for its BinoVision goggles)
  • AXSM +3.4% (confirms pivotal status and advancement of AXS-05 for the treatment of Alzheimer's disease agitation based on successful FDA Breakthrough Therapy meeting )
  • ARWR +2.5% (presents new phase 1/2 clinical data on cardiometabolic candidates ARO-APOC3 and ARO-ANG3)
  • AWK +1.5% (American Water Works' Iowa American Water unit files request to adjust its rate)
  • BLUE +1.4% (reports new results from clinical development program of elivaldogene autotemcel Gene Therapy for Cerebral Adrenoleukodystrophy)
  • SAVE +1.4% (provides investor update; continues to experience significant adverse impact of the material decline in air travel demand due to the COVID-19 pandemic)
  • T +1.1% (in early talks to explore a deal for its DirecTV business, with potential bidders said to include Apollo Global Management (APO), according to WSJ)
  • HUN +1.1% (to sell its remaining interest in Venator Materials)
  • TSLA +0.9% (following stock split)
  • AAPL +0.8% (following stock split)

Analyst comments:

  • RXT +5.5% (initiated with a Buy at Goldman; initiated with an Overweight at Barclays, among others)
  • SPCE +4.2% (initiated with an Outperform at Cowen)
  • OSH +3.5% (initiated with a Buy at Goldman)
  • BYND +2.5% (upgraded to Neutral from Sell at Citigroup)

>>> US Early premarket gappers

Early premarket gappers

  • Gapping up:
    • AIMT +169.4%, AKCA +52.5%, AMRN +8.3%, NGM +7.9%, DISH +3.4%, RGS +2.4%, TSLA +2.2%, T +1.7%, ARWR +1.4%, BLUE +1.3%, AAPL +1.1%, HUN +1.1%, AMGN +0.7%, AZN +0.6%, ABT +0.5%
  • Gapping down:
    • LPCN -18.2%, AVYA -9.4%, NIO -6.3%, ABUS -4.3%, MYOK -1.2%, AWK -0.6%, AMC -0.5%

WSJ : Luxury Brands Dust Off Their Japanese Lessons

Luxury Brands Dust Off Their Japanese Lessons
Covid-19 is making expensive European brands even more reliant on Chinese spending. The industry has been here before.

What happens if the Chinese lose their appetite for haute couture? It seems inconceivable now, but the luxury industry’s growing reliance on one nationality makes stocks such as Hermès and Gucci’s owner Kering riskier to own.

Covid-19 is worsening an already lopsided look at many designer-fashion labels. Spending on expensive clothing and handbags is recovering rapidly in China, but remains weak everywhere else. By the middle of the decade, nearly half of all global luxury spending will come from Chinese nationals, consulting firm Bain estimates, up from 35% in 2019.

Investors are treating this exposure as a big positive for now. At Louis Vuitton LVMUY -0.07% and Christian Dior, the top fashion brands of industry bellwether LVMH Moët Hennessy Louis Vuitton, sales were up 65% in China in the second quarter, compared with the same period of 2019. The company’s Paris-listed stock is down just 4% this year, while shares in rival handbag maker Hermès are up 8%.

Brands have been here before. In 1985, 55% of global luxury sales were to the Japanese, according to Bernstein. That era has a lot in common with the current Chinese spending boom. Buoyed by rapid economic growth, a newly affluent middle class snapped up European luxury goods to show off their wealth and spent heavily on shopping trips overseas. Today, young Chinese consumers whose incomes are bolstered by their parents’ savings are a major source of growth for luxury brands. They are not unlike Japan’s “parasite singles” who lived rent-free in the family home during the 1990s and spent a big chunk of their wages on designer baubles.

Japan’s luxury boom wasn’t ended by slower growth—fashionistas continued to spend through the country’s “lost decade” of the 1990s—but by demographics. As the population aged, spendthrift young shoppers weren’t replaced in adequate numbers to keep demand high. Today, the Japanese count for just 10% of global luxury sales.

China’s economy now is still at an earlier phase of development than Japan’s was in the 1980s, and luxury bulls expect demand to continue swelling with its middle class. But the world’s most populous country might face demographic challenges earlier than Japan did. China’s fertility rate has long been below replacement levels and has increased only marginally—to 1.7 children per woman at the World Bank’s latest count—since Beijing scrapped its one-child policy in 2015. The cost of supporting an older population could weigh on disposable incomes in future.

The more immediate challenge for brands will be to protect their exclusive image. With unsold inventory sitting in U.S. and European boutiques, the temptation to flood the Chinese market with products is strong. There are signs that labels are already going all-out: One proxy for Chinese social media spending by luxury companies increased 230% year over year in the second quarter, according to consulting firm Gartner. Another key reason the Japanese luxury bubble popped was because brands became too mainstream and lost their appeal.

Designers have little choice but to court the Chinese. Other nationalities aren’t biting, most notably in the industry’s home region: Luxury sales to European consumers have remained flat over the past decade, brokerage Jefferies estimates. But the sector now has too much riding on one country. Share prices should discount that risk rather than reward it.

FT : US hotels: hail the staycationers

US hotels: hail the staycationers
Coronavirus curtailed travel but extended stay chains are still showing signs of life

Hotels are in the business of providing a good night’s sleep — something the industry’s own executives may lack. Last year, the US hotel industry took a record $168bn in sales, according to data firm STR. After the pandemic brought global travel to a standstill it will be lucky to get half that in 2020.

However, one segment is seeing signs of life: extended stay hotels. Larger rooms with fully equipped kitchens and self-service laundry have proved popular with a wave of US staycationers looking for a holiday break without any flights. The rooms, priced for budget-conscious travellers, are more popular than those at high-end hotels.


Marriott International, the world’s biggest hotel company by rooms, illustrates the trend. The company’s extended stay chain Residence Inn had the highest occupancy rate in the group during the second quarter, at about 40 per cent. This topped its high-end brands Ritz-Carlton and W Hotels, where occupancy languished at 8 and 6 per cent respectively.


Investors have rewarded smaller hotel groups that focus on budget and leisure travellers. Shares of Wyndham Hotels and Resorts, the company behind the La Quinta and Howard Johnson chains, have surged more than 140 per cent in price from their March lows to trade near pre-pandemic levels. Yet operating profits will probably not return to last year’s level until 2022. The stock prices of other budget specialists, Choice Hotels and Extended Stay America, have doubled or nearly doubled over the past five months.


In a market long dominated by business travellers and conferences, there is no sugarcoating the fact that 2020 will be a painful one for hoteliers. Two industry measures, occupancy rate and revenue per available room (Revpar), are on track for the biggest annual drop ever recorded. Big players such as Marriott and Hilton have the finances to ride out the storm. But the wipeout will also make smaller groups such as Wyndham and Choice Hotels an attractive takeover target. At 19 times forward earnings, Wyndham’s valuation still trades cheaply compared with Marriott’s 32 times.

Forget the fancy hotel spas and swimming pools. Indoor kitchens are in.

Handelsblatt : Marsalek is said to live on property near Moscow - the role of th

Marsalek is said to live on property near Moscow - the role of the secret services in the Wirecard scandal

The special meeting of the finance committee is to shed light on the role of the secret services. The flight of the former board member Marsalek makes the MPs suspicious.


Berlin, Frankfurt Jan Marsalek must have noticed that it was getting tight for him. Four days before Wirecard had to admit air bookings of more than 1.9 billion euros in the balance sheet , the former board member of the payment service provider withdrew. The Austrian manager flew from Klagenfurt in a private jet first to Tallin, the capital of Estonia, and then on to the Belarusian capital Minsk.

Marsalek is now said to be housed on an estate west of Moscow. There he is no longer under the supervision of the Russian military secret service GRU, but under the control of the Russian foreign secret service SWR , the Handelsblatt learned from acquaintances of the refugee, who for reasons of their own security do not want to be named.

The SWR had also insisted on bringing Marsalek out of Belarus, saying that it was "safer for him than there" near the Russian capital. Marsalek had received an assurance that he would not be extradited.

Wirecard and the secret services - that is a so far little illuminated chapter of the multi-faceted economic crime. On Monday it should be a topic in the special meeting of the finance committee in the Bundestag. The MPs have invited Johannes Geismann, he is State Secretary in the Federal Chancellery and Commissioner for the Federal Intelligence Services. It was unclear until the very end whether Geismann would come himself or the Chancellery would send someone else.

In any case, the subject of the secret services is on the agenda. Little is known about this so far. In its documents for Parliament, the Federal Government has so far always referred to ignorance: “The Federal Intelligence Service has no intelligence information on Wirecard AG,” it says there.

And the answer to a new request from the left-wing finance expert Fabio De Masi, which is available to the Handelsblatt, explains: "The Federal Office for the Protection of the Constitution and the Federal Intelligence Service have no intelligence information on Jan Marsalek."

Professional help from abroad?
That doesn't convince the opposition. That Marsalek was able to go into hiding so quickly suggests that he had professional help from abroad. "You don't learn that in business studies," said FDP finance expert Florian Toncar. Marsalek, who is wanted on an international arrest warrant, has been missing for over two months.

The Federal Chancellery would have to explain what it has learned about Marsalek's flight to Russia and about connections to the local secret services, said the financial policy spokeswoman for the Greens, Lisa Paus. The Wirecard case has long been discussed in Moscow. "We are not seeing the end, but the beginning of a great espionage story, ultimately of greater importance than the affair of the NSA defector Snowden," the newspaper "Versija", which is close to the secret services, is convinced.

Roman Dobrochotow, one of Russia's leading investigative journalists, is also convinced: Marsalek has at least worked with the secret service in Russia. And the refugee could have "been a kind of payment courier for Russia".

The interest of the Russian secret services in Marsalek and Wirecard lies on several levels: The young Austrian, who, according to his friends, speaks Russian well and has excellent networks in Moscow, is said to have helped transfer funds for spicy Russian operations abroad - for example for Russian cloaked Investments in "failed states" such as Libya as well as to pay mercenaries in Syria, Ukraine and African countries.

The thousands of mercenaries would have to be financed, payment channels would have to be concealed, because Russia mostly denies using these mercenaries, according to diplomatic circles. If Marsalek had organized this for the Russians, he was "especially valuable" to the Kremlin. Then he is a "first-rate secret holder", even in the highest circles in Moscow.

Wirecard was interesting for intelligence services
Marsalek has also initiated business for Russian operators of online casinos and gambling sites via Wirecard, according to Russian media. This sector is forbidden by law in Russia, Russian financial service providers are not allowed to process payment transactions for it - so Wirecard's services could have offered a way out. Documents that the Handelsblatt was able to inspect show that massive amounts of gambling and pornography transactions were carried out via Wirecard's partner in Dubai.

This data and information could have made Wirecard interesting for numerous intelligence services. There are also indications that the payment service provider could have offered additional services for secret service employees. In the past, Marsalek had spoken very openly about such activities to confidants. "Jan said that Wirecard produces credit cards for all kinds of secret services, provides information about payment flows and the question of who is behind the transactions," recalls an insider.

Marsalek boasted in his environment that he speaks to intelligence services every day. His partners included the so-called "Five Eyes", the secret service network made up of US, British, Canadian, Australian and New Zealand services. Marsalek also claims to have worked with the Israeli Mossad and the German BND. He also had excellent contacts in Russia and repeatedly referred to oligarchs who were friends, said a confidante.

The last major business project that the fleeting management board is said to have been in charge of was the planned takeover of payment processing for the Turkish toll system by Wirecard. Marsalek traveled repeatedly to Turkey in the months before the crash, which also serves as the financial hub of the Middle East.

While he was still on the run, he texted a confidante that he had "several passports, like any good secret agent". In view of the alleged contacts, for example with the German BND, the members of the Bundestag now want to follow up on the finance committee.

"The previous answer from the federal government that there was no intelligence available does not convince us," said Green finance expert Paus. "We will therefore revisit the topic from different angles, including the question of whether or not Wirecard has issued credit cards to secret service employees."

Criticism of unclear statements by the federal government
The financial expert of the left parliamentary group, De Masi, criticized: “Marsalek boasted about his BND contacts. Nevertheless, there is still no clear statement from the federal government as to whether the BND worked with the scandalous company. That is absurd. "

The MPs are also interested in the role of Klaus-Dieter Fritsche. Until the beginning of 2018 he was State Secretary in the Federal Chancellery and Commissioner for the Federal Intelligence Services. After he retired, he worked for the Austrian Minister of the Interior and also for Wirecard.

According to documents from the Federal Government, Fritsche turned to the Chancellery in August 2019 and asked Wirecard for an appointment with Lars-Hendrik Röller, the economic advisor to Chancellor Angela Merkel .

The conversation finally took place on September 11th. In addition to Röller and Fritsche, Alexander von Knoop, Chief Financial Officer of Wirecard, and Burkhard Ley, Group consultant, took part. According to a chronology of the Chancellery, it served "primarily to get to know one another".

In addition, Wirecard provided "general information about its business activities in the Far East". Left-wing politician De Masi considers this representation to be dubious, after all, Merkel had already advertised Wirecard's Asian expansion during her trip to China in early September. Previously, ex-Defense Minister Karl-Theodor zu Guttenberg (CSU) lobbied for the group in the Chancellery.

For De Masi these are too many coincidences, he believes a collaboration between Wirecard and BND is likely: “It can be assumed, after all, ex-secret service coordinator Fritsche lobbied for Wirecard and had good connections with the Austrian secret service. I would be very surprised if services in Vienna, Munich and Berlin would not have liked to use a secret service fan like Marsalek and the financial data from Wirecard. "

Was Marsalek the subject of Maas' visit to Russia?
In the meantime, the Chancellery has examined Fritsche's activities. The Federal Civil Service Act stipulates that retired civil servants report their activities under certain conditions if they could be related to their previous work.

"An examination initiated by the Federal Chancellery of the fulfillment of official duties by State Secretary a. With regard to his work for Wirecard AG, D. Fritsche revealed that the work was not subject to any notification requirements, ”said a spokeswoman for the federal government on request.

Is the federal government making sufficient efforts to provide information? Opposition politicians have doubts. It is unclear, for example, whether Federal Foreign Minister Heiko Maas (SPD) raised the subject of Marsalek to his Russian counterpart Sergej Lavrov during his trip to Russia on August 11. Lavrov said at the press conference that followed a question from a journalist: “I do not know Mr. Jan Marsalek. I hardly know anything about his activities because he is not the subject of foreign policy discussions. "

The Foreign Office does not want to comment on the content of the confidential diplomatic talks. In response to a Handelsblatt request, it declares that it has no knowledge of the implementation of the international arrest warrant (“Red Notice”) against Marsalek by Russia.

“I cannot understand at all that the Federal Foreign Office is keeping silent about whether Maas raised the case in Russia,” criticized De Masi. "If Marsalek is really in Russia, the federal government must address that." The left-wing finance expert criticizes a lack of commitment. The Federal Criminal Police Office distributed wanted posters. "But if Mr. Marsalek were actually to be in Russia, an extradition request would have to be submitted."

WWD : Italy Facing Challenges, Opportunities Post-COVID-19

Italy Facing Challenges, Opportunities Post-COVID-19
Unemployment, as well as potential M&As, loom.

MILAN — At the end of July, Italy officially entered a recession as the country’s National Institute for Statistics ISTAT released a study estimating that local gross domestic product was down 12.4 percent in the second quarter of 2020 compared to the previous quarter. Earlier that month, the European Union’s 27 national leaders agreed on a 750 billion euro Recovery Fund via grants and loans to help countries recover from the effects of the coronavirus pandemic, and Italy is expected to be one of the main beneficiaries of the European Union agreement. Also, to support economic recovery, the Italian government has earmarked an injection of 25 billion euros for its 2020 budget, increasing its public deficit to 11.9 percent of its GDP — the highest of the euro zone.

But at the annual meeting of Catholic activist group Comunione e Liberazione at the end of August, Italy’s Minister of Economy Roberto Gualtieri struck an upbeat note, claiming that the country was showing the “conditions” for “an extremely strong rebound” in the third quarter of the year in the wake of the COVID-19 recession.

Against this background, challenges loom ahead for a number of Italian fashion companies, which may avail themselves of any help they can get. Storied men’s wear brand Corneliani, which in June submitted an application for admission to a composition with creditors procedure, is expected to receive a 10 million euro investment from the Italian government, the first fashion company to receive state funding under the “Re-Launch” Decree. This was developed by the Italian government to support the restart of the country after the global pandemic and includes the creation of a fund to support companies during the crisis. Controlled by Bahrain-based Investcorp, Corneliani is eyeing a revamp as the men’s wear sector is grappling with lackluster demand for tailored clothing, which is weighing on companies ranging from Boglioli to Pal Zileri.

Unemployment is also a concern as ISTAT at the end of July stated that Italy’s unemployment rate rose to 8.8 percent in June from an upwardly revised 8.3 percent the month before, as some 46,000 jobs were lost in the coronavirus crisis.

After months of strikes and protests against Roberto Cavalli’s planned decision to move its headquarters, more than 100 out of 170 employees at the brand’s complex outside Florence will not move to Milan and effectively lose their jobs in September. Roberto Cavalli is owned by the founder and chairman of Damac Properties, Hussain Sajwani, through his private investment company Vision Investments.

At the end of last year, Safilo Group revealed it would shed some 700 jobs this year as it revises its stable of licenses while it expects the exit of the Dior brand from Jan. 1 and that of the Fendi label beginning July 1. The eyewear group is also further developing its own brands, from Carrera to Polaroid and its online business.

The uncertainties are also fueling merger and acquisition rumors, with Kering said at one time or another to be circling Salvatore Ferragamo and Valentino, while speculation about the French group’s interest in Moncler has petered out.

The return at the end of May of Michele Norsa as director of the board and executive deputy chairman at Salvatore Ferragamo fanned new rumors about a possible change of ownership — a development the Ferragamo family has always denied.

Norsa is a partner in FSI, which in 2018 took a 41.2 percent stake in Missoni, and this link could open up new scenarios. Analysts, including Equita, observed that Maurizio Tamagnini, ceo of FSI, has in the past pointed to the fund as a possible aggregator of luxury brands, and that Ferragamo would fit with this idea of a fashion conglomerate.

The Etro family has also denied any interest in selling the namesake company, but rumors repeatedly surface about the possibility.

After an “excellent” 2019 in terms of M&A operations in all consumer sectors, from fashion and design to beauty and wine and food, Alessio Candi, in charge of M&A at Milan-based Pambianco Strategie d’Impresa, said he expects this year, in light of the COVID-19 pandemic, to see “an ongoing consolidation, no longer tied to the development, but rather to the necessary strengthening of the assets of many companies that will be forced to open their capital to survive.” This, Pambianco believes, will lead to “an increased polarization of the market between big players, that will capture more market shares and small players that will on the other hand have a hard time to be competitive.”

WWD : Sales of Luxury Goods in China to End the Year Above 2019

Sales of Luxury Goods in China to End the Year Above 2019
As long as China keeps its unemployment rate at a reasonable low level and stay responsive to potential regional COVID-19 outbreaks.

LONDON — All eyes are on China, as it remains the only source of growth for most luxury brands amid a global pandemic. Analysts and local experts are confident that the country will continue to be the backbone for the sector for the rest of the year.

Imke Wouters, partner of management consulting firm Oliver Wyman, said there is a trend of further polarization among Chinese consumers in the second half of the year.

“Trade-up remains strong in middle and upper classes, while strong trade-down emerges in the lower-income group,” she said. “We believe for the luxury spending, the strong consumer sentiment will continue for the second half. Sales of luxury goods in China are expected to end the year above 2019, as more Chinese who normally shop for luxury goods when they travel stay home and spend in the country. While for fashion spending, the market may revert back to some growth, yet still lower than the historic 5 percent-plus growth.”

Players with a distinctive premium fashion offering will do better than others. For example, Louis Vuitton’s biggest store in Shanghai is hitting a record-high $22 million monthly sales in August, because of the men’s wear show, Chinese Valentine’s Day Qixi Festival, and the fear of another round of price hikes from September. Meanwhile, second-tier luxury brands benefit less from the rebound.

Nick Cakebread, founding partner of Gusto Luxe, a Shanghai-based marketing and digital agency, which just launched dedicated solutions for sustainable brands, added that “brands with a clear point of view, including those putting sustainability at the forefront of their brands and communications, are driving consumer affinity and performing well.”

Localizing in the right way will also help brands stay ahead of their game in China. “You can enjoy the kind of commercial success that sees China continue to grow as their leading source of revenue. Get it wrong as a ‘foreign’ business, and you can go so far out as to be completely canceled from the country altogether,” Cakebread added.

All the brands went big with the Qixi festival, and among them, Balenciaga came up with the riskiest plan. The brand introduced a batch of limited-edition Hourglass Bags with Chinese calligraphy with a Tupao, meaning raunchy or kitschy, campaign. It went viral on Chinese social media. The campaign was hugely controversial, with some finding it offensive and vulgar, as the visual aesthetic can be interpreted as a mockery of China’s poorer past. But the younger generation appreciated the clever tribute, and the bags sold out online within days.

Prada, meanwhile, localized its Prada Mode Shanghai event with a dedicated WeChat mini-program to invite its fans to virtually experience a space curated by film director Jia Zhangke with a series of cultural programs. Its Qixi campaign has a cleaner vibe with a focus on the more affordable reissued nylon bags for younger Chinese fans.

On top of brands adjusting their proposition to fit changing consumer needs, Wouters also advised that companies should rationalize their brick-and-mortar store networks and take active cost-management initiatives, strategically redesign operating models, launching rigorous fact-based assortment planning, strengthening their long-term supplier strategy, adopt leaner store operations and redefine a longer-term markdown strategy via structural and analytical levers to stay competitive.

“Redefine the roles between off-line stores and online. Develop a longer-term off-line store network rationalization strategy to strengthen your footprint. Prioritize investment for service and experience enhancements in most competitive locations,” he said.

Some brands are already on the move, WWD has learned that a handful of brands including Prada, Burberry and Coach have been actively engaging with e-commerce platforms outside Tmall’s Luxury Pavilion to diversify their online presence and connect their internal inventory to their online stores and bring a better offering to the market since the beginning of the lockdown.