We estimate the Chinese consumer has contributed two thirds of luxury growth over
the last decade – so fears of a slowdown should inevitably create share price volatility.
While we remain confident of the long term growth driven by less developed
provinces, there is a trend towards promotions and value. Europe and Japan are the
fastest growing regions following FX moves that leaves them noticeably cheaper.
Given the trend to value, we expect the Chinese consumer to chase the lowest prices –
a significant issue in the sector with Chinese tourism expected to double from 100m
to 200m visits by 2020. Our trip highlighted the push for value with queues outside
luxury stores with markdowns (Prada, Miu Miu and Gucci) – with only the full priced
high end luxury stores seeing queues being Hermes and Chanel. We highlight in this
note the complexity of the Chinese market, discounting, and daigou channels and
conclude that although the Chinese consumer will see growth, the focus on value is a
concern for long term pricing power. We believe the short term outlook remains
challenging with no obvious positive catalysts, with Luxottica and GrandVision, the
least exposed to China, remaining our preferred long term holdings.