TheChek News Flow

For western producers of expensive drinks, clothes and handbags, doing business in China is no longer a life of luxury.

A month-long slide in Chinese share prices has made the country’s consumers “less open to celebrate good moments,” as Gilles Bogaert, finance director of Pernod Ricard, put it last week.

They are certainly opening fewer of the French company’s Martell XO premium cognac bottles. With a typical price tag of €150 or more, sales of this type of aged cognac fell by double-digits in the year to June 30. Less expensive Martell fared better.

Sharp falls in the Chinese stock market, amid concerns over an economic slowdown, represent a further potential blow to Pernod in its second-biggest market — and just as the company appeared to be recovering from President Xi Jinping’s 2013 clampdown on lavish spending by government officials.

Although its spirits sales in China were down 2 per cent in the last financial year, that was a significant improvement on the previous year’s 23 per cent drop.

But Pernod’s drink brands are by no means the only luxury goods to experience rapidly falling Chinese sales.

Swiss watch exports to the country have wound down sharply — by 40 per cent in July, compared with the same month last year. More expensive watches have been much harder hit than those costing less than SFr200, according to the Federation of the Swiss Watch Industry.

Tag Heuer, a watch brand owned by LVMH, said recently it would close one of its shops in Hong Kong due to lower regional demand.

Global luxury goods companies have become heavily reliant on Chinese big spenders, who account for 30 per cent of worldwide spend in the sector, up from 3 per cent just a decade ago.

Last week’s move by the Chinese central bank to devalue the renminbi has also added to the sector’s woes, by making luxury imports more expensive.

Investors in western luxury goods companies have reacted by selling off shares in recent weeks. Those hit include the French groups LVMH, Rémy Cointreau, Hèrmes and Kering, owner of Gucci — down an average 13.1 per cent since August 1. Others to suffer share price falls were Switzerland’s Richemont, down 11.7 per cent, and the UK’s Burberry, down 11.9 per cent.

Analysts are trying to calculate how big a hit to sales of luxury goods can be expected.

For the time being, many believe the slowdown will only worsen if the market volatility leads to a general deterioration in the economy or wage rates.

One reason for optimism is that Chinese consumers depend far less than Americans on the stock market for wealth creation. And, despite the turmoil of the past few weeks, the Shanghai Composite index is still 45 per cent higher than it was a year ago.

As Luca Solca, analyst at Exane BNP Paribas, points out: “If this was happening in the USA, we would see a very negative effect on discretionary spend. But, to be fair, given the prior explosion of the Chinese equity market, we would have seen a corresponding spectacular growth in discretionary spend. We have seen neither so far.”

However, Tiffany & Co, the New York-based jeweller that last week bucked the trend by reporting a double-digit rise in quarterly sales, said it was impossible to predict how the fall in share prices would affect spending.

Mark Aaron, vice-president of investor relations, says: “In the same way that it’s not possible to quantify the positive wealth effect from a rising stock market on our sales growth in China in the past couple of years, it’s similarly difficult to predict any potential negative effect on sales in magnitude or duration from their recent stock market correction or currency devaluation.”

Pernod’s chief executive Alexandre Ricard admits sales over the past month have been “soft” and that the outlook will only become clear until the “make-or-break” Chinese new year next February.

A further variable factor to be considered is the fact that an overwhelming proportion of Chinese luxury goods purchases — some 75 per cent — are made outside the country, not inside. High import duties on luxury items can make the same Burberry trenchcoat or Louis Vuitton handbag at least 30 per cent cheaper to buy in Europe than in China.

These purchases can be made while undertaking personal travel, by placing orders with third-party so-called “daigou” shoppers, or online.

Brian Buchwald, chief executive of Bomoda, a New York and Shanghai based market research company, says luxury companies should be spending less on new stores within China and more on e-commerce to exploit this trend.

“We have seen a significant growth in spending by the Chinese consumer — just not in China. So there is a massive opportunity for luxury goods companies to increase sales by investing more in technology,” he said.

Luxury companies also point out that whatever the short-term pain, the demographic and luxury spending outlook in China is still highly favourable.

As Johann Rupert, chairman of Richemont — which owns Cartier jewellery and Montblanc pens — said earlier this year: “We’ve seen this before on a number of occasions. So, yes, we have problems in China; everybody’s got problems in China. How long it’s going to last? I don’t know. I’m in it for the long term.”