The increase in shopping by Chinese, drives major luxury brands to increase prices in Europe

Chinese consumers in Selfridges, London

To offset the impact of growing sales to wealthy Chinese travellers, major luxury brands are raising prices in Europe. The large gap between prices in China and Europe, partly because of tariffs applied by Beijing, has translated into a shift from local consumption and tourism consumption.

This could have a direct impact on the  the profitability of Louis Vuitton (LVMH), Gucci (PPR), Hermes and Chanel other, because their margins are higher in China than in Europe. Without lower tariffs, a decrease in prices in China is unlikely, most luxury companies being protective of the value of their brands.

“There will be a price adjustment in Europe, the order of 5%,” predicts one analyst who requested anonymity, in an interview to Reuters. “They can not go much further to avoid touching their European customers. Some do right now, others expect the new collections.” However, larger increases, up to 10%, could relate to some leading models of bags, he adds.

Questioned, LVMH refused to comment while Gucci claimed they did not adjust their prices “simply based on a country, product category or parity changes”. The price gap between China and Europe on luxury goods, which was already at 35% last year, has now reached 50% with the weakening of the euro against other currencies.

Taking into account tax rebates (tax free) which foreign consumers enjoy throughout Europe, the gap stands at almost 70%, as estimated by HSBC. The slow down in sales in China reached a climax in the first quarter due to an increasing difference with the prices charged in Europe. “The price differences between Europe and Asia can not be explained only by the various taxes. Profitability is higher in Asia because the margins are higher,” say analysts at CA Cheuvreux.

They stress that this transfer of buying could have a negative impact on operating income of brands, that impact should however be limited due to price increases implemented in Europe and they estimate that approximately 3%. Some brands, however, may be more affected than others, particularly those undergoing rapid development of their store network in China.

CA Cheuvreux highlights the risk for Prada and Gucci, the flagship brand of the PPR group, caught between the deployment of their network and lower domestic consumption. In 2011, luxury companies estimated that it would take four to six months for a new store in mainland China to reach an operational balance and almost two years to reach full profitability. If the globalization of purchases continues, these delays could significantly lengthen, they add.

Morgan Stanley analysts believe that “for Gucci, after an impressive performance made possible by repositioning operated for three years on the high end, there is a risk of slowing down and shrinking margins given the ambitious program openings of stores of the brand.

“After spectacular growth last year, often exceeding 20%, analysts predict a slowdown in the dynamics of the luxury this year, related to settlement of the Chinese economy and the debt crisis in Europe. They anticipate an average growth at constant exchange rates, between 10% and 11% for 2012. But so far, Hermès, LVMH, Prada, Burberry and PPR have once again exceeded expectations, with an average increase of nearly 15% in the first quarter. Asian customers (excluding Japan) became the first consumer of luxury goods in a global market valued at approximately $ 250 billion.

In Europe, consumers from China are now roughly 20% of purchases of tax-free goods, according to figures from Global Blue, world specialist in the tax refund. France, Printemps Haussmann, repositioned on the high end, the Chinese became the second customer of the store behind the Europeans. They account for 15% of sales with targeted purchases of leather goods, fine jewelry and luxury watch and an average basket of 1,500 euros.

adapted from Reuters