Will China and Brazil make up for a possible slow down in luxury sales?

Queues outside Louis Vuitton store in China

Europe’s sovereign debt crisis has already lead to a slowdown in spending throughout the entire E.U., even in less affected countries. While there might be little or no effect on the income outlook of the wealthy consumers, there will most certainly be a psychological factor which would inhibit spending and make consumers less comfortable about luxury goods.

Major European luxury shopping hubs, London, Milan and Paris have been thriving thanks to sales to Asian and South American travellers. Berlin has been the fastest growing luxury market in Europe which relies mostly on domestic buyers. As for emerging luxury-loving capital cities, the luxury markets of Moscow and Kiev have yet to return to the sales levels before the debut of the crisis. The financial crisis has also hampered the development of the promissing emerging markets such as Kazakhstan and Serbia.

It becomes obvious that the major luxury brands with the most established presence in Asia (China, South Korean, Vietnam) and South America (Brazil, Argentina) are likely to be less prone to the effects of this second and continued wave of the international crisis and these are a handful of brands: Louis Vuitton, Gucci, Ermenegildo Zegna, Salvatore Ferragamo, Burberry and Prada. Mention should also be made that despite its size and huge potential, India remains an insignificant market in terms of volumes, its luxury market still being in an incipient phase.

Diversification and lower price point product lines are likely to safeguard some of the important luxury fashion and accessories players such as Ralph Lauren, Michael Kors, Coach. By contrast, companies such as Dolce Gabbana, which recently ended their second line (D&G) aiming for a higher luxury positioning of the brand, are likely to have a more difficult ride in the near future.

Among the companies which have already publicly admitted that the crisis will lead to a slowdown in 2012: Glenmore InvestmentsErmenegildo Zegna, Roberto Cavalli, Salvatore Ferragamo and Barbara Bui. Roberto Cavalli CEO, Gianluca Bronzzetti told Bloomberg: “To say it won’t have an effect is madness. The debt crisis will definitely have an impact on consumption of luxury goods, particularly in Europe”.

Ermenegildo Zegna, CEO of eponymous house, said in June:  ”I am worried about 2012. I see shadows in Europe, I see a question mark in the US and a relative slow down in China”. Michele Norsa, CEO of Salvatore Ferragamo advised “The luxury industry is perhaps more resilient now than it was in 2008. The market is still very positive. Sure, there are some concerns, but we are getting used to being worried.”. In an early sign of trouble, Barbara Bui, one of France’s few listed fashion brands, said earlier this month trading had become more unpredictable as it was concerned rising European taxes could affect consumer spending.

Oliver Petcu