Hermès’ China business has been resilient and has consistently outperformed other luxury brands.
Now, the company has indicated weaker luxury goods sales growth in China; although, Hermès posted a gain in net profits to €413 million ($545 million) for the first half of 2014.
For the first six months of the year, the French luxury group announced a growth of 8 percent in group sales, rising to €1.9 billion on the strength of sales in the United States and Japan, which offset a weaker performance in China, reports The New York Times. Second quarter sales were up 2 percent compared to a year ago, a steep drop from the 15 percent increase in the first quarter of this year.
First half sales grew in ready-to-wear clothing and fashion accessories and leather goods, up 16 percent and 13 percent, respectively. This offset a 7 percent drop in watch sales due to a significant decline in gift-giving in China. In the second quarter, Hermès watch sales declined by 15 percent.
After high double-digit growth in China over the last several years, Bain & Co. estimates that the demand for luxury goods in China will grow no more than 4 percent this year.
The bulk of Chinese revenue for international luxury brands has come from Chinese tourists spending abroad. However, according to tax refund company Global Blue, spending by Chinese tourists grew only 9 percent in the second quarter, which is quite low compared to the annual growth rates of 30 and 50 percent seen in the last couple years.
In fact, Chinese tourists accounted for 27 percent of the value of all tax-refund claims made in 2013 with Global Blue, which processes refunds at airports for shoppers visiting from abroad. However, the tide seems to be turning, as Tax-refund claims by Chinese tourists in Europe grew just 18% in 2013, compared with 57% in 2012, reports The Wall Street Journal.
In addition to the Chinese government’s austerity measures, it seems that tensions with Hong Kong and the strong Euro are to blame for the decrease in spending by Chinese tourists. Furthermore, luxury brands are beginning to offer discounted goods to consumers in China, which further decreases the incentives for Chinese tourists to spend overseas.
Even a sterling brand such as Hermès is not immuned to these challenges.
Despite the slowdown in China, Hermès plans to continue its expansion in the country with the opening of a Hermès Maison flagship in Shanghai in September. This will be followed later this year with the opening of a new Beijing store and a larger outlet store in Chengdu. The company already has more than a dozen stores in greater China.
After years of stellar growth in the Chinese luxury market, luxury brands are recognizing the ‘new normal’. Retailers are always faced with changing consumers and markets. China is really no different – to remain competitive, they will have to continue to invest and change with the Chinese market.
image credit: simon q