中國富人狂買奢侈品 Recovering rich spur pace of sales

On a recent bright autumn afternoon, a Chinese couple – she wrapped in furs, he in Louis Vuitton scarf – emerged from Pisa Orologeria, the exclusive watch boutique, in Milan』s luxury shopping district.

Flanked by a Chinese translator, a store assistant and a security guard, the couple scanned the shop windows and settled on a Roger Dubuis Excalibur Double Tourbillon jewellery watch for him. Then they turned their attention to Patek Philippe ladies』 watches. All told, a shopping trip worth at least €250,000 ($344,621).

Visits by customers such as these are a large part of the reason behind the unexpectedly strong growth in the luxury goods industry, and especially the watches and jewellery segment, as the world』s rich emerge from the financial crisis.

Moreover, many industry experts believe consumers from China, which overtook the US last year as the biggest destination for watches, will be an even greater reason behind the sustained growth of hard luxury next year too.

Scilla Huang Sun, head of equities at Zurich-based Swiss & Global, considers demand from these consumers as one of the main reasons investors should continue to take a look at the sector.

Even as share prices have risen by as much as 50 per cent for some luxury goods companies this year, Ms Huang Sun believes demand from China will keep the sector attractive in 2011 as well.

The latest Swiss data show that a third of Swiss watches are sold in China, and the strengthening of the renminbi over the past weeks mean that still more Chinese will find it attractive to buy watches while travelling.

「In the first six months of 2010, exports to Greater China grew by 49 per cent. The market is booming,」 Ms Huang Sun says.

After a 10 per cent rise in 2010, the $168bn global luxury market is seen returning to its usual 3 to 5 per cent growth rates next year, according to Altagamma, the Italian luxury goods foundation.

This relative slowdown has spawned caution from investors, and some companies, including Richemont, the world』s second largest luxury goods group, believe business will become tougher next year.

However, within that, the watches and jewellery segment is seen as remaining strong and even gaining momentum in the second half of 2011, when other parts of the luxury goods industry are expected to slow.

Demand for hard luxury – watches, jewellery, pens and lighters – is expected to grow by 8.5 per cent in 2011, with sales up a further 9.5 per cent in the past six months of the year, according to Altagamma.

Jon Cox of Kepler Capital Markets shares the view that next year 「demand will remain robust」 within the watches segment.

「Swiss watches have captured the imagination of the Chinese in Asia. Asians are also buying watches in France and North America and the lower currency is helping tourists to buy a watch and bring it home,」 he says.

「Next year I』d expect we will see ongoing growth, and the three major watch companies – Swatch Group, Rolex and Richemont – are all well placed.」

Mr Cox disagrees with the view that the rebound in sales in 2010 was due predominantly to wholesale restocking after a barren year in 2009.

「I don』t see why there would be such a sudden deterioration because the economic situation is much better in Asia than in the developed world,」 he says, adding that retail data from Singapore, Hong Kong and mainland China shows growth from the end consumer.

All this is good news for behemoths such as Richemont, owner of Cartier and Jaeger-LeCoultre, LVMH and Swatch as well as the smaller Swiss producers such as Roger Dubuis, a boutique house founded only in 1995, that are already reaping the rewards of a strong year.

For Swatch, 44 per cent of sales come from all of Asia, 28 per cent of them from China. This compares with 46 per cent of sales from Asia for the Richemont, 35 per cent from the region for LVMH and 43 per cent for the Gucci Group.

Richemont last month forecast significantly better first-half profits because of sharply higher sales in the first five months of the year. Its specialist watch brands, led by upmarket Vacheron Constantin and Jaeger-LeCoultre, proved strongest, with unadjusted sales up 40 per cent. Jewellery, including the Van Cleef & Arpels brand, rose 32 per cent.

As with rivals LVMH and Swatch Group, its business in Asia proved particularly buoyant. Sales were up 51 per cent in the period, or 36 per cent adjusted for currencies and acquisitions. Europe and the Americas were resilient, while Japan was up 4 per cent on an adjusted basis.

While luxury sales in the US, still by far the world』s biggest luxury market even since the financial crisis, tend to tilt towards the relatively lower cost aspirational luxury segment, in China luxury consumers buy the priciest goods. The same goes for consumers from the Middle East, also a focus for hard luxury sales.

Last month, LVMH, the world』s biggest luxury goods company by sales, reported a 14 per cent increase in like-for-like sales in the first nine months of the year. Watches and jewellery showed the strongest growth, up 29 per cent on a reported basis.

The strong increases prompted Swatch Group, which makes watches from the simple Swatch to handmade Breguets, to reinforce its hope for record sales and earnings for 2010. Swatch said growth had continued to be 「solid」 in July across all of its activities and regions.

Nevertheless, some experts remain cautious, in part due to volatile currency movements.

Johann Rupert, Richemont group executive chairman and chief executive, has warned that the past year』s momentum might not be maintained.

Richemont, which produces mainly in Switzerland, would be hurt by exchange rates, given the surge in the Swiss franc against the euro – its reporting currency – and the dollar.

Mr Rupert says sales in Asia and the Middle East 「continue to expand」, but performance in other regions remains below the record levels of 2008-09.

Still, industry experts say that pressure will be cushioned by the pricing flexibility enjoyed by luxury goods companies. Some watch manufacturers have already pushed up prices by about 10 per cent, allowing them to offset the currency swings.

Luca Solca, a senior analyst at Bernstein Research, says trading momentum is favouring companies with higher exposure to emerging markets.

He says this coincides with recent research from the Boston Consulting Group that shows the emerging market consumer』s perception of the macro-economic picture is materially better, and purchase intentions are materially higher US or European consumers.

Moreover, Mr Solca expects retail stores for hard luxury to expand by about 20 per cent by 2011 with most of that expansion coming in China. Chinese consumers such as the well-dressed couple in Milan, will soon have more opportunities to shop closer to home too.