A ‘perfect storm’ for luxury goods

Luxury goods companies are queuing to report falling profits as the problems keep on coming.

After years of raking it in, luxury goods brands have fallen on harder times. Burberry reported a 14% increase in overall sales in its first half, but noted that like-for-like sales slid in the second quarter as Chinese demand faded. The 158-year-old company expects the "more difficult external environment" to weaken margins.

Mulberry, which specialises in handbags, issued its fourth profit warning in a year as sales slid by 9% in the six months to September. Its annual profits are now likely to be just £4m, compared to a previous estimate of £10m, reckons Barclays.

Mulberry has been struggling with a failed move upmarket and tough competition as well as cooling demand. LVMH, the world's biggest luxury goods company, also noted slower growth in Asia.

What the commentators said

Luxury-goods groups "tend to counter doomsaying by snorting that their customers are never short of money, darling", said Jonathan Guthrie in the FT. But this "exceptionalism has come unstuck".

Flaunting your wealth is no longer the way to win friends and influence people in China: thanks to the government's ongoing anti-corruption drive, conspicuous consumption is out.

This campaign is reportedly examining 10,000 people and has wiped an annual $9bn off entertainment budgets, said Alistair Osborne in The Times. The sector is also reflecting a general emerging market downturn, and we can't count on North Korea's Kim Jong-un to fill the gap, "what with his main luxury being cheese".

Meanwhile, wealthy Russians are being hit by EU and US sanctions, said the FT's Andrea Felsted. Then there is concern that the worsening conflict in Syria and Iraq could dent demand from Middle Eastern shoppers.

The rapidly spreading Ebola virus is also in the mix, given the potential impact on luxury consumers from Asia and Africa. Add this all up, said Luca Solca of Exane BNP Paribas, and the sector is facing a "perfect storm".

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