Seven weeks of war in the Middle East are stifling demand in the luxury industry with LVMH, Kering and Hermes all reporting weak first-quarter sales.
Shoppers in the Middle East are some of the world’s biggest spenders, splashing out at retail hubs like Dubai and other luxury destinations including Paris and Milan.
The lacklustre results from three of the most important groups reveals how the impact of grounded flights and disrupted vacations is rippling through the industry.
Hermes International SCA, normally the sector’s most reliable outperformer, disappointed with sales dipping by 5.9% in the region.
Hermes shed close to US$20bil (approximately RM79bil) of its value on Wednesday (April 15) alone, as its shares fell as much as 14%.
"We had beautiful growth at double digit rates in January and February but March ground to a halt” in the Middle East, Hermes chief financial officer Eric Du Halgouet told reporters on a call Wednesday (April 15).
Read more: Is luxury fashion losing momentum? French group Kering sees sales slide
In France – where more than half of Hermes’ business is linked to tourism, sales declined 2.8% due to lower spending by visitors, Du Halgouet said.
The maker of Birkin handbags’ stores in Switzerland and the UK were also affected by fewer Middle Eastern shoppers.
While the Middle East represents about 4.4% of Hermes’ total sales, customers from the region account for about 7% overall, Du Halgouet said.
Earlier this week, LVMH Moet Hennessy Louis Vuitton SE’s most important fashion and leather goods units reported a 2% drop in sales. Gucci sales also tumbled with Kering’s retail revenue in the Middle East falling 11% during the first quarter.
Investor selloff
Hermes shares dropped as investors sold off shares on the back of earnings they particularly deemed disappointing in France and Asia, as well as the Middle East.
The collective market capitalisation of 10 listed European luxury companies has dropped by US$176bil (RM696bil) since the end of last year, according to data compiled by Bloomberg.
LVMH has lost close to US$100bil (RM396bil) of its worth as its shares continued their decline after the luxury giant stock’s worst first-quarter performance on record.
The war in the Middle East has disrupted oil and gas supplies and darkened the economic outlook with fears of a global inflation crisis.
The longer the conflict continues the greater the knock-on effect, with the turmoil already dimming hopes that the luxury sector would see a recovery following the arrival of new designers at brands such as Dior and Gucci.
LVMH’s business in the Middle East, which represents about 6% of total sales, suffered after a "very positive start to the year”, the company’s chief financial officer, Cecile Cabanis, said Monday (April 13).
The war reduced group organic growth by about one percentage point for the quarter.
Read more: Dubai’s luxury fashion scene falters as regional conflict empties flagship malls
Beyond ready-to-wear fashion and handbags, the luxury watch sector is also feeling the chill from reduced demand in the Middle East.
Breitling AG CEO Georges Kern told Bloomberg that the watchmaker has adapted shipments to the Middle East for the time being, given the lack of tourism and reduced flight schedules to the region.
He said some price points, such as the mid-segment, are suffering more than others.
Despite the gloom, Hermes indicated that the situation is starting to improve with Du Halgouet saying that sales in the Middle East in the current quarter are starting to pick up.
Kern is also optimistic longer-term about the future for the Middle East.
"It’s a region where tourism will come back overnight. It won’t be a long recovery like in China, this will come back in 24 hours,” he said, speaking on the sidelines of the Watches And Wonders event in Geneva.
"It’s because it’s secure, infrastructure is the best in the world, the service, tourism, hotels, airlines are the best in the world.” – Bloomberg
