SARS brings luxury market down
By Parija Bhatnagar, CNN/Money Staff Writer
NEW YORK (CNN/Money) -- Gucci, Moet, Donna Karan and other luxury life providers are already jostled by war and weak economies. But their latest problem is micro, not macro. It's the SARS virus.
The spread of the new disease, especially in key Asian markets, could tank luxury industry sales.
"The SARS epidemic in Southeast Asia is likely to have a negative impact on luxury goods sales in the region," said Sagra Maceira de Rosen, an analyst with J.P. Morgan in London. "Southeast Asia ex-Japan is a very important market for the sector because it accounts for about 14 percent of total global industry sales."
"With Japan, the Southeast Asia region takes the bulk of the business, with about 50 percent of total sales," she said. The U.S. and Europe account for about 25 percent each of the global luxury goods market.
Goldman Sachs analyst Jacques-Franck Dossin downgraded the European luxury goods sector in a research note to "cautious" from "neutral," citing the concerns over Severe Acute Respiratory Syndrome (SARS) and the probability of an extended war in Iraq.
Total global luxury good sales stood at about $66 billion in 2000, according to Chicago-based market research firm Mintel Consumer Intelligence, and total sales are forecast to reach $75 billion in 2004.
Prior to the outbreak, industry watchers had pegged Japan -- the world's largest luxury goods market -- as a sort of safe-haven for the industry, given the Japanese consumer's higher-than-average interest in luxury goods. Many Japanese consumers also travel to neighboring Hong Kong to buy brand-name goods like Gucci, Hermes, Burberry and Louis Vuitton.
A lot of high-end fashion goods also are bought in airports. But with consumers curtailing foreign travel in the wake of travel advisories involving the Far East, analysts said that trend could suffer a serious setback.
"About 40 percent of luxury goods sales in Hong Kong are to Japanese and Chinese mainland travelers," Maceira said. "Those sales are also concentrated around some key national holidays, including the Golden Week annual Japanese holiday, which falls this year from April 29 to May 5, and the Labor Holiday week in China from May 1 to May 9. But sales could reduce significantly from the shortfall of tourists."
Dossin added, "The Japanese are very risk averse and their travel patterns have historically been very dependent on safety perceptions. Two months following Sept. 11, Japanese travel was down about 40 percent."
Meanwhile, a luxury goods analyst with Lehman Brothers in London estimates that reduced travel spending could impact 1 to 2 percent of revenue and 3 to 5 percent of profit for branded goods in 2003.
Who's lagging in the lap of luxury?
According to J.P. Morgan's Maceira, New York-based Tiffany (TIF) and Coach (COH) are best positioned to weather the SARS outbreak because of their relatively low exposure to Southeast Asia. Tiffany derived about 6 percent of its total sales from Southeast Asia and 28 percent from Japan in 2002, while Coach had about 5 percent sales in Southeast Asia and 17 percent in Japan.
The companies with the greatest exposure in the region affected by SARS are France's LVMH -- with brand products like Dom Pérignon, Moët, Louis Vuitton and Donna Karan under its umbrella -- Switzerland's Richemont, the world's second-largest luxury goods company behind its French rival LVMH, and London-based Burberry.
Richemont market brands such as Cartier jewelry, Piaget and Montblanc pens. The company had the highest exposure in Southeast Asia, with 19 percent of total sales coming from the region and 19 percent from Japan in 2002. LVMH logged 15 percent of total sales from Southeast Asia in 2002 and 15 percent from Japan.
In Asia, financial markets are coming under increasing pressure as countries start to feel the economic impact of the mystery virus known as Severe Acute Respiratory Syndrome, or SARS.
A Coach spokeswoman declined to comment on the matter, saying that the company is in a "quiet period" before it reports its quarterly results. The leather goods company is set to report earnings for its third quarter on April 22. Analysts at earnings tracker First Call expect a profit of 29 cents a share, compared with 16 cents a share a year ago.
Tiffany was not immediately available for comment.
Dossin dropped LVMH from Goldman's "current investment list" of stocks, citing SARS in Asia and a possible boycott of French products.
"We feel less confident that the stock will outperform over the next 90 days," Dossin said.