Date
17 August 2017
LVMH overexpanded at a time when China was experiencing a slowdown in luxury sales. Its latest financial performance reflects that aggressive strategy more than it highlights the effects of China's crackdown on extravagance. Photo: Bloomberg
LVMH overexpanded at a time when China was experiencing a slowdown in luxury sales. Its latest financial performance reflects that aggressive strategy more than it highlights the effects of China's crackdown on extravagance. Photo: Bloomberg

LVMH woes not all down to China frugality drive

Shares of Moet Hennessy Louis Vuitton (LVMH) tumbled after the luxury brand posted a disappointing report last week.

The company said profit from recurring operations fell 5 percent in the first six months, driving the stock down nearly 7 percent on Friday.

Executives were quick to point the finger for the weak performance at China’s anti-corruption campaign but they’re as much to blame for it.

Chinese domestic and overseas spending was significantly lower in the second quarter, according to chief financial officer Jean-Jacques Guiony.

Sure, China’s unremitting crackdown on extravagance hurt LVMH, but much of the damage was its own making — the company was too eager to expand.

The group increased its mainland network by 122 outlets in 2010, with most of its new stores in small cities. Another 495 shops have been added in the following year.

The overexpansion ramped up LVMH’s overhead but the bigger cost was to its image as a purveyor of exclusive, bespoke luxury.

This couldn’t have come at a worse time. China’s luxury market has been in decline, growing just 7 percent in 2012 after expanding 30 percent in 2011.

Sales of luxury items were 350 million yuan (US$56.6 million) during the Lunar New Year, the lowest in 10 years and 58 percent below the figure for the preceding year, according to National Business Daily.

Nevertheless, it’s easy to blame LVMH with the benefit of hindsight. During its 2010 heyday, nearly all luxury brands aggressively expanded. Dior, for instance, increased its outlets four times in 2011, according to Bloomberg.

Giorgio Armani and Dolce & Gabbana were forced to shut down their flagship stores in Shanghai in recent years.

– Contact the writer at [email protected]

RA

EJ Insight writer

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