Japan's Earthquake Sends a Shockwave Through the Luxury Goods Business

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Nearly half of all Japanese women over the age of 20 own a Louis Vuitton handbag, according to equity analysts MF Global. So if you're LVMH (LVMUY), the French parent of the trendy handbag maker, you have to be worrying about the effect of the Japanese earthquake and tsunami on your bottom line.

Luxury brands like Coach and Tiffany in the U.S., and Richemont (CFRUY), Swiss owner of such posh brands as Cartier and Montblanc, have taken huge hits to their stock prices as investors digest the consequences of a prolonged consumer drought in their biggest market.

"We believe the impact could be fairly significant given Japan is currently the largest luxury market globally," says Sunita Entwisle, a luxury analyst at Nomura Securities International. In London. "It's a declining market, but still an important one, and sales were beginning to pick up at the end of last year."

MF Global estimates that Japan accounts for 23% of the world market for hard and soft luxury goods, compared with 13% for China. But about 18% of luxury sales in Japan are made to Chinese tourists, who may just shift their shopping trips to places like Singapore.

Overall, the luxury goods index was down more than 4% Tuesday as news about further possible damage at nuclear power plants began to circulate.

New York-based Coach (COH), which gets 20% of its sales from Japan, has been among the hardest hit. It has 164 stores there, including three in the affected region around Tohoku. Coach shares have dropped 9% in the last two days. Tiffany (TIF) is another U.S. luxury stock that is vulnerable in Japan. It has 56 stores in the country, accounting for about 18% of total sales. Its shares are also down 9% since the earthquake hit last week.

"While not all parts of the country were equally affected physically, recent events will almost certainly dampen the consumer mood/spending," says Nomura analyst Paul Lejuez.

Will Japanese Buyers -- and Shopping Tourists -- Stay Home?


A number of European brands are also taking a hit. In France, Hermes has the largest exposure to Japan, which accounts for about 19% of sales. PPR, owner of Gucci, gets 15% of its sales there. British clothier Burberry (BURBY), whose plaid designs are beloved by office workers in Japanese corporations, only makes about 5% of its sales in Japan, but gets between 18% and 20% of its earnings from a licensing deal there.
Burberry's local partner is obligated to pay an $80 million annual licensing fee to the parent company, but Burberry has not decided yet whether to demand that payment if sales fall off. "They will have to work out whether it's in their brand's best interests to press for payment within these tragic circumstances," says John Guy, luxury goods analyst at Royal Bank of Scotland (RBS) in London. "There is a risk that if they went ahead and did that, the brand damage could be more longer term if the Japanese consumer became aware that Burberry was pressing for this payment."

Guy notes that most measures of the sales losses expected to be caused by the quake have been limited to the Asian region, and don't include sales of things like sales of handbags to Japansee tourists in Paris. Hermes, whose famed scarves are beloved in Asia, makes one-fifth of its sales in Japan, but another 10% of sales at its French shops are also believed to be to Japanese tourists.

"There is a very high portion of Japanese exposure there as well," he says.

Middle East Turmoil Further Saps Sales


Adding to the luxury sector's discomfort, affluent shoppers in the Persian Gulf, normally big spenders at European boutiques in the region, have also been distracted by the recent outbreaks of political violence. On the heels of upheaval elsewhere in less affluent parts of the Middle East, Saudi troops have moved into wealthy Bahrain, causing disquiet throughout the whole region.

"When you combine the Japanese exposure and the Middle Eastern sales exposure, then you're talking about a significantly higher percentage of sales, potentially," Guy says. "There are a lot of macro things going on."

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NAlexanna2

No one was harmed elsewhere after we bombed them. When the world trade center fell
all of us who lived and worked in the surrounding areas inhaled toxins. Only
those who were closest and working at the site were affected adversely. MY
concern is the wildlife and sea creatures dying or becoming ill. They are
always the ones to suffer the follies of the human race.

March 17 2011 at 1:59 PM Report abuse rate up rate down Reply
wurkinman1

oh boo hoo..........

March 16 2011 at 7:12 PM Report abuse -1 rate up rate down Reply
captmerit

how shallow can that cheap,tacky industry be???????????????

March 16 2011 at 9:33 AM Report abuse +1 rate up rate down Reply
ccm989

With a nuclear meltdown about to happen and food and water in desperately short supply, we're supposed to care about the fate of Louis Vuitton? How shallow can you get?

March 16 2011 at 8:21 AM Report abuse +4 rate up rate down Reply
k4jlp

for energy prices HOLD YOU BOUGHT OFF ELECTED REPS ACCOUNTABLE...THEY ARE LOOKING THE OTHER WAY WHILE THE TRANSFER OF WEALTH GOES ON AND ON....

March 16 2011 at 7:01 AM Report abuse +3 rate up rate down Reply
k4jlp

Banksters at work on wall street...only profit matters nothing else

March 16 2011 at 6:59 AM Report abuse +4 rate up rate down Reply
robocop

The luxury manufacturers produce quality merchandise that sell for obscene prices. The interesting thing is to see the same items being sold by the fat cats at auction for typically 1/2 to 1/4 of their original retail value because they impusively bought this stuff and then tucked it away neatly into the a closet or drawer after toting it home from one of those garish retail stores and then realizing they already own too many other similar items they already never wear or use. I love the fact that a thousand dollar louis vuitton actually costs $100.00 to manufacturer AT MOST. What a Rip Off it all is isn't it though?.

March 16 2011 at 5:46 AM Report abuse +1 rate up rate down Reply
mesager42

I refuse to pay full price for pricy designer goods like Coach, Louis Vuitton, Michael Kors, and others whose products are made in China with cheap labor and materials, and don't have that price break given to the rest of us. The knockoffs are also made in China, probably at the same plants that are irregulars due to some fabric having a minor thread problem or the purses not passing inspection due to exact size requirements. Those designer goods are not made in better in China than their knockoffs are. Stop buying off on letting the rich get richer at your own stupidity. Seriously, ladies, take a good look at where those pricy shoes, handbags, and accessories are being made, then take a good look at where the knockoffs are being made. Same nation, no difference, except for prices.

March 16 2011 at 3:32 AM Report abuse +5 rate up rate down Reply
mesager42

Ah, New York-based Coach handbags are made in China. Buy the knockoffs, they are worth the money, because both are made in China with the same materials and the same cheap labor.

March 16 2011 at 3:26 AM Report abuse +5 rate up rate down Reply
ajax

We have all forgotten what happenned in the Gulf 6 months ago, or the media has at least. Spring Break is here and their all basking in the sun and boiling shrimp in Margaritaville.
It was supposed to be the end of the world then too.

March 16 2011 at 2:06 AM Report abuse +1 rate up rate down Reply