Western luxury brands were hit by People’s Bank of China last week, which unexpectedly decided to devalue the yuan against the dollar, by 3% in two days.
The devaluation of a currency tends to give a boost to domestic producers at the expense of international imports — a yuan-denominated income is suddenly worth fewer dollars or euros, so items produced in the US or Europe are immediately more expensive.
So when China devalued, investors started to expect lower revenues and profits from some big companies. Salvatore Ferragamo, LVMH, Richemont, Swatch Group and Burberry share prices all slumped by more than 5%.
Analysts at Deutsche Bank sent out a note showing just how reliant on China some luxury retailers now are. Between 10% and 20% of the revenues of major luxury brands are now raised in the country
The figure rises even higher when you’re considering Chinese consumers rather than sales emanating from the country alone. That includes wealthy travellers from the country who might be shopping in Hong Kong, Japan or Europe. See the illustration in the slides attached.
Even though those sales don’t come from inside China, they’re inevitably tied to the successes of the Chinese economy. Having a solid sales base in China has been a very good thing for these companies in recent years — while sales have been stagnant in the rest of the world, Chinese consumers, especially the higher-income groups, have been spending like there’s no tomorrow.
But the country’s economic slowdown will be reflected in those companies’ performances — Deutsche Bank’s analysts note that a 5% devaluation of the yuan would hit their profits by 4% on average.
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