The Russia-Ukraine war has had a limited direct effect on luxury-goods makers with light asset-impairment write downs and little lost revenue, according to a new report from Bloomberg Intelligence (BI). Even so, minimal Russia stores exposure, China’s Zero-Covid policy and subdued travel retail pressured 2022 sales, costs and supply chains. Luxury’s No. 2 market, China, is a brightening 2023 prospect.
Deborah Aitken, BI Senior Industry Analyst (Consumer Products) and Andrea Ferdinando Leggeri, BI Senior Associate Analyst (Consumer Products) added: “Luxury goods sold in Russia were limited to less than 1-3% of company sales, though there are wider ranging effects of the sanctions in response to the war on Ukraine.
”The delay to travel recovery was felt in 2022, while inflationary-linked cost rises passed on to consumers, raised interest rates and currency-volatility risks means purchasing is becoming squeezed at the entry-level for aspirational brands. Some entry-point brands have begun to struggle in the US, while higher-placed luxury pyramid brands are less price elastic.” The rebound of luxury-goods revenue in Western Europe is still boosted by euro weakness, with Americans spending in Europe to get “bargain” buys.
Luxury Goods Face Soft, Short Year-Ago Comparisons
Luxury-goods sector Russia exposure was only at a stores level and quickly manageable. The biggest luxury brands had a flagship-store presence via Moscow, though brand availability was more so via wholesale partners or online. Employee headcount was thus limited and exits swift, mostly by March 2022. Beyond the first six weeks of 2022 trading comparisons normalize for 2023 vs. an average 2% year-prior organic-sales-growth drag, while intangible asset write-offs are limited and are mostly booked into 2022.
Russia ranked 12th for personal-luxury-goods sales in 2021, while China was the No. 2 market at $58 billion, based on Euromonitor data. With China’s prompt reopening after Zero-Covid measures were lifted in early January, the luxury-goods recovery has accelerated, more than compensating for lost Russia revenue.
Luxury-Sales Russia Exposure, Exit Costs Limited
Major luxury-goods makers’ Russia share was limited to 1-3% of revenue, while global purchases by Russians averaged 5%. LVMH (16% share of Russia’s luxury market, less than 2% of sales) and Kering (8% share) were the most exposed, yet group sales weight was limited. Richemont (1% of revenue) was also below average, with half of its portfolio made up of ultra-high-end jewellery brands like Cartier.
Hermes’ presence was nominal, given the premium price of its leather goods and few stores. Some premium-entry fashion brands were slightly more vulnerable, with e-marketplace Farfetch (which carried a wider array of luxury brands and 7% GMV exposure) closed in Russia in mid-2022. High-end luxury goods are mostly manufactured in western Europe. LVMH’s Sephora sold its Russia operation to local general managers in October.
LVMH, Luxury Goods Defy Closures, Double Scale vs. 2015
China’s reopening after its ending of Zero-Covid policy in January is a potential boon for luxury-goods makers, which may be able to beat the consensus median revenue growth target of 9% and EPS 12% in 2023 as the reopening speeds up. LVMH is representative of the formidable market recovery since Covid-19 spread globally early in 2020, and vs. the gradual reopening in 2021 and 2022.
A year on, Russia’s invasion of Ukraine proved to have much less of an effect on luxury goods sales vs. sentiment. China’s reopening may repair most of the 25% of demand that’s still missing, we believe, from the luxury-goods market, both locally and internationally, as spending and travel have further to rebuild. LVMH is 47% of the MSCI Europe Textiles, Apparel & Luxury Goods Index, with Richemont at 16%, Hermes at 12% and Kering at 9%.
Louis Vuitton new store in Milan
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