Burberry has become the latest upmarket brand to report struggling sales in China, raising further concerns about the future of what is arguably the world’s most important luxury market.
The fashion house said strict Covid lockdowns in China triggered a 35 per cent slump in sales in that country during the 13 weeks to the beginning of July. Despite a strong recovery in Europe as US tourists returned to the continent, like-for-like sales across the group were up just 1% at £505 million on the same period a year earlier.
Excluding mainland China, comparable store sales grew by 16%. Strongest growth was in Europe, the Middle East, India, and Africa (EMEIA), with a 47% increase in spending surpassing pre-pandemic levels.
Burberry was joined yesterday by Richemont, the maker of Cartier jewellery, in reporting woes in China. In Scotland, whisky companies such as Chivas Brothers owner Pernod Ricard and the Artisanal Spirits Company have in recent months have warned that China’s zero-Covid stance is impacting business.
Burberry said it continues to expect high single digit revenue growth and profit margins in the region of 20% in the medium-term, but warned that “the current macro-economic environment creates some near-term uncertainty”. Sophie Lund-Yates, equity analyst with Hargreaves Lansdown, said the first-quarter trading update was a “sore” disappointment.
READ MORE: Scotch whisky giant warns of ‘softer’ sales as Covid hits China
“Mainland China is acting as a serious drag for the group, which is overshadowing successes elsewhere, including increased domestic spending in other markets, which is needed to offset lost tourism spending from Chinese visitors to Europe,” she said.
“The group’s medium-term ambitions for revenue growth are admirable, but exactly how this will be achieved is the big question for newly minted CEO, ex-Gianni Versace leader Jonathan Akeroyd. The heavy lifting for Burberry’s strategic pivot is largely over, and the question now turns to one of delivery.”
Burberry said the situation in China – which accounts for two-fifths of its global sales – started to improve in June as stores began to re-open. However, Covid cases are on the rise again in the country, bringing the threat of fresh lockdowns.
China narrowly missed contraction in the second quarter of this year as its zero-Covid policy battered the economy. This has also severely restricted numbers of Chinese tourists travelling abroad.
Sales to Asian tourists, especially Chinese, remained weak in Europe with the majority of spending generated by locals. Burberry said trade in its home market of the UK was not as strong as in mainland Europe after tax-free shopping for non-EU visitors was axed in 2020 as part of Brexit.
The company said it is “actively managing” the impact of soaring inflation, which in the UK has hit a 40-year high of 9.1% and is heading higher.
READ MORE: Shares dip as worries mount in Eastern Europe
“While the current macro-economic environment creates some near-term uncertainty, we are confident we can build on our platform for growth,” Mr Akeroyd said.
With most of its sales made overseas, Burberry now expects the stronger dollar to add £190m to sales this year, up from a previous estimate of £159m. It is forecasting a profit of £90m for the current year.
Sales of leather goods, led by its Lola handbag range, grew by 21% outside mainland China, while outerwear, driven by rainwear and jackets, grew by 19%.
Burberry said it is continuing to invest in initiatives including a fresh campaign for the Lola range featuring models such as Bella Hadid. The company is also creating a virtual collection on the online gaming platform Roblox.
Other investments include a seasonal campaign for its TB Summer Monogram collection featuring Gisele Bündchen, and the signing of South footballer Son Heung-min, who plays for Tottenham Hotspur, as a brand ambassador. The announcement of the signing on Instagram fuelled record engagement for Burberry, up some 21% on the company’s previously most popular post.
Shares in Burberry, which have lost about a quarter of their value during the past year, closed yesterday’s trading 62p lower at 1,586.5p.
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