Business of Fashion: “Top 10 Risks for the Luxury Industry“
February 25 2015
Business of Fashion consulted Luca Solca, Head of Luxury Goods at Exane BNP Paribas, to examine the top ten risks that currently affect the luxury industry. Solca points out that the atmosphere of economic and geopolitical uncertainty combined with currency fluctuations, pockets of social strife, as well as a slowing China might cause several important challenges for luxury companies.
The first risk mentioned by Solca identifies the downturn in sales due to the store saturation in China. This would result ‘’in operating deleverage and margin compression, typically leading to price-to-earnings multiple compression’’. Another risk is represented by the slowdown of the income inequality, which will lower the luxury spending, as luxury consumption is used as a public signal of rising private wealth. The third risk is embodied by the austerity climate that rules over the Eurozone and the declining of property prices in China. Overall, the personal luxury goods consumption in China is slowing down and this represents a major risk for luxury businesses. The shifting of tax rates, the currency fluctuations, as well as the fear of traveling (due to health issues and threats of terrorist attacks), are all major drains for the luxury goods market. Furthermore, the potential closure of Hong Kong’s luxury hub to Chinese tourists, following the resurgence of last year’s protests, would be very painful for the industry. Other leading risk factors are identified by Solca in the brands overexposure and hefty acquisition premiums.