Chinese Choosing Prada Over Louvre Boost Luxury Shares

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By Bloomberg News - Jan 17, 2013 5:00 PM ET
Move aside Mona Lisa. More Chinesevisitors are headed to Paris and they are picking luxury storessuch as Galeries Lafayette over visits to the Louvre.
Europe will be among the top destinations for the 94million mainland Chinese who are expected to travel abroad by2015, according to McKinsey & Co. Their tour-group itinerariesare showing day-long trips to luxury outlets -- squeezing shortvisits to the Eiffel Tower and Louvre museum in between.

Pedestrians browse window displays at the Prada store, operated by Prada SpA, in Paris, France. Photographer: Balint Porneczi/Bloomberg

By turning their holidays into lengthy shopping excursions,the Chinese are propping up European sales and aiding theoutlook for brands from Prada SpA (1913) to PPR SA (PP)’s Gucci, even as theeuro area faces a second year of economic contraction. Close toa third of Chinese luxury buyers will shop in Europe in 2013,McKinsey estimates, up from a fifth last year.

“Consumption is happening more and more outside thanwithin China,” said Erwan Rambourg, HSBC Holdings Plc’s head ofconsumer and retail research in Hong Kong. “It’s cooler to sayyou bought a Vuitton handbag in Paris than in China.”

At Harrods department store in London’s upscaleKnightsbridge district last summer a sign welcoming Chinesevisitors was prominently displayed at the entrance, and someemployees milled about wearing badges that asked “Can I helpyou?” in Chinese. London-based Burberry Group (BRBY) Plc has doubledthe number of Mandarin-speaking staff in Europe in the past 12months, Chief Financial Officer Stacey Cartwright said Jan. 15.

‘Love Story’

“We have a love story between us and the Chinese,” saidDesiree Bollier, chief executive officer of Value Retail, whichhas nine Chic Outlet “shopping village” outlets in Europeselling brands from Dolce & Gabbana to Jimmy Choo.

That’s hardly surprising when Chinese visitors to Europe,Hong Kong or Singapore spent 11,000 euros ($14,700) on shoppingper trip, according to a survey published last year by GlobalBlue, the world’s biggest operator of tax-refund points fortourists. Chinese buyers now account for 25 percent of globalluxury spending, from 10 percent three years ago, according to aSeptember HSBC Global Research report.

Value Retail opened its center in Madrid two hours early tocater to a group of 1,500 Chinese tourists, and added fasterchoices such as pasta and salads in its restaurants afternoticing that mainland visitors don’t want meals eating upshopping time. Now, the company is decorating for next month’sLunar New Year holiday.

Helping drive the overseas purchases are China’s importtaxes on luxury items and added rebates on European taxesavailable to non-residents. The cost of 20 luxury items inChina, including bags and watches, was 72 percent higher than inFrance and 45 percent higher than in Hong Kong, according to a2011 survey by the Ministry of Commerce.

Grand Tour

Chinese from richer cities are also picking Europe and theU.S. over nearby Hong Kong as they seek out new experiences,according to UBS Securities.

“If you travel to Hong Kong three times a year and you’vedone that for the past three years, you probably feel your nexttrip should be somewhere else,” said UBS analyst Spencer Leung.
Less affluent shoppers, who prefer smaller items such asbelts and small handbags, are filling Hong Kong’s void, he said.Almost three million Chinese visitors a month arrived in thecity of seven million people, government data show.

Madding Crowd

“There are too many tourists shopping in Hong Kong thesedays,” said Summer Xia, a 35-year-old finance executive fromZhejiang province on China’s eastern coast who travels at leastonce a year to Europe or the U.S. to shop. “I can save up to 40percent on some luxury items.”

Xia said she spends as much as 300,000 yuan ($48,200) atrip, and past purchases have included Harry Winston diamondjewelry and an 80,000 yuan red Hermes Birkin bag.

Chinese visitors like her will contribute about a third ofluxury sales in Western Europe this year, Credit Suisse (CSGN) Group AGforecasts. That is helping to insulate the industry from asecond year of economic contraction in the Euro area, forecastby the World Bank at 0.1 percent.

Milan-based Prada’s sales rose more than 40 percent inEurope in the first nine months of last year, double the pace ofthe company’s Far East and Greater China regions. Louis Vuittonsales rose 9 percent in Europe between January and September,outstripping Asia’s 5 percent.

Prada’s Hong Kong-listed shares surged 53 percent in thepast six months. In Paris, LVMH Moet Hennessy Louis Vuitton (MC) SAgained 20 percent; PPR jumped 43 percent.

Chinese tourists’ shift toward Europe, which started earlylast year, is “quite an established trend at the moment,”Prada CEO Donatello Galli said on a Dec. 6 earnings call.

Pricing Power

Success for the luxury industry in Europe does create itsown problems, not least of which is the prospect of stores inChina becoming “empty showrooms,” HSBC’s Rambourg said.

To narrow the gap with China, Louis Vuitton raised prices 8percent on Oct. 1 in Europe. Put them up too much and brandsrisk alienating local shoppers, Rambourg said.

“You don’t want to appear to be a brand that only sells toChinese or only to Brazilians or Indonesians in 15 years time,”he said. “The idea is to be global and present some interest toall different nationalities. That’s where you get your pricingpower.”
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-Liza Lin. With assistance from Alfred Cang in Shanghai andAndrew Roberts in Paris. Editors: Anjali Cordeiro, Ben Richardson