Julienna Law
May 18, 2022

As Q1 results disappoint, should brands look beyond China?

Brands such as Starbucks, Tesla and Tod's are just a few brands that reported sluggish Q1 numbers. And it's going to take a whole lot more than coupons to stoke consumer spending.

As Q1 results disappoint, should brands look beyond China?

Tapestry, Tod’s, and Tesla: these are just a few names in the long list of brands that reported less-than-stellar results in the first quarter.

While China was the saving grace for global companies when the rest of the world was shuttered, roles have been reversed. With the government relentlessly sticking to its zero-Covid policy, Shanghai has remained in lockdown for almost two months, trapping residents indoors and leaving retail outlets deserted. In fact, the financial hub moved to impose its tightest restrictions yet last weekend, barring commercial food deliveries and forcing those who live near positive cases to move into quarantine facilities.

Naturally, brands with wider exposure to the market were dealt bigger blows. Roger Vivier, for example, was the only label in the Tod’s Group portfolio to report single-digit growth rather than double-digit growth due to its larger footprint in China (22 stores in the mainland, four of which are in Shanghai). The owner of Tod’s and Hogan also reported that 30% of the company’s stores remain shut while goods are stuck at its distribution center in Shanghai, making it impossible to fulfill e-commerce orders. 

Luxury fashion wasn’t the only category impacted. Tesla, which saw its Gigafactory in Shanghai closed for weeks, was the automaker that suffered most in the world’s largest EV market, with sales in April plunging 98% from March. Although CEO Elon Musk downplayed concerns about the lockdowns, the company has cut its daily factory output to fewer than 200 cars because supplies of some key components had been suspended. 

Even F&B was not spared from sluggish spending: Starbucks suspended guidance after reporting same-store sales in China fell by 23% in the quarter — a stark divergence from the 0.2% increase analysts expected. “Conditions in China are such that we have virtually no ability to predict our performance in China in the back half of the year,” said interim CEO Howard Schultz on an earnings call. 

However, many brands were able to offset these losses thanks to the strength in North America and Europe. Aeffe, the parent company of Mochino, nearly tripled its net income in the three month period, as Europe (which represents almost one-third of its total revenue) jumped 37.5% thanks to Germany and the UK. Tapestry shares even climbed on May 12 after it posted that sales in North America rose 22% year-on-year, fully offsetting mid-teens decline in China.

These two regions will be crucial as China slowly recovers from its worst Covid wave since 2020. Although the mainland is on track to become the world’s largest luxury market by 2025, the US is still in top spot, accounting for 31% of the global market (China accounts for 21%). As such, it is important for brands to continue building traction in North America and Europe to cushion against near-term losses in Asia.

Given that about 375 million people in 45 Chinese cities were in some sort of lockdown in April, regional sales will likely continue to struggle in the second quarter. Beijing imposing stricter measures to curb the virus, although denying rumors of a Shanghai-scale lockdown, also makes it unlikely that the zero-Covid policies will lift soon, particularly as the capital gears up to host the party congress in November. 

Even when Shanghai inevitably does lift its lockdown, it may take a lot more than coupons to stoke consumer spending. Luxury should brace for a bumpy ride.

Source:
  

Related Articles

Just Published

2 hours ago

Tech MVP 2022: Felix Chang, Digitas

MOST VALUABLE PROFESSIONAL: A perfect mix of pioneer, educator and problem-solver, the Digitas Taiwan GM and his technology solutions have raised the games of the stakeholders he works with.

4 hours ago

Andy Ho promoted to Publicis China's first chief ...

The former global client partner will have a wide mandate, including managing the recently acquired Wiredcraft team.

4 hours ago

Mindshare Australia to launch inclusion private ...

A selection of digital partners chosen to support communities that are often underrepresented in Australian media populate this marketplace.

13 hours ago

Will you listen to stock market advice from a rapper?

That's what Anand Rathi, a financial services firm in India hopes with this quirky campaign, starring its own leaders.