The capitals of Europe were long destinations for foreign tourists, most notably Chinese and Arabic visitors, to fill their shiny Rimowa suitcases to bursting with luxury goods. Buying a new Hermès bag on the Rue du Faubourg Saint-Honoré or a bespoke suit on Savile Row felt more authentic and could seduce many an international visitor to spend, spend, spend.
Left - Interior of LVMH duty-free travel division DFS's T Fondaco dei Tedeschi in Venice
David M Watts, Fashion Industry Advisor, says, “Given they (LVMH) have deep pockets it will be possible for them to refocus on local markets in Europe but not without its challenges given the continued state of lockdown all across the world.
Right - Artist's impression of the new, yet to open La Samaritaine in Paris
Despite the unprecedented turbulence in the world’s retail markets the luxury conglomerates reported strong bounce back results this month. Both LVMH and Kering, two of the world’s largest luxury goods groups, reported extremely strong sales in the third quarter of 2020.
Left - Dior AW20 - Many luxury brands no longer have limits on how much people can buy
Considering many people aren’t even leaving the house, letting alone travelling, it was surprising to see that LVMH saw sales at its fashion and leather goods division rise 12 per cent to €5.9 billion. This was much higher than market expectations and saw standout performances from the Louis Vuitton and Dior houses. The LVMH results said Christian Dior “showed remarkable momentum.” while Louis Vuitton “continued to display exceptional momentum and creativity”.
Kering too reported better than expected results. Revenue in the third quarter totalled €3.72 billion, a fall of 4.3 per cent, but representing only a decline of 1.2 per cent in comparable terms. This represented a sharp rebound after second-quarter comparable sales had plunged by 43.7 per cent.
Kering’s main cash cow, Gucci, saw revenues rise sharply in the third quarter, compared with Q2, with revenue only down 12.1 per cent, whilst retail sales were down 4 per cent on a comparable basis. Gucci reported a 43.7 per cent rise in North America and a 10.6 per cent growth in Asia-Pacific. LVMH too saw strong spending and growth in Asia and the US.
What could be behind this huge recovery surge?
Luxury companies always had a good ‘problem' in the Chinese phenomenon of ‘Daigou’. Daigou or 'Surrogate Shopping' is a term used to describe the cross-border exporting in which an individual or a syndicated group of exporters outside China purchases commodities for customers in China. Often these are luxury goods from big-name designer houses. The main reason Diagou exists is because of the price differential in the Chinese market and buying abroad is often far cheaper even after the middle men take their cut. There is a huge amount of money to be made because of the volumes and value of the goods.
Many luxury companies tried to limit the amounts sold to Diagou so as to preserve their exclusivity and not flood the market. Rarity and scarcity naturally make things more desirable. But, it appears that some of the biggest fashion houses have opened the floodgates to these buyers and organisations, no longer limiting the amounts they can purchase. Having buyers queuing up and wanting to buy as much as you can give them looks like a temptation few brands could resist as they saw their sales fall off a cliff due to COVID 19.
At the end of 2018 it was announced that Kering was ending its joint venture with Yoox Net-a-Porter and taking charge of the e-commerce for its brands including Alexander McQueen, Saint Laurent, Balenciaga and Bottega Veneta. The partnership was slated for renewal in 2020, by which time Kering’s digital operation, which looked after Gucci separately, would have, hopefully, matured to an advanced level.
While many of the world’s busiest luxury streets have been quiet since the beginning of 2020, Kering has been using its stores to process online orders rather than its warehouse in Bologna, as it had done previously.
Right - Diagou sending Dior gifts to China?
These ‘distance sales’ are up 25 to 30 per cent throughout the group and, according to an unnamed source, they are now letting the Korean and Chinese Diagou traders buy everything they want.
“The fact that the traders are now allowed to get what they want definitely helps those brands. Even at Dior, they can buy without restrictions now.” they say.
“Some companies do it everywhere. Particularly Louis Vuitton. And Dior. For the Kering Group, before the confinement, they had vague procedures that were changing depending on what items were selling. For example, for whatever reasons, some stores were selling huge amounts of the same item (usually cheaper leather goods with a logo, like pouches). When that happened, some accounts were flagged by the directors. There is a system at Kering called ‘Luce’ where you can see who bought a particular item. Every time, a trader would come, the sales assistant had to check their purchase history.
"At one point, they also checked that the credit card they use matched their profile name. (Companies would send different people who would all use the same company card. That was flagged during audits). After the confinement, every company has relaxed the procedures. I know some traders and they told me that for instance, at Gucci or Moncler, there are no limits on items purchased.
“Even Dior doesn’t do limits of items anymore. Although I hear that Louis Vuitton and Goyard still check accounts. At Saint Laurent, there is a limit of 3 of the same item per transaction. (But they can come every day and buy 3 items - they couldn’t do that before). I understand it is happening everywhere. Also, brands like Dior have resumed doing export sales. But Saint Laurent still refuse export sales unless the client has a good reason (if there is no store in their country that carries what they want to buy). It used to be a huge market for the brands until about 2 years ago when they decided to stop it all ‘to protect the markets in Asia and the Middle East’ mostly.”
Export sales are by a foreign buyer asking for it to be shipped to their territory from a store overseas. The Korean and Chinese traders often buy closer to home in other Asian markets. The Koreans are now the biggest traders selling into China.
“When they used to call stores and ask for an export sale, they would be able to have the VAT off and the European price.” says the source.
Many Daigou are or work with sales staff, using their staff discount as an extra price differential. But, it is not really possible anymore at some brands, like YSL, because they've put a limit on staff purchases. However, the limits are not imposed throughout the Kering group and Gucci doesn’t have limits. I regularly see or hear of people buying the same products. The directors have started to flag it.” says the source.
“One would think the procedures would be the same throughout the group, but it varies drastically and depends on the CEO/ Director’s decision. There are so many odd decisions though. For instance, I heard that Gucci had cancelled the VIP discounts ... which doesn’t make a lot of sense.
There are limits in the stores but not online for Kering.... which is beyond stupid. Again, something that doesn’t make sense.
“At Kering, there is a separate online system called 'Sellsy' which is like ordering online, but through the store stock. The directors can check the accounts and stop some people from buying (if they suspect that it is for resale), but the traders can call the stores (if they cannot find items in the website) and use a different name. The credit card used cannot be checked by the stores.” says the source.
Left - Saint Laurent AW20
“Although they are starting to check the accounts again. I heard that one Korean trader got flagged and is not allowed to buy anymore. But I am sure he still does.... using various names. Some clients have more than a dozen profiles.... with same email but variations of their name. Quite surreal.” the source says.
Speaking to a Diagou reseller in China, via WeChat, they say they have direct cooperation with many of the brands, but nothing is ever ‘official’. Louis Vuitton is the best seller, followed by Dior, then Gucci. They say that COVID 19 has forced the luxury goods companies into this loose cooperation.
As for the end consumer, “Most of the clients don’t know anything about luxury. They just want to show off”. says the owner of the Diagou store on WeChat. “They don’t even have passports.”
Asked which products were most in demand at the moment and from which brands. “Every season is different. Which one is best depends how we promote.” they say.
Diagou buy and then export the goods themselves with their commission priced in. It will be interesting how the UK Tax Free shopping changes - Read more here - alters things for Daigou buying in the UK. But, then, the vast majority of reselling sales are made in more localised markets to China, hence the huge uplift in Asia.
What it does signify is the continued huge demand for named luxury goods. Which is a good sign for the industry overall.
Daigou has always been a game of cat and mouse for the brands. In one respect, this great demand is flattering for any brand, but they also want to be extremely protective of their image and how their goods are sold. COVID 19 was a massive jolt for any business and it’s understandable why many brands panicked and became more relaxed about knowingly selling to Daigou for resale into China. It could explain some of the huge bounce back in Q3 sales.
COVID created a vacuum and distorted the balance between buyer and seller. The luxury brands have turned the taps on for the Daigou market. Just don’t expect them to be on for too long.
Buy TheChicGeek's latest book FashionWankers - HERE
Something occurred to me the other day with regards to the watch business. Much like the oil industry which continues to pump out millions of barrels of oil, despite the price falling, in order to fend off or weaken the burgeoning fracking industry, (it’s a lost cause, btw, but what other options are there?) the watch industry is doing much the same thing: pumping out large volumes of product at all different price levels trying to keep themselves desirable and relevant.
Left - Are luxury watches sinking for good?
The smartwatch was a catalyst, and while it hasn’t really dented the traditional watch market, it was already under threat from people using their phones to tell the time and the slightly old-fashioned, pompous and alienating approach many Swiss brands/makers have.
Global Blue’s latest data for the third quarter of 2016 show global spending on watches is down -32%. The UK aside, which is experiencing a blip due to the weakness of the pound, Global Blue’s latest year-to-date data shows that the W&J (Watches & Jewellery) category has been hardest hit by the global luxury spending slowdown.
The reasons they give are: Chinese are buying fewer watches due to the conspicuous consumption crackdown, higher import duties are a major deterrent, as is the dual effect of less attractive product and lack of price differentials. Plus the landscape is dramatically different now that global shoppers are deterred from visiting Europe due to the persistent perception of reduced safety and threat of terrorism.
Like all industries that experience rapid growth it will inevitably lose momentum and stall. They are trying to offer something special, but in volume, which is an oxymoron. They are also not very transparent at helping consumers know what they are buying and paying big bucks for.
They’ve opened huge flagships to showcase their brands in insulation, so as not to be contaminated by any others, but it’s not sustainable. Recently, Mike France, co-founder of internet watch retailer Christopher Ward, said, when talking about mono-brand watch stores, the “Regent Street model cannot be economically viable”. He said: “Ultimately they will die. Some of them will remain, but most of them will die. At the moment stores are flags for the brands; most of them lose a fortune.”
The volumes the industry are churning out are unsustainable too and has taken the 'luxury' halo off the industry. They are in a damned if they do and damned if they don’t situation.
Lots of consumers are turned off by the prices and are turning towards the ‘pre owned watches’ or 'second hand watches' market for something different or if they still want a status symbol-type brand at a price that they can afford and justify.
I’ve also heard branded/licensed watches in the mid-market are struggling and many brands and fashion companies which don’t specialise in this area are leaving the category all together.
Luxury watches are at a crossroads. Will we look back in a few years and find it funny that people used to wear lumps of mechanical metal on their wrists? Only time will tell.