China border crackdown on luxury items spook big brand investors

Paris

CHINESE border guards searching travellers' suitcases for undeclared Louis Vuitton bags, Gucci loafers and Tiffany necklaces are giving luxury-goods makers their biggest scare in years.

Shares of some of the biggest brands, from Prada SpA to Shiseido Co, tumbled across the globe on signs that Chinese officials are cracking down on travellers returning from places like Paris, London and Tokyo loaded with high-end merchandise.

The stricter scrutiny is adding to fears of a slowdown in spending by China's consumers, who account for two-thirds of the luxury market's growth. Luxury investors were already skittish, as the effects of the US-China trade war threaten a three-year spending boom.

"Spending on luxury goods by travelling Chinese shoppers in overseas markets could slide on concerns of increased scrutiny by customs authorities," said Bloomberg Intelligence analyst Catherine Lim on Thursday. "This may hurt sales in countries of origin for branded goods in popular categories such as cosmetics and bags." Shares of Louis Vuitton owner LVMH fell 7.1 per cent, the most since 2009, on Wednesday and rivals including Gucci owner Kering SA, Tiffany & Co, Michael Kors Holdings Ltd and Coach owner Tapestry Inc followed suit.

The sell-off spread to Asia on Thursday. Prada slumped as much as 11 per cent in Hong Kong, the biggest drop in more than a year. Japan's Shiseido fell more than 8 per cent for its largest decline since February. In South Korea, LG Household & Health Care and Amorepacific Corp fell more than 7 per cent.

Terry Hong, an analyst at Guotai Junan Securities, played down the significance of the border crackdown, noting that such actions have been happening over the past two years. The broader global market sell-off and concerns over China's slowing economy are also impacting the sector. The tariff spat with the US is dragging on China's growth, with factory activity in retreat and the yuan sliding.

"The luxury brand shares are usually hit the most amid the depressed sentiment over the slowdown in Chinese consumption," he said. "Investors are likely overreacting on negative news when the market is weak."

LVMH on Wednesday confirmed speculation - which surfaced on social media last week - that Chinese officials are cracking down on travellers returning with luxury goods. Some of those items are sold at a profit when shoppers return home, undercutting the luxury companies' own, higher-priced stores in Beijing or Shanghai.

Chinese tourists flock to destinations including Seoul and Tokyo to stock up on cosmetics and handbags, especially at airport duty-free shops. An easing of political tensions between Seoul and Beijing over the past year has helped draw more Chinese tourists to South Korea. Increased purchases by Chinese shoppers in Japan should account for more than half of Shiseido's sales of higher-profit luxury cosmetics, Bloomberg Intelligence's Ms Lim wrote in August.

Hong Kong-listed Prada, meanwhile, has been seeing growth as a turnaround push is bearing fruit, as it has belatedly joined in on the China-led luxury rebound.

"The brands that this hits the most are the most recognisable," said Simeon Siegel, an analyst at Instinet LLC. "It's the brands that are worth buying because of the logo." Other European brands, each with exposure to Chinese tourism, felt the impact of investors' concerns as well, because of their popularity among Asian shoppers. Kering - which owns numerous high-end labels including Gucci, Saint Laurent and Alexander McQueen - has expressed concern about foreign tourism in Western Europe, which it said hurt sales at Bottega Veneta last quarter. The stock fell 9.6 per cent on Wednesday.

Richemont - parent company of Cartier, Piaget and Van Cleef & Arpels - fell 4 per cent, while Burberry slid 8.1 per cent. It warned in July that tourist numbers in its domestic UK market were falling.

US flagship shops and outlet malls have long been magnets for international tourists looking to stockpile American brands and bring them back home. Chinese tourists still purchase many American fashion labels that are viewed as aspirational with a worldwide presence. The Tiffany flagship in New York, for example, is visited by millions of tourists each year and accounts for as much as 10 per cent of the company's annual global sales. News of the crackdown drove its shares down as much as 10 per cent.

Tapestry fell as much as 8.5 per cent on Wednesday. Last year, Tapestry executives expressed concern about Chinese tourist traffic prior to the holiday shopping season. Michael Kors fell as much as 7.3 per cent. Kors, which is renaming itself Capri Holdings as it acquires Gianni Versace SpA, plans to grow its new business into a US$2 billion brand by courting Asian consumers, including China's middle class. BLOOMBERG