2021 OCTOBER
MARKET INTELLIGENCE PART 1
Short Read
Written by : Andrew Sia
Contents:
Restructuring of Neiman Marcus
China’s Stance on Xinjiang Allegation
The Opening of La Samaritaine
LVMH is Back on Track With Strong Demand in China and US
Performance of Chinese Sports Brands in China
Retail Sales in July Dropped 1.1%
Challenges of Luxury Brands in China
Sales Spring Back for Macy’s, Kohl’s and Tapestry
Toys ‘R’ Us inside Macy’s
Amazon Plans to Open Stores
New Market Platform for Luxury Goods in China
Retail Rejuvenation
Spinoff of Victoria’s Secret
Fashion House Ermenegildo Zegna Going for Public
Nordstrom Starts a Partnership with Asos
The Challenge of Supply Chain Squeeze for the Small Businesses
How Do We Read China’s Latest Crackdown on Wealth Inequality
Restructuring of Neiman Marcus – WSJ, June 16, 2021
Nieman Marcus is known for its luxury goods and its core customers are returning to the stores and resulted the rebound of its sales from last year when Covid-19 closed its stores and pushed the chain into bankruptcy protection.
In last September Nieman Marcus emerged from bankruptcy protection with two successive leveraged buyouts and as a result wiped out $4 billion in debt.
The interest payments on its debt now totaled about $80 million a year, down from $327 million in fiscal 2019.
As of April the group has a debt of $1.1 billion, down from $5.1 billion a year ago. It has $850 million in cash and under its revolving credit facility, and this was up from $132 million a year ago.
It has not to report its financial results to the public. Its new owners, including some of its biggest creditors, Pacific Investment Management Company, Davidson Kempner Capital Management and Sixth Street Partners LLC.
It submitted its sales figures for February to April period showed an increase of 43.8% compared with the year-earlier period. And compared with a year ago, sales were down 6.6%. E-commerce sales represented about 35% of revenue, up 1.6% from 2019.
The company generated $116.2 million in earnings before interest, taxes, depreciation and amortization for the third quarter, compared with a loss of $49 million a year ago.
Nieman Marcus’ inventory down 31% compared with a year ago, and this leaner inventory helps to sell at full price.
China’s Stance on Xinjiang Allegation – WSJ June 21, 2021
While the western brands were busy withdrawing their statements over Xinjiang, although it was the right thing to show concerns over the cotton and the forced labor. After what they have seen from what happened to H&M, all the others have erased their statements and replaced with something milder.
These western brands have faced the pressure from doing business in China as the country has become one of the biggest and fastest fashion growing market in the world. The China government together with many of its shoppers have become very sensitive for any criticism and the spirit of nationalism in China is becoming all-time high.
Many fashion brands have made environmental and human-rights in their image building in recent years. This is in response to demands by activists, governments and customers from their home countries. Young customers are more interest to buy fashion that reflect the mission and purpose behind the brands.
This time the conflict over the Xinjiang cotton, which represents 20% of the world’s cotton, has caught the brands being crushed in between.
Chinese officials called the allegations as lies, the nationalist internet users targeted brands and quickly turned into a boycott. H&M, as we know, became the biggest victim and have their brand erased from e-commerce sites and landlords have 20 of their physical stores closed out of its total of 500 stores.
As a result, H&M removed all their references made on Xinjiang.
It will be interesting to see the development of this allegation from the international level while most of the fashion brands have try to stay away. We cannot deny that the power of the geopolitical is something that we cannot be neglecting.
The Opening of La Samaritaine – FT, June 24, 2021
In the fairyland of luxury, Bernard Arnaut, the tycoon who controls the world’s biggest luxury goods company—LVMH, partnered with DFS, spent 15 years and €750 million to renovate La Samaritaine, a grand department store in Paris, set back by the pandemic for its grand opening last spring.
This waiting came to an end, as on June 23, this Art Nouveau and Art Deco grand department store opened its door. Bernard Arnaut has forecasted that the revenue of 2021 will exceed 2019’s. Not only that, Forbes estimates that the growing fortune of Arnaut and his family has grown 80% to $194 billion since the beginning of 2020. Also, in a few days in May, Arnaut dethroned Amazon’s Jeff Bezos as the world’s richest person in the world.
LVMH had added more equity value to its shares than any other companies in Europe, about $175 billion. Investors value the company at a price equivalent to 39 times its forecast earnings, which is almost double of its ration five years ago. It is higher than any tech highfliers, such as—Apple at 25 times, Alphabet at 28 times, Microsoft at 32 times.
Remember that luxury brands are absolutely no essential goods, and this trend has underpinned the sector’s growth. Bain & Company, an American management and consulting company reported a 6% compound annual growth rate from 1996 to 2019. And this has not changed even during the pandemic period.
The biggest market for luxury is China, accounted for two-thirds of growth, and use the luxury brands to apply for their status. During this time because foreign traveling is off limit for now, they are buying from home instead.
Luxury brand is a marketing strategy itself, it is a dream, an idea, a status symbol and a therapy itself. The use of social media with the selfie and the selling in the internet helps the marketing.
With La Samaritaine Arnaut is putting all the luxury brands under the same roof and even in the internet. You can visit them at the link as the following.
LVMH is Back on Track With Strong Demand in China and US – FT, July 27, 2021
It its second quarter, LVMH is back on track to exceed its pre-pandemic sales this time. Revenue in the second quarter was €14.7 billion, higher than the same period in 2019. This was ahead of the analyst forecasts for €14.2 billion.
It continued to say that its Louis Vuitton handbags and Moët Chandon champagne are doing very well. It has reported that both the US and China is doing exceptionally well.
But the international traveling is still not picking up and China, the big spenders, has not been traveling already since the beginning of 2020. What they are doing now is to spend at home in China and online.
Performance of Chinese Sports Brands in China – WSJ, August 18, 2021
Two of the market leaders, Li Ning and Ante, are doing very well recently. As part of the five-year mass fitness program announced this month, the government said that it would build more fitness facilities and encourage people to exercise. It aims to grow the sports industry to a 5 trillion yuan, equivalent to $772 billion by 2025. This would be a growth of 70% from 2019 level.
Shares of Li Ning gained 983% since the end of 2018, and shares of Ante have grown more than four times over the same period.
Both companies have improved their design and quality and their operating margin improved as the result. Also the marketing to China’s younger generation using social media channels like Douyin, the Chinese version of TikTok, to interact with customers is more effective. In this case, both the products and marketing have featured more Chinese cultural elements.
Retail Sales in July Dropped 1.1% – WSJ, August 18, 2021
Spending at US retailers fell by 1.1% in July due to the rise of the Delta variant. This excluded autos, a category where the supply issues have affected the sales by 0.4%. Also clothing, sporting goods and furniture, where the sales are down.
Restaurants and bars are up by 1.7% over the month. But online retail sales fell 3.1%.
Challenges of Luxury Brands in China – WSJ, August 20, 2021
First if all, we have seen Xi Jinping clamping down on high incomes after his crackdown on big technology companies. He emphasizing on the need to regulate the high incomes and encourage them to return more to the society. We can see that Beijing are starting to rein in the super rich.
A selloff that started on Wednesday and lasted into Thursday has wiped €60 billion from the market value of Europe’s four luxury names—LVMH Moët Hennessy Louis Vuitton, Kering, Hermès and Richemont.
The calling for the wealth-redistribution is a potential bad news for the luxury brands especially in China where there is a very small group of the very wealthy individuals, only 10,000 of them, generates a quarter of all luxury sales in China. We have to know that the Chinese are the most important shoppers for the luxury goods.
The previous move in 2012, the Chinese government tackled gift giving, whereby civil servants were accepting Louis Vuitton handbags, Cartier watches and expensive cognac in return for favors. At that time all the luxury brands were having a tough time and their share prices crawled back slowly to their new height before Xi’s latest clampdown.
One would have to know what is trending now in Beijing, and lately there is a strong headwind.
Sales Spring Back for Macy’s, Kohl’s and Tapestry – WSJ, August 20, 2021
All three of them reported sales gains in July. Macy’s sales at stores jumped 62% in the three months to July 2021 compared with a year ago. Same-store sales also grew slightly compared with the same period in 2019. Net sales of $5.65 billion exceeded both 2020 and 2019.
Sales at Kohl’s and Tapestry, parent company of Coach, also returned to pre-pandemic levels. Their earnings also beat analyst expectations.
But all are hesitant to the surge of the Delta variant and delay plans to bring the full force into the stores.
Toys ‘R’ Us inside Macy’s – WSJ, August 20, 2021
Toys ‘R’ Us was founded in 1948 by Charles Lazarus, a WWII veteran who started a baby-furniture store in Washington D.C., to cater the postwar baby-boomers. In 1957 the first Toys ‘R’ Us store was opened. It was a supermarket concept where a wide assortments of toys that customers picked off shelves to fill into the shopping carts. A cartoon giraffe, Geoffrey, became the store mascot and appeared in TV and printed ads.
A heavy debt load and the rapid shift to online shopping led to the bankruptcy of Toys ‘R’ Us. It was until WHP Global Inc., a brand-management company who bailed it out earlier this year.
This time Toys ‘R’ Us will have its presence in Macy’s and it is also said that it will roll out shops in more than 400 Macy’s stores. Not only customers can buy the toys from the bricks and mortar, the partnership will also allow the products to be bought online with the Macy’s digital retail.
Toys ‘R’ Us is under the parent company known as True Kids Inc. and it generates more than $2 billion sales in global retail sales annually through 900 branded stores outside the US and e-commerce. It was earlier this year WHP Global Inc. bought the controlling stake.
The challenge now is the assuring of enough supply for this year’s holiday season in the middle of logjam at seaports around the world. This has disrupted the supply chain but also the rising cost of the materials and the freight cost. This is threatening the toy industry.
Amazon Plans to Open Stores – WSJ, August 20, 2021
Amazon.com plans to open several large physical retail outlets in the US that will operate like department stores. It is planned to sell clothing, household items, and electronics.
Some of the first Amazon department stores are expected to locate in Ohio and California and they will be around 30,000 square feet, unlike the typical department stores are all about 100,000 square feet each.
Amazon was founded in 1994 as an online bookseller. It opened its first physical store—a bookstore in 2015 in Seattle, It provides discounts to its Amazon Prime customers and creates a curated selection of books based on a ratings system.
Amazon operates today 20 bookstores throughout the country, as well as two dozen Amazon 4-star stores which are outlets selling gadgets from electronics to kitchen products.
It acquired Whole Foods Market, a grocery in 2017, with its technological innovations have been used in the grocery store. The Amazon Go convenient stores with its cashierless in Chicago, New York, San Francisco and Seattle. And the more conventional Amazon Fresh stores across several states.
Amazon started by taking down the bricks and mortar retailers by chipping away their market share. It pushed a lot of them out of the way that ended in bankruptcy.
Amazon is now the largest seller of clothing in the US and have overtook Walmart already.
Amazon is entering into the area that department stores have been struggling. A generation ago, department stores accounted for 10% of retail sales, excluding other retailers such as cars, gas and restaurants. But it is now only accounted for less than 1%. What happened was the department stores lost out to discounters, fast fashion retailers, and online stores. The trouble deepened last year during the pandemic when JC Penney, Neiman Marcus, Lord & Taylor filed for bankruptcy. Now JC Penney and Neiman Marcus emerged from court protection and Lord & Taylor only sells online.
This year Macy’s and Kohl’s reported strong sales and their shares jumped.
Amazon has their own brands for apparel, but they are approaching some US apparel brands and will stock them in their stores. Amazon sees apparel as an area where it can work very well with customers. It has also invested in its fashion apparel and may attempt some of the higher brands.
New Market Platform for Luxury Goods in China – New York Times, August 27, 2021
It is not exactly new and perhaps you can consider it as an additional market platform. You can buy a latest luxury fashion piece from the website of Baltini from Italy, Italist from the US or Cettire from Australia, who can offer you at a discount of 30%. It is known as the grey market who sells authentic luxury brands at a price between 15 to 35% less expensive than the shops.
It can make the price possible by taking advantage of the price and import duty across different regions to meet those demands from people who would like to pay less.
Perhaps the best-known example is the “diagous”, or better known as the buying agents who cater specially for the Chinese consumers for luxury items. The “diagous” typically are presence outside China in the most trendy cities, where every luxury item is cheaper than in China , they would take the orders and ship back or carry back to China by charging a fee.
This grey market is estimated to be worth up to 8% of the $257 billion luxury goods market value. The luxury brands like this kind of business which can help them to move their products out quicker rather than to wait inside the shops to see the sales take place.
But not all the authorized retailers would fall into this grey market as they are concerned that this may exploit their market as it is directly undercutting the brands. Some luxury brands openly refused to work with them and some would continue and keep it as an option to their business.
The further development of this market is yet to be seen.
Retail Rejuvenation
Retail sales in August were 1.1% lower than a month earlier. The Delta variant continued to cause the price spikes and supply-chain glitches and sales of some products, such as cars being the most obvious, have dropped.
Talk of a “retail apocalypse” had started in 2017 already, and the pandemic just acted as the catalyst. But this is not all too drastic for the bricks and mortar, as we have begun to see the retail goes for hybrid. Many have started their online and with this, the business starts to pick up. The retailers are starting to learn everything about the digital sales, such as the fulfilment of the orders by taking control of distribution, marketing through social media, online advertising and we have never seen retail business have picked up so many innovation and this is opening a new horizon for the industry.
Spinoff of Victoria’s Secret – WSJ, July 21, 2021
From August 3, Victoria’s Secret will be listed as a separate company while L. Brand will change its name to Bath & Body Works. This is a symbolic milestone for L. Brands and it will be a good way to show a fresh start for Victoria’s Secret.
It has been no secret that Bath & Body Works has been the star at L. Brands for quite some time already. And since when the spinoff of Victoria’s Secret has been announced, its sales began to pick up. We will continue to follow it in the coming months.
Fashion House Ermenegildo Zegna Going for Public – New York Times, July 20, 2021
Zegna, the Italian luxury group is merging with a special-purpose acquisition company in a deal that valued the company at $3.2 billion. It is the trend for companies to merge with the SPEC and get public listed.
Zegna is known for its top-quality men’s wear fabrics and suits. It runs 300 stores with 6,000 employees in 80 countries and it is expecting its sales this year to come close to pre-pandemic levels.
The company was doing $1.5 billion in 2019 and $1.15 billion last year. It is expected to recover its revenue to the level of 2019 this time.
Who is saying that business suits are out of fashion now? We were told that half of Zegna’s revenue is coming from the Greater China region.
Nordstrom Starts a Partnership with ASOS – New York Times, July 12, 2021
Nordstrom is acquiring a minority stake in the Asos Group that owns Topshop, Topman, Miss Selfridge and HIIT. Nordstrom will bring Asos into its department stores and Nordstrom Rack stores. This deal is bringing Asos into the North America and to help Nordstrom to improve its assortment and services for millennials and Gen Z shoppers.
Nordstrom has been investing in its digital operations with its physical locations by offering customers to pick up or return online purchases.
Asos has no physical store presence and its customers are in their 20s with its base in the UK. The US is only 13% of its global sales.
Asos acquired all the brands—Topshop, Topman, Miss Selfridge and HIIT from Acadia Group who entered into administration early this year. But two of its brands, Topshop and Topman have been carried in Nordstrom since 2012 and have both been popular with its customers.
Asos also carries products at a lower price point, while on the other hand Nordstrom has been reducing its full-price store locations, which are mall-based locations while expanding its off-price Nordstrom Rack located in stripe malls. This has offered the two companies the equal opportunity for business expansion especially when the market is making the change now.
The Challenge of Supply Chain is Squeezing the Small Businesses – WSJ, July 12, 2021
Shipping delays and high freight rates, shortage of shipping space, the lack of labors, and all these are the factors that drive up the shipping cost. The retail giants, Walmart Inc. and Amazon.com are rushing to restock their supply to meet the increasing demand of the US consumers. The smaller companies are fighting for the dwindling shipping space coming from Asia and we have already reported that the freight has been increased by 300% easily.
Things are not easing as everyone is trying to bring out the goods earlier for the holiday season.
The increase of the fright rate accelerated as the result of the blockage in the Suez Canal when Ever Given was grounded. It created congestions in both the west and the east coast. It got worse when Covid-19 was found in Yantian port in southern China and followed by the Ningbo Port.
In general, the freight is three times higher and the shipping time has double and this is not helping the peak season when products are required by the retailers, big and small, and they cannot afford to miss the season.
In this meantime, more problems have been brought out, such as the big business is dominating the supply chain, and the Federal Maritime Commission will have to answer to the consolidation of the shipping industry enables very aggressive freight rates. The merging of shipping companies earlier on doesn’t create a healthy competitive environment any longer.
How Do We Read China’s Latest Crackdown on Wealth Inequality – Jing Daily, August 30, 2021
It is already for many years that China was either underestimated for its importance to the global luxury market, or it was predicted that its influence, actually its bubble would burst. So far, nothing have happened until the last two weeks when its party calls for wealth redistribution, its crack down on those super billionaires and the redistribute of wealth has been called.
We read now from Jing Daily that the consumers are still those younger, millennials and Gen-Z who are buying luxury fashion, and their engagement with digital would accelerate their behavior than the rest of the younger consumers in the other parts of the world.
It went on further to mention that the fact is the country’s wealthy, highly-educated, and entrepreneurial young millennial and Gen-Z consumers are the driving force behind this market boom. In the next 10-15 years, an additional 400 million consumers will improve their income from low-income to middle-class and even higher.
These additional customers will significantly grow the Chinese luxury market. There is already a duty-free zone—Hainan, also known as the second Dubai, will draw domestic tourists for domestic luxury consumption when the Covid will be lifted.
This piece of the writeup was contributed by Daniel Langer, the CEO of luxury, lifestyle and consumer brand strategy firm Équité, and he is also the professor of luxury strategy and extreme value creation at Pepperdine University in Malibu, California.
He shows his full confidence in China’s luxury market while BOF and Fortune gave their worrisome outlook.
The time when we were reporting this, the news that Alibaba pledges $15.5 billion to promote “common prosperity” streaming through my iPhone.