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As China Slows, LVMH Emphasizes Quality

Luxury goods group still believes that the key to future growth in China lies in fewer stores and pricier products.

LVMH has seen weaker demand in China.

PARIS — The Asian growth engine remained stalled in the first quarter, but LVMH Moët Hennessy Louis Vuitton still believes that the key to future growth in China lies in fewer stores and pricier products.

That was the key message from Jean-Jacques Guiony, chief financial officer of the world’s biggest luxury goods group, after LVMH reported that revenue growth slowed in the first three months of the year to 5.5 percent from 12 percent in the fourth quarter of 2012.

LVMH shares fell 3.8 percent to 126.25 euros, or $165.25, on the Paris stock exchange on Tuesday following the release of the figures after Monday’s close.

Analysts were disappointed with the performance of the fashion and leather goods division, which posted like-for-like sales growth of 3 percent, below market expectations of a 5 percent increase.

“Obviously, what is missing is strong demand from the Eastern part of the world,” Guiony said in a conference call with analysts on Tuesday.

“Half of the business is done there, more or less, directly or indirectly. For the last nine to 10 months, we have had flattish growth from this part of the world. That’s the big driver that is missing,” he added.

The fashion division, which includes brands such as Céline, Fendi, Givenchy and Kenzo, posted flat sales in Asia and Europe. Revenues were up by mid-single digits in the U.S. and double digits in Japan, Guiony said.

While LVMH does not break out figures for Louis Vuitton, which is its star, cash-cow brand, Guiony said its growth in the first quarter was in line with that of the fashion and leather goods division as a whole, fueled by strong increases in leather products and the success of its new Metis Monogram line.

Based on data from Louis Vuitton, he provided some insight into consumer trends worldwide.

Demand from Chinese consumers was actually higher in the first three months of 2013 than in the second half of last year, but this was due almost exclusively to tourists, with domestic sales remaining flat amid slowing Chinese economic growth, he revealed.

Other negative factors included the political handover last November, which was accompanied by a crackdown on official gift giving, and the yuan’s sharp rise against the euro, which meant Louis Vuitton products sold in China at one point last year cost up to 50 percent more than in France, a historically high differential.

Guiony noted that although that gap has since decreased to around 30 percent, following price increases in Europe and a reversal of currency trends, consumers’ behavior has yet to catch up.

“We are pretty satisfied with the level of the price difference for the time being between Beijing and Paris,” he said. “But it takes a while for people to realize that things are not what they used to be price-wise, and it’s less interesting to go outside China than it used to be.”

Japan experienced the exact opposite effect in the first quarter, as a weakening yen prompted Japanese consumers to stay at home and buy there, despite a 10 to 15 percent increase in prices for Louis Vuitton products. The Japanese currency last week hit a three-year low against the euro and a four-year low against the dollar.

“The business in travel retail with Japanese was down more than 40 percent, so it was a huge, huge impact in the business throughout the quarter,” Guiony noted.

Despite Asia’s poor performance, LVMH will not waver from the strategy of fewer store openings and more high-quality products set out by its chairman and chief executive officer Bernard Arnault earlier this year.

“We think that one reason why, in some instances, our growth in Mainland China could be lower than that of competitors is mostly due to the fact that we slowed down fairly significantly in opening stores way before the others,” admitted Guiony. Quoting Arnault, he said the luxury group would stick to this strategy. “If we were to open, for instance, many more stores in China in third-tier cities, that would certainly pay off rapidly. We are not so sure that this is the right thing to do long term for the brand exclusivity, and hence we are not doing it,” he said.

Supply constraints are also forcing LVMH to take a gradual approach to upgrading its product lines, namely by increasing its sales of soft leather bags.

“Having the skins of the right quality for such a large number of bags is a bit of a challenge, so we are working on that,” Guiony said. “It’s more of a question of years, in my view, than months.”

The executive acknowledged that LVMH’s strategy might prove a bitter pill to swallow until Chinese domestic demand rebounds.

“Some of you will be tempted to see the bottle half-empty,” he said. “Yet I would like to stress our confidence in the long-term development of the brand. We believe that our product and retail strategy is the best for the brand and will enable it to grow much faster when the Eastern part of the world recovers.”