After a series of shocks in 2016, with populism swelling in Europe and the U.S., a regular rhythm of terrorist attacks, and uneven demand for luxury goods as the Chinese cancel their overseas trips and consumers seal up their wallets, 2017 is looking uncertain — at best.
This story first appeared in the November 30, 2016 issue of WWD. Subscribe Today.
Question marks are sprouting like mushrooms on the damp earth of the wealthiest and most powerful countries: Will Italy’s pro-business Prime Minister Matteo Renzi be forced to resign after the divisive referendum on Dec. 5? How much momentum will French and German populist movements — built on a wave of antiglobalization, fear of immigration and national sovereignty — gain ahead of next year’s elections?
Asian countries will bear the brunt if Trump’s election protectionist promises are enacted, according to Tuan Huynh, chief investment officer at APAC at Deutsche Bank Wealth Management.
“One key risk is U.S.-China relations,” Huynh said. “A Trump administration brings more uncertainty to cross-Pacific relations. Given that Trump wants to increase tariffs on China and has usually taken an unfavorable view on China, a deterioration of U.S.-China relations can potentially hamper the global economic recovery and cause more market volatility in Asia.”
The uncertainty does not bode well for consumer confidence, tourist flows and the appetite for nonessentials such as fashion and luxury goods.
“We are not yet willing to call a bottoming out of the luxury industry,” said Mario Ortelli, of Bernstein Research, in a downbeat report published this month.
He pointed to “potential for deterioration in the underlying economic fundamentals that support growth in the luxury sector, especially against the backdrop of political uncertainty.
In the personal luxury market, Ortelli is forecasting 0 percent growth for 2016; 2 percent for 2017 and 4 percent thereafter to 2020, with the “potential for year-over-year volatility,” due to macroeconomic uncertainty.
That uncertainty is a given and UBS bank is factoring that into its forecasts. The bank is expecting gross domestic product growth in the euro zone to decelerate to 1.3 percent in 2017 and to 1.2 percent in 2018 after this year’s 1.6 percent.
The bank said while it maintains a “constructive growth outlook” for the coming months, it believes the “exceptionally strong support” that euro-zone domestic demand has enjoyed in 2015-16 is likely to soften as higher oil prices and inflation slow down the growth in household real incomes.
UBS said the outlook for the U.K. will be “crucially determined” by the European Union exit process, set to be triggered in March. The bank said it’s expecting weaker investment and a softer labor market, with rising inflation squeezing real incomes and consumption in the U.K.
It’s likely the big challenges that emerged this year will roll well into 2017: changing spending and tourism flows, especially among the Chinese; political and social turmoil in Asia; the weaker pound driving up domestic prices yet fueling exports, and increasing pressure on the luxury brands to drive sales and protect their margins aren’t the sort of conundrums that will disappear anytime soon.
Chinese consumers left their country in even greater numbers this year in search of competitive prices, although the high-spending ones continued for the most part to bypass Hong Kong — a region that once yielded the biggest margins in the luxury business.
A record six million Chinese traveled overseas during Golden Week, spending about $7.2 billion. At the same time, domestic sales were also on the rise, thanks to a boom in “m-commerce,” or mobile commerce, which is becoming more important to Chinese consumers.
According to eMarketer, mobile purchases in China will increase more than 51 percent this year to account for 55.5 percent of all retail e-commerce sales this year. The latter is expected to reach $899 billion this year, or 18 percent of total retail sales.
At that point, who needs to get a visa, hop a plane and book a hotel in a European capital when the threat of terrorism hovers — even in the U.K., where retail prices have dropped due to the weaker, post-referendum pound.
While a year ago, Taiwan and Thailand were touted as Chinese tourist hot spots, the election of a defiant “anti-Beijing” Tsai Ing-wen and the death of Thailand’s King Bhumibol Adulyadej, the nation’s longest-reigning monarch, cast a pall over spending in both places.
South Korea is also experiencing its share of geopolitical turmoil. It has seen tens of thousands take to the streets to call for the resignation of President Park Geun Hye.
In the U.K., prices are set to rise 10 percent up and down the high street next year as the weaker pound puts pressure on input costs and profit margins.
Meanwhile, luxury businesses in the U.K. and across Europe are busy cost-cutting, reorganizing, repositioning and soul-searching about their approach to creativity, commerce and retail in an unpredictable world of lower growth and higher competition.
Richemont is poised for its second round of Swiss watchmaker layoffs in the past year, as it grapples with falling profits and slack demand for high-end watches, while Burberry is looking to save 20 million pounds, or $25 million, per year for a total of 100 million pounds, or $124 million, by 2019, as it de-bloats its structure and prepares the company for harder times.
Last month, Sonia Rykiel said it was shuttering its diffusion collection and laying off staff as it moves to reposition its main line to lower price points to meet the demands of an increasingly competitive market, while Hugo Boss disclosed plans to return to the premium category, with a renewed focus on entry price points.
Retailers, meanwhile, under constant pressure to drive footfall and digital sales, are embracing the premium middle ground selling “accessibly priced” pieces alongside the high-end runway ones as everyone seeks to navigate their way through the storm.