NEW YORK — Asia, the market that was almost too good to be true for Western fashion brands, got an unsettling dose of reality Thursday.
The big hits taken by the Hong Kong and Tokyo stock markets in the last 24 hours raised already-high anxiety levels, and now fashion houses wonder whether the increasingly vital Asian market is in for a prolonged tumble.
“This is certainly a major economic slump that is and will affect all designer brands,” said Krizia chairman Aldo Pinto, noting that the crisis has particularly hit hard in Thailand, Indonesia, Malaysia and the Philippines.
Hints have been coming for some time that the market — a formidable growth outlet for virtually every major fashion brand — was due for a jolt.
It came.
The financial crisis that raced across Asia since Thailand ran into trouble in early July has now spread to Wall Street via Hong Kong, Tokyo and London.
The Hong Kong stock market had its largest point decline ever on Thursday, plunging 10 percent, bringing the week’s loss so far to 23 percent. The Hong Kong hit followed efforts to protect the value of the Hong Kong dollar by raising interest rates. Rates in Hong Kong soared to unprecedented levels, going as high as 150 percent for interbank overnight money. The prime rate was increased to 9.5 percent from 8.75 percent on Thursday.
The Hong Kong crash was also felt in Tokyo, where stocks closed at the lowest point in more than two years, a 3 percent drop. The action moved across time zones to London, where the Financial Times Index plunged 157.3 points to 4,991.5. The downtrend kept on rolling to the New York market. After being down over 200 points during Thursday’s session, the Dow Jones Industrials finished with a loss of 186.88 points, or 2.33 percent.
Other markets that closed lower Thursday included Shanghai, Shenzhen, Manila, Singapore, Jakarta, Kuala Lumpur, Wellington, New Zealand and Sydney, Australia.
In New York, the market rout took along retail and apparel stocks, but losses generally were fractional. The exceptions: Sears, Roebuck lost 1 3/8 to 43 1/4, and Dayton Hudson and Nordstrom each dropped a point. In the apparel group, Gucci Group lost 2 to 40 1/4; Fruit of the Loom was down a full point to 27 3/4 and VF Corp. gave up 1 9/16 to 87 3/4.
Jonathan Auerbach, managing director of Auerbach Grayson & Co., a brokerage firm with Asian connections, doesn’t think the equity markets in Hong Kong and Tokyo “have hit rock bottom yet.” Auerbach expects more corrections and continued market sensitivity for a couple of months.
“Tokyo, which hasn’t had a decent market for six straight years, is under extreme pressure,” Auerbach said.
While most fashion houses say it’s too early to panic, they cite the decline in Japanese tourism, sluggish sales and an overall consumer insecurity across Asia as bad omens for the next few quarters.
“Designer brands have registered a strong slowdown in future development projects [in the affected countries],” said Krizia’s Pinto. Krizia has more than 700 points of sale in specialty and department stores in the region. He said a damper has been put on the opening of new boutiques, spending is more controlled and orders for spring ’98 have been reduced.
“There is certainly a reassessment of future expansion plans,” Pinto said. Putting the situation in perspective, Pinto added, “One must consider that the growth in these countries was in the order of 8 and 9 percent per annum, so hopefully, it will settle between 4 and 6 percent in the next two years, and we can’t describe that as a disaster — especially compared to growth rates in Europe.”
Gucci chief executive officer Domenico De Sole was the first fashion executive to sound the alarm when he added a warning to an otherwise positive first-half earnings report in late September. He targeted “a significant reduction in Japanese tourism to certain key locations such as Hawaii and Hong Kong,” reporting that sales had already slowed in the second quarter and were expected to slump in the second half as well.
Gucci stock took a pounding on the report, which also cited exchange rate factors and Gucci’s own efforts to hone distribution. The stock plunged 19.1 percent that day.
And Prada co-owner Patrizio Bertelli recently noted that Hong Kong sales had plummeted 70 percent because Japanese shoppers were staying away since the colony was turned back to Chinese rule and foresaw “difficult times ahead for Italian fashion — we have been too dependent on the tourism market….The Japanese now prefer to go to the Fiji Islands, and that is where we must open stores.”
Gucci’s De Sole said he has been talking with other luxury goods executives about the Asian issue, adding, “Our sense is that this is a short-term problem and the market will probably bounce back next year.
“The growth of the Asian economies has been quite spectacular, and this is a temporary slowdown,” he added. De Sole said Gucci hasn’t put any of its store openings in the region on hold. Gucci is opening six new stores in Japan next year and one boutique in Hong Kong’s new airport. Gucci already has six stores in Hong Kong.
A spokeswoman for Louis Vuitton Moet Hennessy LVMH said the company has not yet determined the impact on group sales from the currency turmoil in Asian markets.
“The devaluation of the currencies certainly will impinge local buying power, but it could encourage tourism to those markets and ultimately benefit travel shopping,” the spokeswoman explained. “We will have to see the results in a few months.”
Asia, especially Japan, represents a huge business for LVMH and if sales for its duty-free operation, DFS, were to be included for all of 1996, the market would account for some 45 percent of total turnover, or about $2.9 billion at current exchange rates.
At the first sign of trouble last summer, the Louis Vuitton leather goods division acted to counter the negative affect of devaluations by hiking retail prices 20 to 30 percent. “Since the company is so vertical, it could react quickly,” the spokeswoman explained.
Vuitton produces its goods mainly in its own factories and sells the products in its own stores.
Cartier is experiencing overall growth in Asia, but that is mainly being fueled by double-digit growth in the Japanese market from the first half of Cartier’s fiscal year ending Sept. 30. “But this year is a bit exceptional,” explained Gerard Djouai, the international executive director of Cartier International. “We have had a lot of special events this year for our 150th anniversary, and have launched new products. All this has stimulated sales.”
The growth in Japan is offsetting slowed growth, or sales drops in other Asian markets. Djouai agreed that the Japanese are traveling less and spending less when they travel. Thus, sales to Japanese tourists in Guam, Hong Kong and Singapore are down, compared to previous years, he said. This decrease, however, is being countered by single-digit increases in purchases from local consumers, Djouai noted.
But since the beginning of this month, Cartier has been concerned about growth in turbulent markets like Thailand, the Philippines and Indonesia, which have been hit by either currency devaluations or natural disasters like the fires that ravaged Indonesia.
“In Thailand, our business has not yet been affected, but we are expecting a significant slowdown there and in the Philippines,” Djouai said, adding that Cartier raised prices 30 percent in Thailand to offset local devaluations.
Djouai is skeptical that Japanese tourists could be lured to these markets because of the cheaper local currency. “Sure, theoretically if the Japanese do travel there, they would likely spend on the luxury goods,” Djouai observed. “But if you know the Japanese, if there is a risk, they won’t go.”
Djouai recalls, as do others in Paris, how the Japanese avoided France for the better part of last year following bombings, bomb threats and strikes that rocked the country in the second half of 1995. On the positive side, Cartier is optimistic about growth from China and India. In China, Cartier has several stores in cities like Shanghai and Peking. Cartier has some 60 stores in Asia, roughly 40 of which are wholly owned, Djouai said.
While Cartier doesn’t break out sales, its parent company, the Vendome Luxury Group, said that Asia accounted for 40 percent of total group sales, which were about $2 billion for the year ended March 31.
Bulgari ceo Francesco Trapani says he hasn’t been overly concerned about the general slump in the Asian luxury goods business. “There’s a lot of talk now about the Asia effect, which is hurting everybody,” he said. “I’m not too troubled because for us it represents about 31 percent of our business. We aren’t over-exposed.”
Lew Frankfort, ceo of leather goods maker Coach, said, “When a Japanese woman travels, typically she is required to buy the same number of gifts for friends and family — about 10 to 11 on average. With the yen worth about 20 percent less now, she has the same amount of dollars to go around, so she needs to reduce the amount of each purchase. Business travelers suffer from the same factors.”
While department stores still dominate the retail landscape in Japan, several manufacturers said many of them have had declining sales for a few years, estimating they are down over 15 percent from their peak.
In anticipation of the 3 percent hike in retail sales tax that was instituted last April, retailers advertised heavily, advising consumers to make their purchases before the tax went into effect. Consumers did, and haven’t come back since.
Sources said sales rose as much as 30 to 40 percent in the 30 days prior to the tax going into effect and plummeted when the tax hit.
Growth in the discount channel for men’s and women’s apparel has also hurt the department store sector. Japanese men, for instance, now buy upwards of 20 percent of their suits in the discount channels instead of the department stores.
Industry observers in Japan confirm that, since April, department store sales in Japan have dropped below last year’s levels, due to a combination of factors: an increase of consumption tax to 5 percent in April from 3 percent; a protracted delay in the recovery of the Japanese economy; sluggish investments in the private sector and poor housing starts; the on-going currency crisis in Asian countries, and rising global competition.
According to the Japan Department Store Association, collective sales in August at 281 stores of its 122 member companies were down 1.2 percent from a year earlier, at 622.3 billion yen or $5.19 billion.
“The decline in August was smaller than the 3.4 percent in the previous month, returning closer to normal,” the association said, but noting that “a severe situation continues and consumer buying still lacks strength.”
This follows declines of 4.7 percent in June, 5.1 percent in May, and 14 percent in April.
Apparel, which accounted for 35.5 percent share of all department store sales in August, was 0.4 percent behind a year earlier. Women’s wear sales, with a 21.9 percent share of all sales, were down 0.4 percent.
Apparel imports to Japan from all sources in the first seven months of 1997 were down 1.9 percent in yen value to 1.03 trillion yen or $8.58 billion, according to the Japan Textiles Importers Association. Imports from Europe accounted for a share of 14.2 percent at 146.7 billion yen or $1.22 billion, down 4.4 percent against the U.S.’s share of about 6 percent at 61.4 billion yen or $511 million, down 13.5 percent.
As for the lucrative Hong Kong market, dramatic drops in Japanese tourism during the post-handover period have taken their toll, but most luxury and designer goods retailers there seem unfazed.
“True, there’s been a decline in Japanese tourism which has affected sales in the past three months,” said Serge Brunschwig, executive vice-president Asia-Pacific for Louis Vuitton. “But it’s not the end of the world. If the Japanese don’t come, we have plenty of customers locally and from other countries.”
“Furthermore, growth in 1995 and 1996 was so phenomenal that it was inevitable there would be a slowdown,” he continued. “But everybody knows why the Japanese stopped coming. Those conditions are just temporary and after five or six months, things will swing back.”
Last year, 2.4 million Japanese visitors visited Hong Kong, a 40 percent rise over 1995. But since June, the Japanese have stayed away, deterred by handover hype, hotel prices that tripled over normal rates during the handover, and travel agents who pushed other destinations. Arrivals dropped over 30 percent in July and more in August. A weakening yen also worked against Hong Kong, whose currency is pegged to the U.S. dollar.
Roberto Domenici, managing director of designer label retailer Joyce Boutiques which has a joint venture with Prada, confirmed Hong Kong sales for Prada were down 50 percent.
“This isn’t going to change until the yen reaches about 110 [against the dollar] and until someone makes Japanese tour operators realize that nothing’s changed here, that Japanese tourists have nothing to be afraid of,” he said.
Joyce has been particularly battered of late. Although only 16 percent of its sales are generated by tourist trade, 60 percent of that figure is from Japanese shoppers while the rest is mostly from Southeast Asian tourists whose own currencies have depreciated dramatically against the Hong Kong dollar.
“We knew it was going to be a difficult year,” said Peter Harris, senior merchandiser for Lane Crawford, an upscale department store, whose parent company also handles brands such as Ferragamo, YSL and Oscar de la Renta.
“Our strategy is to be more proactive about getting customers into the shops. We’ve organized all kinds of events this fall, including bringing in a Lanvin tailor for custom-made suits, mini-shows and other launches. We’ve also increased advertising by 18 percent,” he said. Harris reported sales for 1997 are up slightly over last year.
Other trends may also be affecting high end consumer patterns. More companies are instituting dress down days, revolutionary for Hong Kong, where the tendency is still to dress up. Hong Kong’s former brand junkies are also maturing and more confident about individual style, no longer afraid to throw together looks which don’t necessarily scream designer label.
“Let’s face it, we’ve had so much ‘branded, branded’ these past few years, there was bound to be a backlash,” said Harris. “Any designer who has too much of a signature may be vulnerable these days.”

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