Tag Archives: China

Macau gambling crackdown?

December 5, 2012 By in Asian economic development, capital flight/brain drain, Casinos, China, economics, Entertainment, Hong Kong, Industry Analysis, Recent Market Action, Stock ideas Tags: , , , , , , , , , , Leave a comment

The Financial Times, among others, ran stories yesterday attributing the sharp, across the board fall in Macau casino shares in Hong Kong Tuesday to the detention by Chinese authorities of several junket operators who organize groups of high roller gamblers travelling from the mainland to the SAR to gamble.  Government inquiries have apparently also been made to the casinos themselves for information about the structure and betting behavior of some junkets.

To my mind, it’s not yet clear what’s going on.  The possible government concerns, as I see them, might be:

–displays of affluence in a socialist economy.  This has never bothered Beijing before, so I doubt this is the issue now, other than as a formalistic expression of official disapproval.

–possibly illegal flow of foreign exchange out of China.  This is a perennial problem for any country with foreign exchange controls.  The time-honored method of moving funds abroad, however, is through corporate transfer pricing.  But there’s no evidence of a wider crackdown, so I don’t think this is the issue, either.

–money laundering.  This was a notorious problem while Macau was a Portuguese colony, and while the former casino incombent had a monopoly on legal gambling.  Money of dubious origin enters the casino and leaves as legal, taxable gambling winnings–with the casino serving much the same function that urban parking lots sometimes serve on a smaller scale.

This is a serious issue.  In my view, eliminating criminal influence in the Macau casino industry is the prime reason the Macau SAR granted gambling concessions to Wynn Resorts and Galaxy Entertainment.  I’d be surprised and disappointed if Galaxy, Sands or Wynn were involved in money laundering.  Authorities have apparently contacted all three for information, however.

–defining political have-nots.  It seems that a lot, if not all, of the regulatory attention has been focused on associates of the disgraced former head of Chongqing, Bo Xilai, whom Beijing regarded as a threat to the stability of the Communist Party.

my take:  my guess is that what’s going on is some combination of #3 and #4 and that any investigation will end up having little negative impact, if any, on Wynn Macau, Sands China or Galaxy.  But I have no hard facts to base this view on.  So my reaction is to trim my positions–the Hong Kong stocks have been very strong performers recently–and wait for further clarification.

a weak 3Q12 for Tiffany (TIF)

November 30, 2012 By in Asian economic development, China, earnings conference calls, Gold, Hong Kong, Industry Analysis, Japanese development, Luxury goods, Retail, Stock ideas Tags: , , , , , 1 Comment

the results

Before the New York open on November 29th, TIF announced 3Q12 earnings results (the company’s fiscal quarter ended October 31st).  Sales were up 4% year on year.   Profits for the three months, however,  were down 30% yoy at $63 million, or $.49 per share–lower than the company had guided to during its 2Q12 conference call.  TIF also revised down its expectations for the full fiscal year to eps of $3.20-$3.40 vs. its prior guidance of $3.55 – $3.70.

What’s behind the earnings miss?

Business was better than expected in Europe and Japan. It was so-so in Asia-Pacific—comparable store sales down 4% yoy—but in line with management’s view. In the US, however, which still comprises about half the company, sales weren’t as good as TIF had expected.

Not only that, but product mix was a problem. Purchases of items costing over $500 each held up well. Sales of less expensive silver jewelry, however, flagged. And they carry higher margins at the moment.

 How can sales be up and profits still fall by almost a third?

As I interpret TIF’s actions in preparing for 2012, the company expected a sales advance for the year of around 10%. So it increased sales space and added staff with that kind of increase in mind. Those extra costs are now acting against the company (negative operating leverage) because sales aren’t yet high enough to absorb them fully.  That cost the company about $6 million in operating profit in 3Q12, I think.  More important,

TIF also build its inventories aggressively. The fundamental choice a firm makes is between:  do I keep inventories small and risk losing sales?  …or do I keep the shelves full, at the risk of having too much?  Based on its sales forecast, TIF picked the second.

In addition, in carrying out its strategy TIF appears to have acquired or made goods containing gold when the yellow metal’s price was relatively high. That decision has two consequences that have also turned into temporary negatives. Because their costs are high, those pieces carry lower gross profit margins than TIF has shown in recent quarters. This wouldn’t be a big deal if sales were growing as rapidly as TIF thought. Better to lose a couple of points of margin on a necklace or ring rather than have a customer walk out empty-handed because there’s no merchandise in the store. But when sales are slow, as they are now, lower-margin merchandise can end up being a big chunk of sales for an entire quarter or two.  As I reckon it, this cost the company about $30 million in operating profit in 3Q12.

At some point, however, maybe in 4Q12 or 1Q13, TIF will have sold all these items and gross margins should rebound.

Finally, to carry out all its plans and still continue to buy back its stock, TIF’s debt has gone up by about $250 million yoy.  Interest expense is $4 million higher in 3Q12 than in 3Q11, as a result.

Do TIF’s quarterly earnings matter at this point?

Yes and no. The stock dropped by about 10% in the pre-market Thursday before rebounding to close down 6% or so. To my mind, that’s not much of a negative reaction, considering how big the earnings shortfall was vs. expectations and how strongly the stock has performed in recent months.

To my mind, investors have clearly been betting that we’re at or near a business cycle low point for high-end jewelry sales. They’re buying TIF in anticipation of a significant upturn in profits. For these investors, the overall story is still intact. Their timing may have been a bit off, but they’re not worried.  And, in my view, TIF’s management didn’t do anything crazy.  It carried out an intelligent plan for 2012 that’s been undermined by a weaker than expected world economy.

On the other hand, I suspect it will be difficult for the stock to advance from the present level without the company demonstrating that the low point is behind it.

One other note: it seems to me that the area of concern for Wall Street based on 3Q12 results can’t be China, even though sales there were down yoy. Why do I say that? Chow Tai Fook Jewellery, which caters solely to the China market, was up 4% overnight in Hong Kong.

11th Annual Bain Luxury Goods Worldwide Market Study, October 2012 (iii): market structure

November 21, 2012 By in Bain luxury goods study, Industry Analysis, Luxury goods, Retail, Securities regulation, Strategy Tags: , , , , , , , Leave a comment

Yesterday I wrote about long-term trends in the personal luxury goods industry, as seen by the Bain Luxury Goods study.  The prior day, Monday, the topic was short-term revenue growth prospects.

Today’s post will deal with the responses by luxury goods firms to the development of the global market for their products.  I’ll close with Bain’s estimates of the size of the personal luxury goods market in the context of the market for all luxury goods.

continuing slow vertical integration

The traditional model for luxury goods companies has been to design and manufacture their products and sell them at wholesale to third-party retailers, like department stores or multi-brand specialty retailers (think, e.g.: jewelry stores).

The virtues of this way of doing business are:

–it’s simple and

–the time that company cash is tied up in inventory is, under most circumstances, the shortest.  So its financing needs are the least.

Over the past decade or so, however, luxury goods firms have been entering retail themselves by opening free-standing stores of their own or company-owned boutiques in department stores.  Where necessary to do so, they’ve also been buying back territorial distribution rights they had previously granted to third parties.

The rate of change toward vertical integration is slow, but steady, at the rate of about a 1% increase in market share per year.  Currently, luxury goods’ distribution is still predominantly wholesale, with 30% through company-owned retail channels.

Why the shift?

After all, going all the way to the retail customer requires a much more complex company organization and a lot more capital to meet the heavy extra expense of building and keeping up a store network.  At the same time, a firm’s existing wholesale customers can scarcely be thrilled to see the luxury goods company entering into direct competition with them.

Several reasons:

–the price markup from wholesale to retail for luxury goods is immense

–the company has much better, and more current, information about customers, sales trends and inventories if it has a retail operation

–it has much better control over the brand message and the customer experience

–the company has the opportunity to make the customer its client, rather than the department store’s, thereby increasing the size and frequency of purchases.

single brand vs. conglomerate, private vs. public ownership

the rise of luxury conglomerates

In 1995, according to Bain, a majority (55%) of personal luxury goods sales were of products made by a single-brand company.  The rest came from multi-brand groups.

Today, in contrast, sales by multi-brand groups are double the size of those of their single-brand counterparts, which account for only a bit more than a third of industry revenues.

…and publicly owned firms

In 1995 companies that had raised expansion capital in the stock market represented only 30% of luxury goods revenues.  The vast majority of sales were by privately held firms, mostly family owned.

Today, those proportions are reversed.  Only 30% of industry sales come from traditional privately held companies.  Firms representing 65% of total revenues are publicly traded.  Private equity and sovereign wealth funds hold the other 5%.

The reasons behind this transformation are a bit more complex.  They include:

–the massive rise in world GDP over the past few decades that has made the luxury goods market accessible to many more consumers.  According to Bain, the personal luxury goods market has almost tripled in size since 1995

–the development of supply chain software, which makes the management control task more manageable

–revival of once moribund businesses through modern management techniques–Gucci, Tiffany, Coach are names that immediately come to mind, which has attracted capital to the industry

–often a diffuse group of second- and third-generation owners of a private firm would prefer to cash out rather than remain involved in the family business.

where the personal luxury goods industry stands in overall luxury spending

According to Bain, global luxury spending breaks out as follows:

luxury cars    €290 billion, up 4% from 2011

personal luxury goods     €212 billion, up 10%

luxury hospitality     €127 billion, up 18%

luxury wines/spirits     €52 billion, up 12%    (no beer?)

luxury food     €38 billion, up 8%

design furniture     €18 billion, up 3%

luxury yachts     €7 billion, up 2%

Total     ~ €750 billion

Note:  in the food and beverage category, Bain detects a trend toward in-home consumption rather than in restaurants.  Apparently even the wealthy need to economize somewhere.

11th Annual Bain Luxury Goods Worldwide Study, October 2012 (ii): long-term trends

November 20, 2012 By in Bain luxury goods study, Industry Analysis, internet, Luxury goods, Retail, Stock ideas, Strategy Tags: , , , , , , , Leave a comment

post # 2

This is Day two (of three) blogging about the 2012 Bain global study of personal luxury goods.  Yesterday I wrote about Bain’s analysis of the industry’s growth prospects.  The consulting company’s general picture seems to be that after a post-Great Recession surge in luxury goods spending the industry is settling back toward trend growth.

In the Worldwide Study, Bain has pencilled in 4% – 6% annual revenue expansion as being “trend.”.  My sense, however, is these numbers are there more as prudent (read: low-ball) placeholders than the product of hard core analysis.

Trends

That was yesterday.  Today I’m going to write about the major trends Bain sees in the luxury goods market.  They are:

–tourism  

According to Bain, 40% of the total money spent by buyers outside their home country!  I knew that this phenomenon was big, but I didn’t realize it was so large.

Why not spend at home?

—price   Prices are cheaper in the EU than anyplace else.  This is partly because luxury goods makers set prices higher in Asia and partly because of government duties imposed on foreign luxury goods imports.   Outlet shopping may also not be available in the home country (more below).

—selection  Two-thirds of worldwide luxury goods distribution is through third parties like department stores, which may focus on only a small number of items.  In some cases (think: China) there may not be stores nearby

—anonymity  Buyers may prefer to make purchases that don’t advertise their affluence to their friends and neighbors

–authenticity  Buying from a luxury firm’s retail store gives greater assurance that the merchandise isn’t counterfeit

—vacation atmosphere  buyers may be less careful about spending when abroad.

How does Bain know this?  Traditionally, the information comes from credit cards, although in today’s world more progressive companies will be using “big data.”  If so, they’re probably not telling anyone, though.

the geographical spending mismatch

Chinese citizens do 25% of global luxury goods spending; China accounts for 7% of worldwide sales

Europeans do 24% of global spending; Europe accounts for 35% of worldwide sales

Americans do 20% of global spending; the US accounts for 31% of worldwide sales

Japanese do 14% of global spending; Japan accounts for 9% of worldwide sales

Everyone else does 17% of global spending, everywhere else accounts for 18% of worldwide sales.

In the aggregate this is an East/West phenomenon.  Yes, Americans do a little bit of luxury shopping in Europe and Europeans in the US.  But Japanese and Chinese citizens do the majority of their personal luxury goods buying abroad.

–China accounts for 25% of the global luxury goods market.  That’s more than any other country.  And it’s up from basically nothing 12 years ago.

–accessories, not apparel   Accessories, typified by leather goods and shoes, are now the largest segment of the luxury goods market, comprising 27% of total sales vs. 26% for the #2 category, apparel.  They’re also growing faster than apparel.  Reasons:  lower prices, greater recognizability, faster innovation

–men, not women…  Fifteen years ago, men made up a third of the luxury goods market.  Today, that’s up to 41%.  The impetus for this change is the emergence of younger male consumers in China.  Now luxury brands are beginning to cultivate males in the US and Europe as well, where men hav e traditionally been second-class citizen, on the view that men “normally” buy less than women–and are much more highly business cycle sensitive customers.

–…except maybe for China, where Bain notes, for the first time I’m aware, that women business owners, “power women,” are becoming a significant force in luxury goods consumption

–off-price  Outlet shopping, long a staple in the US (59% of global off-price sales this year) , has arrived in Europe–and is being rapidly developed from a very low base in Asia.  Bain reports growth in luxury outlet sales from Chinese customers in Europe of up to 100%+.

The category as a whole will likely grow at a 30% clip in 2012, although it will only account for about €13 billion in total sales.

–online  This market, which is still tiny at an estimated €7 billion in sales this year, is growing at about a 25% annual rate.  It’s 2/3 full price, 1/3 off-price, with off-price growing faster.  Private sales, flash sales and sites for men are the hottest sub-categories.

That’s it for today.  Tomorrow, structural features of the personal luxury goods market.

11th Annual Bain Luxury Goods Worldwide Market Study, October 2012 (i): short-term performance

November 19, 2012 By in Bain luxury goods study, Current Market Thoughts, Industry Analysis, Luxury goods, Portfolio management, Retail, Stock ideas, Strategy Tags: , , , , , , , , Leave a comment

the study

Bain and Company published its 11th annual study of the global luxury goods industry in Milan last month.  The study is authored, as usual, by Claudia D’Arpizio, the head of Bain’s luxury goods practice.  It’s developed in cooperation with Altagamma, the Italian luxury goods trade association.  (Thanks to Bain for giving me access to the study, a summary of which can be found on the Bain website.)

three posts

I’m going to write about this year’s study in three posts.

Today I’ll cover Bain’s assessment of the personal luxury goods industry’s prospects for the upcoming holiday season and for full-year 2012, as well as what’s likely to be in store for 2013 and beyond.

Tomorrow I’ll write about the longer-term trends developing in the luxury goods market.

On Wednesday, I’ll add Bain’s view of the geographical structure of the luxury goods market, in addition to–something new this year–the consultant’s sense of where the €212 billion in annual sales of luxury goods stands in the context of the overall €750 billion “market of markets” of all worldwide luxury expenditure.

€ vs. constant currency

The Bain study is framed in euros.  This makes sense, since a majority of the important luxury brands are European and the largest single bloc of affluent customers still remains the EU.  Also, historically the € has been relatively stable.  However, the currency has been uncharacteristically volatile over the past several years, as the Great Recession has brought long-simmering economic, political and demographic issues in the EU to a head.

From an equity investment point of view, it’s no bad thing in an area under economic strain to hold stock in companies with strong global brand names and lots of overseas sales.  So luxury goods firms will find support from local investors.

We’re not all €-based buyers, however.   Also, almost 2/3 of luxury goods sales, and the lion’s share of the growth, lie outside the EU.  For both these reasons, it’s important to separate underlying expansion in demand from fluctuations in currency.

2012

the recent past

The personal luxury goods market hit what was then an all-time peak of €170 billion in 2007.  The market fell by 10% over the following two years to €153 billion in 2009, before rebounding to hit new highs of €173 billion (+13%) in 2010 and €192 billion (+11%) in 2011.

Bain predicts another new record of €212 billion in personal luxury goods sales (+10%) for 2012.

2012 to date

The first two quarters of 2012 are already in the books, showing +14% growth.

Although publicly traded companies have by and large not yet reported 3Q12 earnings (many have fiscal periods ending in October), monthly sales announcements, industry data and anecdotal evidence give us a good sense of how the quarter will play out.  Year on year deceleration is the operative word.  Bain has pencilled in a 7% yoy revenue advance.

two forecasts for the holidays

For the upcoming holiday season, Bain has two forecasts.  Its base case is that 4Q12 will show the same yoy gain as 3Q12, up 7%.  It’s optimistic case is that the holidays will show the same yoy growth they did in 2011, +12%-+13%.  (For what it’s worth–personally, I’m not familiar enough with Ms. Arpizio’s work to have an opinion–both Bain’s base case for 4Q11 (+8%) and is optimistic case (+10%) were conservative.)

Bain continues to project annual +4% to +6% growth in personal luxury goods growth in constant currency over the next several years.  This will be driven by Asian consumers, tourism, deeper penetration of emerging markets and of second-tier cities in developed markets, and rapidly expanding online and outlet channels.  I think this figure may prove to be too low.

Accessories–leather goods and shoes–will likely be the best categories.

weaker than it looks in 2012

2010 industry growth of +13% breaks out into +8% in constant currency and +5% from € weakness

2011 growth of +11% breaks out into +13% in constant currency and -2% from € strength

2012 growth of 10% breaks out into +5% in constant currency and +5% from € weakness.

The Bain study, then, is projecting a continuation of the current environment of slower growth through 2015.

my take

There’s an increasingly large separation between the nationality of the buyers of luxury goods and the places where the purchasing takes place (more about this tomorrow).  If we look at the economies where the large groups of buyers reside,

–China (25% of the market) is, I think, at a cyclical low point from which growth will accelerate next year.  Luxury purchases should be a high-beta function of this rebound.  +20% in 2013?

–Europe (24%) is a continuing mess, from which I’m expecting no better than flat

–the US (20%) is an enigma.  Layoffs of high paid bankers will continue to dampen growth in luxury goods purchases.  But the current slowdown in luxury goods sales is more widespread.  Who knows why?  My guess is that this isn’t the affluent anticipating higher personal income taxes.  Rather it’s the worry, symbolized by the “fiscal cliff,” that gridlock in Washington will undermine economic growth.  Legislators on both sides of the aisle appear refreshingly open to compromise in their post-election statements.  The administration doesn’t sound so willing.  Negotiating stance?…tin ear?  We’ll know more in the coming few weeks.

If I’m correct about Chinese growth in 2013, that country alone will provide Bain’s 5% constant currency growth.  The big imponderable for me is how much the US will add to that number.

At this point, therefore, to me the safest bet–maybe the only safe one–seems to be on accessories sold to Chinese luxury consumers.