What Effect Has The Russia-Ukraine War Had On The Luxury-goods Market?

One year on from Russia’s invasion of Ukraine and it appears that the luxury goods market has emerged relatively unscathed.

A new report from Bloomberg Intelligence (BI) has found that the Russia-Ukraine war has had a limited direct effect on the luxury-goods market, with light asset-impairment write downs and little lost revenue.

The Russia-Ukraine war has not been the only impacting factor on the market in the past 12 months, with minimal exposure in the Russian market, China’s Zero-Covid policy and subdued travel retail also placing pressure on sales, costs and supply chains throughout 2022.

In 2021, Russia ranked 12th globally in the sale of personal luxury goods, while China was number two in the market at $58b (£51b).

Prospects look bright for the upcoming year – with the prompt easing of Zero-Covid restrictions in China in early January, the recovery of the luxury goods sector has accelerated, more than compensating for lost revenue in Russia.

Deborah Aitken, BI senior industry analyst (Consumer Products), and Andrea Ferdinando Leggeri, BI senior associate analyst (Consumer Products), explained: “Luxury goods sold in Russia were limited to less than 1-3% of company sales, though there are wider ranging effects of the sanctions in response to the war on Ukraine.

“The delay to travel recovery was felt in 2022, while inflationary-linked cost rises passed on to consumers, raised interest rates and currency-volatility risks means purchasing is becoming squeezed at the entry-level for aspirational brands.

“Some entry-point brands have begun to struggle in the US (Michael Kors, Dr. Martens and Canada Goose), while higher-placed luxury pyramid brands are less price elastic.

“The rebound of luxury-goods revenue in Western Europe is still boosted by euro weakness, with Americans spending in Europe to get ‘bargain’ buys.

“That suggests the US – the world’s largest luxury market – could lose share to Europe in 2023.”

According to BI’s report, the impact of limited exposure for the luxury-goods sector in Russia was only experienced at a stores level and was quickly managed.

The biggest luxury brands had a presence in flagship stores in Moscow, though brand availability was more consistent across wholesale partners or online.

Luxury brands limited employee headcount and made swift exits from Russia, with most departing by March 2022.

The report stated: “Beyond the first six weeks of 2022 trading comparisons normalise for 2023 vs. an average 2% year-prior organic-sales-growth drag, while intangible asset write-offs are limited and are mostly booked into 2022.”

Premium-entry fashion brands were slightly more vulnerable to exposure in Russia, with e-marketplace Farfetch closing completely in Russia in mid-2022.

The share of major luxury-goods makers in Russia was limited to 1-3% of revenue, while global purchases by Russians averaged at 5%.

LVMH and Kering were the mast exposed, and Richement was below average – with half of its portfolio made up of ultra-high-end jewellery brands, like Cartier.

The BI report concluded: “China’s reopening after its ending of Zero-Covid policy in January is a potential boon for luxury-goods makers, which may be able to beat the consensus median revenue growth target of 9% and EPS 12% in 2023 as the reopening speeds up.

“LVMH is representative of the formidable market recovery since Covid-19 spread globally early in 2020, and vs. the gradual reopening in 2021 and 2022.

“A year on, Russia’s invasion of Ukraine proved to have much less of an effect on luxury goods sales vs. sentiment.

“China’s reopening may repair most of the 25% of demand that’s still missing, we believe, from the luxury-goods market, both locally and internationally, as spending and travel have further to rebuild.

“LVMH is 47% of the MSCI Europe Textiles, Apparel & Luxury Goods Index, with Richemont at 16%, Hermes at 12% and Kering at 9%.”

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