China’s fast-growing economy boosted incomes and opened the door to luxury companies eager to sell glitzy bags, cosmetics and jewelry to consumers who suddenly had cash to burn.
Now, those brands are grappling with the flip side of that coin — a drag on quarterly revenue from the mysterious virus that began in Wuhan, spread across China and has become a global health panic.
Canada Goose, the maker of iconic parkas, said Friday that travel restrictions and lower foot traffic would cut into 2020 profits, while Burberry revised its forecasts after closing more than a third of its stores in mainland China.
The coronavirus was discovered in December in Wuhan, a city in the Chinese province of Hubei. It’s been traced back to a live-animal market, though scientists are convening this week in Switzerland to swap notes and try to pin down its origins and makeup.
In the meantime, the scramble to contain its spread has resulted in a patchwork of quarantine rules and canceled flights, leaving Chinese stores empty and disrupting global supply chains for a range of sectors, including aerospace and automaking.
Experts and financial reports suggest virus-related travel restrictions are even having an impact on luxury shops in hotspots like New York, London and Paris, where Chinese tourists love to shop.
China’s economy has grown into the second-largest in the world, with rising incomes adding hundreds of millions of people to the middle and upper classes. In the process, Chinese consumers have embraced high-end status symbols, such as Hermes scarves, Burberry coats and Jimmy Choo shoes.
But the coronavirus adds to a string of headaches companies have encountered in the Chinese market of late. Unrest in Hong Kong disrupted commerce, and President Trump’s trade war with Beijing caused ripples of uncertainty in the global economy.
“You’re just piling up a number of things that would make a corporation looking ahead say, ‘I think we want to diversify,’” said Dean Cheng, a senior research fellow at the Heritage Foundation’s Asian Studies Center. “Not pull out of China, say, but say, ‘Where should my next plant be? Maybe not in China.’”
The World Health Organization on Sunday reported over 40,000 confirmed cases and more than 900 deaths in China, exceeding the number of global fatalities from the SARS epidemic in 2002-2003.
Outside China, there have been over 300 confirmed cases spread across 24 countries. A man died in the Philippines after traveling there from Wuhan.
The White House insists the coronavirus outbreak will not have a major impact in the U.S., with chief economic advisor Larry Kudlow predicting “a drop in GDP of perhaps two-tenths of 1% — that’s all we found so far.”
Still, mounting fears and resulting precautions around the deadly disease are denting quarterly earnings for global brands.
“We now expect that our second half results could be negatively impacted by approximately $200-$250 million in sales and $0.35-$0.45 in earnings per diluted share, given current trends in China,” Tapestry told investors. “If the situation further deteriorates, or the outbreak affects demand outside of the country, this impact could be worse.”
Estée Lauder, a major cosmetics company, said it adjusted its outlook after the outbreak resulted in a significant drop in air travel and consumer traffic in vital shopping and tourist areas.
“Global travel retail, localities most affected by the virus outbreak and destination markets favored by tourists are expected to experience the greatest negative impact in the coming months followed by a gradual recovery later in the fiscal year,” it told investors. “The company stands ready to facilitate the recovery as soon as the market dynamics support it.”
Another cosmetics giant, L’Oreal, said it conveys its “deepest solidarity” with the people of China as they grapple with the disease and are bracing for a “temporary impact” on their Asia business. It’s confident that sales will bounce back.
“The experiences we have had with similar situations in the past (SARS, MERS, etc.) show that, after a period of disturbance, consumption resumes stronger than before,” the company said. “Therefore, at this stage, and assuming that this epidemic follows a similar pattern, we are confident in our capacity this year again to outperform the beauty market and achieve another year of growth in both sales and profits.”
Mr. Trump has tried to manage the fallout from the virus by imposing travel restrictions to prevent its spread while praising Chinese President Xi Jinping to keep his relationship with the strongman on an even keel.
“The history of Trump and China is a little bit of good cop, bad cop,” said Tom Duesterberg, a senior fellow at the Hudson Institute, a D.C. think tank. “The U.S. economy is in pretty good shape right now and the only thing that could derail it in the election year — which honestly Trump thinks about — really is this crisis in China, with the virus, and the impact it’s having on economies around the world.”
The president is hoping to enter “phase two” trade negotiations after striking an initial agreement in which China agreed to buy large amounts of U.S. farm products in exchange for tariff relief from the White House.
The phase-one deal eased global tensions around trade, though the virus is giving global companies another reason to feel skittish about their relationship with China.
“Global firms, including those in the United States, are certainly going to have to take this into account looking ahead,” Mr. Duesterberg said. “There are all kinds of reasons to diversity your supply chains away from China. This inability to control this situation is another one.”
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