Hermès Continues to Feel Disruptions to Business in China Due to Coronavirus

It’s too early for a tally, but Hermès International continues to feel disruptions to its business in China due to the coronavirus outbreak, even if stores are gradually reopening there, the French luxury group said on Wednesday.

“When a store is closed, we do zero business, like everyone else,” said Hermès CEO Axel Dumas, speaking at the company’s annual results presentation.

Four of the company’s stores remain shut in mainland China. At the height of the crisis in February, 11 were closed in mainland China and four were shuttered in Macau.

Dumas added that the disruption hit “an important country for our industry at an important time,” but he said that executives won’t be able to provide figures before the second quarter. Even as stores reopen, sales continue to suffer from weak traffic.

“Traffic has not returned to normal levels in China at this point,” Dumas added. The executive said business was brisk at the end of January, but it dropped off as people canceled their Chinese New Year travel plans.

“We were impacted like everyone, due to the events, particularly in February. We were on a good trend in January. Clearly, demand was there,” he added.

“There was the difficulty of opening stores. Several were closed and others operated with restricted hours,” explained Dumas, noting precautionary sanitary measures required separating teams of employees.

Standalone stores have fared better than those in malls, where traffic has been most affected at a time when consumers are fearful of public gathering places, Dumas explained.

Meanwhile, the company has no plans to rein back marketing investments in the country, including digital channels.

“At any rate, we won’t reduce our communications, especially in cosmetics,” said Dumas, even if events may be canceled as consumers avoid large public gathering places.

The coronavirus outbreak comes as Hermès prepares to launch its first line of lipsticks on March 4 in 180 points of sale across 35 countries. Unveiled in Paris earlier this month, the line sits at the top end of the luxury cosmetics spectrum, with the refillable lipsticks retailing for 62 euros ($68.44). Further cosmetics will follow soon.

Meanwhile, as the virus moves across the globe, the executive said Hermès supply chains are not at risk. “At this stage, there is no supply chain problem in Italy,” he said, noting that the company has ready-to-wear and shoe production in the country, but that 80% of its production takes place in France.

Hermès reported revenues rose 10.7% over the last three months of 2019 at constant rates, providing a snapshot of luxury business before the coronavirus outbreak. Annual profit was 1.53 billion euros ($1.69 billion), equivalent to 22.3% of sales.

Fourth-quarter sales reached 1.87 billion euros ($2.06 billion), with the fastest growth coming from its smallest region, the Americas.

“Strong as expected,” Luca Solca, analyst at Bernstein, said in a research note. “Hermès should prove among the most resilient in the slowdown — waiting lists for its iconic products should partially offset its relatively high exposure to Chinese nationals globally.”

Asia, the company’s most important region, clocked 10.2% growth at constant rates, dragged down by a slight decrease in Japan, which is down 0.1%. The performance in Japan was affected by an increase in sales tax in October, but toward the end of the quarter, activity there had begun to return to normal levels, according to Dumas. Before the sales tax-induced decline, Hermès had seen a surge in sales in the country, spurred by rising tourism there by Chinese visitors in particular.

A drop-off in business due to a decline of mainland consumers visiting Hong Kong had shifted to the mainland, according to Dumas.

Excluding Japan, sales were up 14.3% in the Asia-Pacific region, where the company continues to roll out its digital commerce sites and extend stores in Qingdao in China and Hyundai in South Korea. In Europe, sales were up 8.7% at constant rates.

The leather goods division clocked 11.3% growth, reaching 3.4 billion euros ($3.75 billion), with the company citing sustained demand for the Mosaïc, 24/24 and Twins bags.

Hermès continued to increase production capacities, with two new workshops, Guyenne and Montereau, slated for completion this year. Dumas said plans are to continue investments in production capacity.

“We continue our long-term industrial investments for the moment. We see the demand is there, the desirability remains there,” he said.

Accessories and RTW activities rose 17%, while the silk and textiles division posted a 7.5% gain.

The company is open to selling specific products on external e-commerce platforms in China, such as perfume, or perhaps testing a pop-up site on WeChat, Dumas said, noting that executives had been surprised by the success of their e-commerce site in China, which was launched in 2018.

Luxury brands, which have been slow to embrace digital channels, are turning to e-commerce sites operated by other companies in the country, such as Alibaba’s Luxury Pavilion.

This story was reported by WWD and originally appeared on WWD.com.

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