Strong Asian demand gives L'Oreal a sales bounce

4 Min Read |

There’s life in China’s luxury shoppers yet.

L’Oreal SA on Tuesday reported better than expected first quarter sales. Most notable was a 23.2 percent gain in Asia, which led the region to outpace western Europe for the first time.

This is an important signal about the health of the Chinese luxury consumer. The nation accounts for about a third of sales and two thirds of growth in the luxury industry, according to analysts at Bernstein.

Its shoppers drove two years of phenomenal growth for sellers of high-end goods, as the effect of the government’s anti-extravagance campaign and stock market gyrations faded. Some slowdown from this frentic pace of purchases was always going to be inevitable.

L’Oreal’s report suggests that the pace of decline will be a gentle one, instead of a sharp drop, something that could easily have happened given trade tensions between the U.S. and China. This is reflected in valuations: luxury stocks have bounced back strongly this year, while L’Oreal’s forward price earnings ratio remains close to a record high.

Luxury Love Affair

The lipstick index seems to be at work here. This is the phenomenon where, when times look tough, women turn to make-up as an affordable treat while they cut back on other purchases.

This is an option now that cosmetics have become big business in Asia, driven first by the rise of Korean beauty and a craze for all things Japanese. The trend for a while has been for young Chinese buyers to skip entry-level products and go straight to top-end eyeshadow palettes and foundations.

Masks to Make-up

So, while Apple Inc.’s sales in China have stumbled and car sales fell for the first time in 20 years, L’Oreal seems to be benefiting from shoppers’ willingness to spend on, for example, Yves Saint Laurent Touche Eclat highlighter and Giorgio Armani foundation. This is useful, particularly as its showing in other regions was mixed – it noted U.S. consumer demand was weak.

There are some signs that indulgences aren’t confined to cosmetics – LVMH reported strong sales of its handbags. The next insight on the state of the luxury industry will come from Kering SA, which reports first quarter sales later Wednesday. The question is whether this apparent resilience in Chinese shopping is enough to maintain enthusiasm for the group’s Gucci brand, which is a favorite among millennials. Just a glance at the number of Gucci-logo bags and T-shirts on the streets of Shanghai illustrates its popularity.

It is worth noting that the first quarter includes the Chinese new year, often a strong point for spending. Sales figures after this event will give a clearer indication of whether the current momentum will continue.

There remain significant risks. Relations between the U.S. and China could worsen, as could the global economy. Reports Wednesday of a recovery in Chinese GDP growth could turn out to be premature. A cooler stock market would dent consumer confidence.

If any of these were to materialize, the lipstick index shows that L’Oreal is in a good position to weather the storm.

Written by Andrea Felsted and Jennifer Ryan for Bloomberg

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