Luxury Goods Company Burberry CEO’s Tremendous Pay Cut

Sign of times to come for global luxury goods market

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China’s economic slowdown continues to impact the global luxury goods market. The most recent indication of this has been in the form of a significant pay cut undertaken by British luxury brand Burberry Group PLC’s (LSE: BRBY.L) CEO and Chief Creative Officer, Christopher Bailey. The pay cut was part of the company’s FY2016 results announcement, which saw a revenue decline of 0.3%, the first in the last five years. This follows continued weak performances by other luxury brands such as LVMH Moët Hennessy Louis Vuitton S.E. (Other OTC: LVMHF), Richemont N, and Swiss watchmakers Rolex, TAG Heuer (TAGN) and Swatch (UHR) to name a few. Burberry’s CEO Bailey opted for a 75% cut in total remuneration to GBP1.9 million for FY2016 (ending March) vis-à-vis GBP7.5 million he took home in FY2015.

China controls nearly 20% of the world’s luxury goods market

A weakness in the second-largest economy of the world had a direct and rather immediate impact on the average wealth of Chinese consumers through the stock market crash. Retail investors, who own a majority of China’s stock market, have seen their portfolios erode dramatically in recent months. As such, discretionary spending on luxury goods has taken a back seat. Several large global luxury brands significantly depend on Chinese consumers’ recent penchant for premium products and are now facing the pinch. Global forecasts for luxury goods indicate a meager 2% growth in 2016 with no major signs of recovery until 2020.

Weaker Yuan and curbs on corruption have not helped either

The Chinese government’s decision to devalue the Yuan against a basket of global currencies, especially the US dollar and Euro, has been a setback. A weaker Yuan implies lower value of goods sold in Chinese markets, thus impacting realized revenue for foreign brands. Additionally, the government has cracked the whip on controlling corruption in public parlances, where luxury goods and gifts have been common. Hong Kong and Macau, which have also been strong markets apart from Mainland China, have remained sluggish in their response toward luxury brands.

Middle East unlikely to bring any respite

Regions such as Abu Dhabi and Dubai have emerged as newer markets for luxury goods, given the significant wealth creation over the past decade or so. However, the oil slump of nearly 70% since the past 12 months could be a major headwind for these markets to compensate for the loss that the likes of Burberry and Louis Vuitton have faced in China. Even if oil were to recover, the UAE’s population of a little over 8 million seems too small to move the needle for these brands by any measurable amount.

It appears managing costs and profitability, much like Mr. Bailey’s pay cut, could be the order of the day than material topline growth for luxury brands.

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