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China could end up spoiling the show for Burberry

A trifecta of political unrest in Hong Kong, US trade war tensions and the coronavirus outbreak are all threatening to upset one the luxury brand's crucial markets

Burberry Group PLC - China could end up spoiling the show for Burberry
Burberry has a campaign prepared for Chinese New Year

Despite increasing its full-year revenue forecasts in a trading update, shares in luxury fashion brand Burberry Group PLC (LON:BRBY) stumbled lower on Wednesday.

The main cause for concern among shareholders appears to be that the fashion house’s crucial Chinese market is currently trying to contain an outbreak of coronavirus, a pneumonia-like illness that has already infected over 400 people and left nine dead after spreading from the city of Wuhan.

READ: Burberry Group ups guidance after new lines sell well

Burberry shares were 4% lower at 2,178p in mid-afternoon trading, down more than 6% since the start of the week.

The outbreak has highlighted just how closely the company’s fortunes are tied to the Chinese market, and how the wider spread of the virus could end up keeping customers in the key market out of Burberry’s stores, said Russ Mould, investment director at AJ Bell.

The risk of disease keeping punters out of its shops is particularly acute with Chinese New Year celebrations due to start this weekend, a period that often sees large exchanges of gifts and money between relatives.

Burberry’s reliance on consumer spending in the Chinese mainland has also been increased by recent political unrest in Hong Kong, a significant market for the company and where sales have more than halved as protests continue to drive customers away from the city.

The issues in Hong Kong have also resulted in Burberry having to mark down more of its inventory to shift stock, putting pressure on profit margins, noted Interactive Investor’s Richard Hunter.

While growth in the mainland has previously helped to offset this decline, the coronavirus outbreak threatens to upset the balance.

There is also the lingering risk that the ongoing trade spat between China and the US will flare up again despite the signing of a truce earlier this month, putting pressure on Chinese consumer spending power should economic growth begin to slow as a result.

Many observing the coronavirus outbreak will also be drawing comparisons to the severe acute respiratory syndrome (SARS) epidemic in 2003, which killed over 700 people and caused Chinese GDP to fall by 1% as the disease disrupted trade and consumer spending.

Tourists and social media may save the day

However, while the Chinese market could be looking more bleak than usual for Burberry, tourists, many of them from Asia, could help pick up the slack by splashing their cash in its stores across Europe and the US.

Analysts at Morgan Stanley highlighted that in a note on Wednesday that tourist flows in continental Europe had increased, helping the region to remain relatively stable despite declines in domestic consumption, most of which was confined to the UK market.

Social media marketing is also touted as a key part of the firm’s growth strategy, with Hargreaves Lansdown analyst Nicholas Hyett pointing out that clothing firms such as ASOS PLC (LON:ASC) had shown that a “social led campaign can resonate in the mass market”, and that Burberry was now trying the same approach in the luxury segment.

Quick facts: Burberry Group PLC

Price: 1495.5 GBX

LSE:BRBY
Market: LSE
Market Cap: £6.05 billion
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