A worker at the Beijing West Railway Station in Beijing on January 24 2020. Picture: AFP/NICOLAS ASFOURI
A worker at the Beijing West Railway Station in Beijing on January 24 2020. Picture: AFP/NICOLAS ASFOURI

For a while there, the major luxury companies appeared to be impervious to hard times in Asia. Even as prolonged unrest in Hong Kong hurt sales, and trade talks between the US and China ground on, their stocks kept climbing. That changed this week as fears grow about the spread of a deadly virus in China.

With the death toll reaching 25 on Friday, and China restricting travel for 40-million people on the eve of Lunar New Year, the question of what it all means for demand for high-end watches and handbags is obviously of minor concern.

Yet it’s an unwanted reminder of just how dependent the industry is on Chinese consumers. Shoppers from the world’s most populous nation, be they in Shanghai, Singapore or San Francisco, probably accounted for about 35% of global luxury goods sales last year, according to Bain & Company and Altagamma. What’s more, they generated the lion’s share — 90% — of all growth.

There’s no reason to think they won’t be just as crucial to the sector’s performance this year too. One analyst, Flavio Cereda at Jefferies, says he expects the bulk of his estimated 5% sales growth (excluding currency movements) in 2020 global luxury sales to come from the Chinese, putting their expected impact at four percentage points.

Some companies in particular, including Burberry, watchmakers Swatch, and Cartier-owner Richemont, have an exposure above the industry average.

It’s too early to say what impact of the new coronavirus that’s gripping China will be, as hundreds of millions of people travel for the Lunar New Year — traditionally a time when revelers spend on goods from the top luxury brands.

On Friday, the World Health Organisation (WHO) stopped short of calling it a global health emergency. After first appearing in the central Chinese city of Wuhan, it has spread to locations including Singapore, Hong Kong, Thailand and the US. Chinese authorities have been working to revise or cancel planned holiday activities in an attempt to stop any further spreading. Disneyland Shanghai is being closed temporarily.

Chinese tourists are high spenders

If the crisis intensifies, it could become more problematic. People wanting to avoid the risk of catching the virus will likely curtail anything but the most necessary travel, and avoid crowded areas, with shopping malls being among them. That will hurt companies that managed to make up some lost Hong Kong sales at their stores in mainland China.

It will also hit sales to Chinese tourists the world over. Although Hong Kong and Macau, which has canceled all its Lunar New Year festivities, remain the most popular destination for Chinese travelers, Japan, the US, Italy and France are also high on their itineraries. Chinese tourists are the highest spenders across most of Europe, according to payments provider Planet, typically splashing out for goods worth about four times that of domestic shoppers.

In the US, a number of retailers, including diamond jewellery specialist Tiffany, have already said they’ve been negatively affected by having fewer tourists due to the dollar’s strength.

Even though Chinese shoppers have recently been spending more at home, as excursions to Hong Kong fall, they still make the bulk of their purchases when they travel, a time when people are more inclined to blow the budget on impulse buys. Any slowdown in international travel would also hit demand in duty-free shops (DFS), including luxury behemoth LVMH’s DFS business and Dufry, in which Richemont has a 5% stake.

• Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries.

Bloomberg