Chanel Sees Trouble Through 2021: What Happens Now?

PARIS, France — Chanel, owned by the secretive Wertheimer family, kept its finances private for over 100 years, leaving analysts to estimate the performance of what has become one of world's most successful luxury megabrands. But starting with its 2017 fiscal year, Chanel reversed course, releasing its annual results each June because, the company has said, consumers are demanding greater transparency from the brands they buy.

On Thursday, Chanel announced 2019 sales of nearly $12.3 billion, up 10 percent from $11.1 billion in 2018 — a 13 percent jump when adjusted for currency fluctuations. Operating profit for the period was $3.5 billion, up close to 17 percent on the previous year. While the company cut back on capital expenditures, like new store openings — which accounted for $771 million (or 6.3 percent of total sales) in 2019, down from $1 billion (or 9.1 percent of total sales) the year before — it invested almost $1.8 billion in “brand support activities,” which include advertising, marketing and events like runway shows. Free cash flow was almost $2.3 billion in 2019, up nearly 85 percent year over year.

While the company doesn't break out sales for individual product categories, it reported a double-digit percentage increase in its fashion segment across regions and lines, which include ready-to-wear, couture, shoes, handbags and other personal accessories, noting that the collections designed by Creative Director Virginie Viard, a longtime right hand of Karl Lagerfeld, who passed away in February 2019, performed particularly well, with ready-to-wear up 28 percent year over year. Viard's collections, which have received good but not glowing reviews from critics, are more commercial than her predecessor's.

“It was a very easy and smooth transition,” Chanel Global CFO Philippe Blondiaux told BoF. “At the same time, for some [customers], [her designs] are slightly more feminine, simple and easy to wear.”

Sales of watches and jewellery grew by double digits as well, while fragrance and beauty — by far the company’s biggest contributors to overall revenue — experienced “robust” growth, though the brand declined to disclose further details.

Despite the positive momentum, Chanel's 2020 results are set to be significantly down due to the Covid-19 crisis, which has forced store closures and crushed consumer demand for luxury goods. The company warned the fallout would severely damage sales for the next year or two. (The overall market for personal luxury goods is expected to contract by up to 35 percent in 2020, according to Bain.)

“There are reasons to be increasingly bearish for 2020,” Blondiaux said. “This isn’t not a question of three months, but a question of 12-18 months.”

Chanel's iron-clad brand may offer some degree of protection, but the company has been cautious in its approach to e-commerce, part of a deliberate strategy to focus on its physical boutiques and maintain the perceived exclusivity of core products.

Government measures to slow the spread of the pandemic forced Chanel — which sells fragrance, cosmetics and certain accessories online but not ready-to-wear and handbags — to temporarily close stores in every region in early 2020. Currently, 15 percent of Chanel’s stores remain closed, mostly in the US, where the pandemic has hit hard.

The company has seen tremendous growth in sales of beauty and fragrance products made via its own online channels, up by 60 percent year to date, with significant spikes in April and May. This, combined with its sales through Alibaba’s Tmall in China, has resulted in a tripling of total online sales in beauty and fragrance, Blondiaux said.

Chanel remains adamant that it doesn’t need e-commerce for fashion and accessories, and that its customers value the in-store experience. Instead, the brand has put an increased emphasis on digitally “augmented” physical retail, making it easier for store employees to sell products virtually through customer relationship management systems, if not a website. (For the first time since it began publishing an annual report, the company used the word “omnichannel” to describe its sales strategy.)

Analysts agree that Chanel may be able to skip traditional e-commerce for core category products, instead using "digitally enabled" sales associates to process transactions, whether that means through SMS, WhatsApp or Instagram direct message. "I wouldn't worry too much about Chanel," said Bernstein analyst Luca Solca.

As lockdowns have eased, Chanel has seen an uptick in sales with local clientele in every region, particularly Asia and Western Europe, but Blondiaux warned that these gains will not be enough to compensate for losses from tourists, both in boutiques and airports. "The duty-free business is so important, but even more for fragrance," he said. "It's going to take a lot of time."

Price hikes for certain Chanel products — including its classic handbags — raised eyebrows in May, given what Covid-19 has done to consumer demand for luxury goods. Some analysts suggested the move appeared designed to pad margins and cushion the impact of lower overall sales volumes after weeks of store closures, with a price hike contribution to top-line growth expected to be in the single digits. But Blondiaux said the price increases were, instead, made as a part of the company's long-term "price harmonisation" strategy to balance prices across regions, accounting for currency fluctuation and the rising cost of high-quality raw materials.

“We haven’t done this price increase to compensate,” he said. “We regularly have to adjust prices to adjust for the cost of raw materials and changes in currency.”

In the past few weeks, civil rights protests in the US and beyond have compelled consumers and employees alike to hold corporations like Chanel accountable for the lack of diversity in their teams. Chanel hired a chief diversity officer in 2019 but has yet to publicly communicate concrete actions on the topic.

Blondiaux said that managers and leaders have received diversity and inclusion training and that the company had made changes to its recruiting protocols. "We have taken a number of actions over the last few years," he said. “Diversity and inclusion is at the heart of our recruitment process. We all have unconscious biases, and it's really present during each interview. We have to find ways to eliminate them."

Chanel expects a significant decrease in sales and profits — "topline, bottom line and cash flow" — in both 2020 and 2021. But it does not plan to stop investing in the business. Vertical integration — Chanel owns approximately 35 of its suppliers, from a feather specialist to a hatmaker — is key to its future, especially as competitors LVMH and Kering move to exert greater control over their own supply chains.

“That control that we have gained in the last 10 years, is, to a large extent, unique in the fashion industry,” Blondiaux said. In 2020, capital expenditures are expected to reach $700 million, and $800 million in 2021.

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