The stricken luxury goods sector is unlikely to pick up any time soon, commentators have warned, with one of the key market drivers, Chinese spending, under continued downward pressure.
After a nearly €184 billion ($200-billion) drop in value this year, the sector is now ringing with profit warnings from luxury brands like Burberry, Hugo Boss, and Swatch Group, as well as Richemont which has seen sales fall by 27% in China, Hong Kong and Macau.
Chinese market up and down
The luxury market in China increased three-fold between 2017 and 2021 and in 2023 Chinese consumers were responsible for a massive 16% of the €362 billion ($393.8 billion) spent globally on luxury retail, says Bain consultancy, reported by Reuters.
But though 2024 is the Year of the Dragon, that dragon market has not continued. Consumer confidence is faltering, with the latest Chinese growth figures at 4.7%, the slowest since the start of 2023 and down by 0.6% quarter to quarter. The property market has plunged, and employment worries are causing Chinese shoppers to tighten their purse-strings. Even those who are still spending are doing so in a less flamboyant way due to a feeling of what Federica Lovato, a partner at Bain in Milan, calls “luxury shame”.
What happens next?
The ups and downs of the Chinese market are now being watched closely and the slurry of poor profit headlines is causing investors to shed assets, erasing €180 billion between March and July, according to Reuters’ calculations based on LSEG data.
Kering and Hermes are due to report results in the third week of July, alongside LVMH, which holds Louis Vuitton, Dior and Tiffany & Co and is seen as a giant canary in the coalmine in terms of the health of the sector. Investment platform Visible Alpha is predicting stagnant second-quarter sales at LVMH, but up 3% year-on-year. Kering, in the midst of its Gucci relaunch, could see up to 9% slashed from Q2’s sales.
Do online deals and cut prices damage perceptions?
Some brands have pivoted to online retail strategies in an attempt to boost sales, and the Financial Times is reporting unusual cut-price deals for reluctant Chinese customers from “aspirational brands such as Versace and Burberry”, as well at Marc Jacobs, and a two years’ interest free credit at Bottega Veneta. Average discounts for 2024 are 50%, versus 30% and 40% in previous years.
But perversely, some commentators say the discounts could be putting consumers off even further. “Discounted brands can make people doubt the actual value of the products as well as the brands themselves in general,” says fashion curator Pooky Lee, co-director of Shanghai-based creative agency Poptag.
They also cause consumers to play games, purchasing items they don’t want to get free postage for example. Whether its luxury shame, product dissatisfaction once it’s seen in person, or just bargain trickery, there has been an uptick in returns at Marc Jacobs and Brunello Cucinelli whose Chinese return and cancellation rates both rose by 10% from 2023 to the same period in 2024, according to Jonathan Siboni, founder of data intelligence platform Luxurynsight.
Winners and losers
Siboni has told the FT that the Chinese market previously seemed like a place where “everyone was a winner” but “now there is a polarisation between winners and losers.”
This translates itself into a situation where the really high end is still doing alright, if $10,000-bag-maker Hermes’ expected sales growth of 13% for the second quarter is to be believed. Similarly, Italian fashion house Brunello Cucinelli is anticipated to reach first-half sales growth of nearly 15%.
“The challenge is for the brands that are stuck in the middle and they are not cheap enough or not big enough to survive,” Siboni said.