• Article
• 2024-04-14

Luxury Cools Down: LVMH's Chill in China

Under the influence of downward pressure on the macroeconomy, the growth rate of global luxury goods market sales has slowed down, but there are huge differences between regional markets.

The 2024 Paris Olympics have come to an end.

At this Olympic Games, luxury brands such as LVMH (Louis Vuitton Moët Hennessy), Hermès, Chanel, and Gucci (Gucci) have unprecedented participation.

Among them, LVMH, the world's largest luxury goods group, as the chief sponsor of this Olympic Games, invested 150 million euros (about 1.2 billion yuan) in sponsorship fees.

Louis Vuitton (Louis Vuitton) was responsible for creating the medal boxes, torch boxes, and award trays for this Olympic Games, Dior (Dior) sponsored the opening ceremony performance guests' clothing, and Chaumet (Chaumet) was responsible for designing the official medals.

However, behind the scenes, the LVMH group is not doing so well.

On July 23, the LVMH group, which holds brands such as Louis Vuitton, Dior, Fendi, and Bvlgari, released a performance report, with a 1% decline in operating income in the first half of 2024 to 41.7 billion euros, and a 14% decline in net profit to 7.3 billion euros.

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LVMH's predicament is not an isolated case.

Kering Group, which owns Gucci, Saint Laurent, and other brands, Richemont Group, the parent company of Cartier, Van Cleef & Arpels, and Vacheron Constantin, and British luxury brand Burberry, are all facing varying degrees of performance decline.

Even luxury goods cannot escape the impact of the overall economic environment.

Bain's recently released "2024 Global Luxury Goods Market Research Mid-Year Update" (hereinafter referred to as the "report") shows that from the market performance in the first quarter of 2024, most regions have slowed down under the influence of downward pressure on the macroeconomy, and the global luxury goods market sales are expected to decline by 1% to 3% in the quarter.

There are huge differences between regional markets and within each market.

Among them, the European and Japanese markets have shown strong resilience.

In Japan, the yen's exchange rate against the US dollar has fallen to its lowest level in more than 20 years.

The sharp depreciation of the yen has stimulated a surge in the number of foreign tourists to Japan, and at the same time, emerging luxury stores have become a must-visit on their itinerary.

Relatively speaking, the Chinese and American markets are facing pressure.

They believe that the uncertainty of the Chinese economy has led to weak domestic demand, and American consumers are also facing pressure at the macroeconomic level.

Many luxury giants have mentioned in their financial reports that the Japanese market's performance has been eye-catching, while sales in the Asia-Pacific market (excluding Japan) have declined.

Taking LVMH Group as an example, in the first half of 2024, its Japanese market revenue increased by 44%, and the Asia-Pacific market revenue excluding Japan fell by 10%.

LVMH Group attributed this to the buying spree of Chinese consumers in the Japanese market.

"Chinese consumers, especially the middle class, are becoming more rational.

Recently, the sharp depreciation of the yen has led to a large number of Chinese consumers starting to shop in Japan, which has a higher cost-performance ratio."

An analyst told Caijing.

Similar to the above situation is the American market.

Affected by factors such as the appreciation of the US dollar, in 2023, the luxury goods sales in the American market decreased by 8% year-on-year.

The reason is that, on the one hand, many "aspirational" consumers generally have uncertainty, suppressing the willingness to buy luxury goods; on the other hand, although the top customers have maintained a firm consumer confidence, due to the continued strength of the US dollar against the euro and the price difference between domestic and foreign markets, this kind of consumer is more willing to go abroad (outside of America) for consumption.

In addition, high-end shopping malls with many luxury brands, such as Hang Lung Properties and Swire Properties, have also encountered a decline in property rental income, which also indirectly confirms that China's luxury consumption has cooled down.

Despite this, the Chinese market is still one of the most important markets for international luxury brands.

Bain estimates that in 2023, Chinese mainland consumers accounted for 22%-24% of the global luxury consumption volume, and the Chinese mainland market consumption volume accounted for about 16% of the global luxury consumption volume.

Faced with the weakness of the Chinese and Asia-Pacific markets, the strategies of major luxury giants have diverged.

Burberry, Saint Laurent, Versace, and Balenciaga, as representatives of second-tier luxury goods, have started to reduce prices, while Hermès, Louis Vuitton, and Chanel, as top luxury brands, have collectively raised prices to maintain their high-end image and market scarcity.

As the chill in the luxury goods industry is getting stronger, there are still a few brands that have achieved outstanding results.

Hermès and Prada have maintained a growth momentum against the trend.

The capital market has also given its own attitude.

So far this year, as of August 14, the stock prices of LVMH (MC.PA), Kering Group (KER.PA), and Burberry (BRBY.L) have fallen by 11%, 34%, and 53% respectively, while Richemont Group (CFR.SIX), Hermès International (RMS.PA), Prada (1913.HK), and Ralph Lauren (RL.N) have risen by 12%, 9%, 30%, and 11% respectively.

Since 2023, the performance growth of international luxury giants has obviously slowed down.

The financial reports disclosed by luxury giants recently have once again revealed the fact that the polarization in the industry is becoming more and more obvious.

These luxury groups have unanimously mentioned that the Chinese market sales have declined, while the Japanese market is outstanding.

Regarding the large number of Chinese tourists flocking to Japan for consumption, some analysts told Caijing, "The changes in the global macroeconomic environment have made the willingness of the middle class to consume luxury goods loose, and they have begun to pay attention to cost-effectiveness."

The performance changes of the luxury leader LVMH Group are a major weathervane for observing the luxury industry.

In 2021 and 2022, the revenue of LVMH Group maintained a high-speed growth of 44% and 23% respectively, but the growth rate in 2023 was only 9%, and in the first half of 2024, it turned into a year-on-year decline of 1%.

By region, the American market's revenue increased by 2% in the first half of the year, the Japanese market's revenue increased by 44%, the European market grew by 3%, and the Asia-Pacific market excluding Japan's revenue fell by 10%, becoming the only market with declining revenue.

The CFO of LVMH Group once said at the financial report meeting in the first quarter of this year that although the number of Chinese consumers has increased by 10% year-on-year in the past three months, their consumption behavior has become more and more unpredictable.

Similarly, the second-largest luxury goods company in the world, Kering Group, also has a hard time selling.

In the first half of 2024, Kering Group's revenue decreased by 11% year-on-year to 9.018 billion euros, and net profit attributable to the parent company decreased by 51% year-on-year to 877 million euros.

From the perspective of brands, Gucci has dragged down the overall performance of the group, and its sales account for half of the group's sales, but the operating profit has declined by 44% year-on-year.

By region, the Asia-Pacific region (excluding Japan) is the largest market for Kering Group's global performance decline, with revenue decreasing by 22% year-on-year, the European market's revenue has decreased by 8%, and the American market's revenue has decreased by 11%.

Japan is the only region in the world that has achieved positive growth, with a year-on-year increase of 8%, and if the impact of exchange rate changes is excluded, the growth is 22%.

Like LVMH Group, the financial report also attributes the reason to the impact of customers from other Asian regions (especially China) traveling to Japan for consumption.

Burberry's second-quarter retail sales in 2024 decreased by 22% year-on-year to 458 million pounds, and same-store sales decreased by 21%.

Japan has become the only region where Burberry has grown globally, with a comparable store sales increase of 6%, while the Chinese mainland market has declined by 21% year-on-year, and the American market has declined by 23%.

Over the past year, the company's stock price has fallen more than 70% from its historical high in April 2023.

Faced with the downturn, Burberry has suspended dividends and replaced the CEO (Chief Executive Officer).

Cartier's parent company, Richemont Group, disclosed that in the second quarter of 2024, sales increased by 1% to 5.3 billion euros at constant exchange rates, while in the same period of 2023, the growth was 19%.

Except for the Asia-Pacific market (excluding Japan), where sales decreased by 18%, sales in other regions have achieved positive growth, with the European market growing by 4% and the American market growing by 11%.

However, the Greater China region in the Asia-Pacific market has seen a sales decline of 27%.

Compared with the unsatisfactory performance of other luxury brands, Hermès and Prada are outstanding, still in a growth trend.

In the first half of 2024, Hermès's revenue increased by 15% year-on-year to 7.5 billion euros, and net profit increased by 6% to 2.4 billion euros.

However, in the Asia-Pacific region including China, the second-quarter revenue growth rate was 5.5%, significantly slower than the first quarter's 14%.

The Italian luxury group Prada's revenue in the first half of the year increased by 17% year-on-year to 2.55 billion euros (at constant exchange rates), and net profit increased by 25.6% to 380 million euros.

As a new traffic-bearing brand, Miu Miu, which accounts for 20% of the revenue, has a growth rate as high as 93%.

By region, the Japanese market's retail sales increased by 55%, other Asia-Pacific markets increased by 12%, the American market grew by 7%, and the European market grew by 18%.

While luxury goods are not easy to sell, the fate of these high-end shopping malls that these luxury brands are competing to enter is also closely related to the rise and fall of luxury goods.

On July 30, the semi-annual report released by Hang Lung Properties showed that affected by three factors: the weakness of luxury consumption in mainland China, the slowdown in the retail and office market conditions in Hong Kong, and the depreciation of the renminbi against the Hong Kong dollar, property rental income decreased by 7% to 4.886 billion Hong Kong dollars, among which the property portfolio rental income in mainland China decreased by 6%.

The latest operational data released by Swire Properties in the second quarter showed that among the six major retail property projects in mainland China, except for the 0.2% increase in sales in Shanghai Qiantan Taikoo Li, the sales of the other projects have all declined to varying degrees.Bain believes that the Chinese market is facing considerable pressure: first, the gradual recovery of outbound tourism, and second, the economic uncertainty leading to weak domestic demand.

From 2017 to 2021, the luxury goods market in Mainland China doubled in size within five years, but the growth momentum stopped in 2022, with the market sales experiencing a double-digit decline.

In early December 2022, the recovery of social and economic activities also led to a rebound in the luxury goods market in Mainland China in 2023.

Bain forecasts that by 2030, China will become one of the world's leading luxury goods markets, with Mainland Chinese consumers accounting for 35%-40% of the global total, and the domestic market consumption volume's share of the global total will increase to 24%-26%.

Faced with the downturn in the luxury goods industry, the strategies adopted by major luxury brands are quite different.

Some second-tier luxury brands frequently offer discounts, especially in e-commerce channels, trying to compete for the market by lowering prices.

Burberry and Balenciaga have reduced the prices of some handbags.

According to data from luxury big data company Luxurynsight, in 2024, Versace and Burberry products saw an average discount of about 50% across all distribution channels in China, sometimes even more.

However, top-tier luxury brands continue to adhere to a price increase strategy.

Especially popular bags and watches sought after by Chinese consumers have seen a certain degree of price increase.

On July 2nd this year, Louis Vuitton announced a price increase across the board, with an adjustment range of 5%-7%, and it has raised prices more than ten times in the past three years; Dior, also under LVMH, completed a price increase at the end of June, with an increase of about 3%-9%; Hermes completed a price increase for the entire product line in January this year, with a global average increase of about 8%-9%; Gucci's price adjustment saw some hot-selling bag prices increase by more than 10%; Chanel also raised prices again in March this year, and the pricing of the large CF classic handbag in the Chinese market has approached the 100,000 yuan mark.

"Consumers buy luxury goods not for their practical value, but for the brand's added value.

For top-tier luxury goods, discount promotions can damage their brand value," an analyst told Caijing.

"Luxury goods also have liquidity in the second-hand market.

Another purpose of price increases is to enhance the brand's value retention, and price reductions may affect transactions in the second-hand market.

The prices in the luxury goods second-hand market have declined significantly this year."

Now, the competition among luxury brands is increasingly fierce, and the market is becoming more competitive.

The second half of 2024 is a critical juncture for brands to survive and change.

In the era of internet e-commerce, luxury giants that used to be proud of their high-quality service in physical stores are now also focusing on online channels and starting digital transformation.

The vast majority of luxury brands have entered e-commerce platforms to open online flagship stores, actively participate in shopping festival activities such as "6·18" and "Singles' Day," start live-streaming with goods, and showcase the brand's charm through social media.

In March 2020, LV made its first broadcast on Xiaohongshu, and in the same month, Prada also made its first live broadcast on Tmall, attracting various high-end and light luxury brands to follow suit and enter the live broadcast room.

Recently, Versace also started live-streaming with goods on TikTok.

More and more luxury brands are using differentiated and localized marketing to close the distance with domestic consumers.

Cross-border cooperation with sports is one of the common brand promotion methods for luxury brands.

During this Paris Olympics, many luxury brands also shone brightly, using such brand promotion opportunities to reach more new audiences.

The current luxury goods marketing methods are very different from the past.

As more and more young customers join the ranks of luxury brand consumers, whoever can better understand the personalized experience needs of Generation Z consumers, and make marketing activities eye-catching and innovative, can take the lead.

Many luxury brands have adopted cross-border co-branding marketing methods.

LV's cross-border co-branding with MANNER coffee shops, Fendi's cross-border co-branding with HEYTEA, have allowed high-end luxury brands to enter the daily lives of the public, expanding the brand's communication range.

Prada provided costumes for the characters in the TV series "Fanhua," and then, taking advantage of the popularity of the TV series, launched a series of co-branded products such as coats and dresses.

In the past, luxury brands expected to expand market size by attracting the middle class, but as the middle class began to be more cost-effective, luxury brands also shifted their sales focus more to VIP (Very Important Client, high-net-worth customers).

A report released by Bain shows that there are currently 400 million luxury goods consumers worldwide, among which VIP customers account for less than 1%, but they contribute up to 30% of the luxury brand's revenue.

"Compared with the increasingly cost-effective middle class, VIP users are not sensitive to price changes, and they hope to highlight their identity and wealth through luxury goods, and they maintain a certain loyalty to the brand," an analyst told Caijing.