China's luxury spending downturn shows no signs of reversing this year, according to analysts and executives, deepening a slump that has wiped nearly $200 billion off the sector's value in recent months. The luxury sector, heavily reliant on China's market, faces significant challenges as middle-class consumers cut back on high-end purchases.
Profit warnings from Burberry and Hugo Boss, alongside a 27% drop in quarterly sales in China, Macau, and Hong Kong from Richemont, have heightened concerns about weakened demand in the region. Bain & Company reports that China accounted for 16% of the global luxury market, which was worth €362 billion ($393.8 billion) last year.
Economic data from Monday revealed that China, the world's second-largest economy, experienced slower-than-expected growth last quarter. A prolonged property slump and job insecurity have hampered a fragile economic recovery, casting further doubts on a quick rebound in luxury spending.
Bleak Outlook for Luxury Brands
Expectations for the luxury sector’s second-quarter earnings were already low, but recent reports have dashed hopes of a recovery in the latter half of the year. Bernstein analysts, after visiting China, noted that the country’s market is "in the repair shop." Richemont’s quarterly sales report confirmed fears of lackluster demand on the mainland.
According to Bain, China’s wealthiest individuals are opting for more discreet fashion choices, avoiding overt displays of wealth. This shift has alarmed investors, causing a €180 billion sector-wide drop since March, with LVMH losing about €85 billion of its value.
JPMorgan analysts stressed the need for signs of improving business conditions to support second-half expectations. Flavio Cereda, co-manager of GAM's luxury brands investment strategy, noted the absence of any significant uptick in discretionary spending.
Sector leader LVMH, owner of Louis Vuitton, Dior, and Tiffany & Co., will report results on July 23, followed by Kering on July 24 and Hermes on July 25. Visible Alpha consensus estimates suggest that LVMH’s second-quarter sales growth will remain unchanged from the previous quarter, with a 3% year-on-year increase. Kering, revamping its key label Gucci, is expected to post a 9% drop in second-quarter sales.
Top-End Luxury Brands Resilient
Despite the overall downturn, luxury brands targeting the ultra-wealthy are faring better. Hermes, known for its Birkin bags that sell for over $10,000, is the only major luxury stock to gain in the past year and is expected to post 13% sales growth for the second quarter. Italian luxury label Brunello Cucinelli also reported nearly 15% first-half sales growth, driven by high-end shoppers in China.
Future of Luxury Spending in China
The luxury sector has long relied on China's robust appetite for premium goods, with market size tripling between 2017 and 2021, according to Bain. However, the prolonged downturn may lead some brands to reconsider expansion plans in China. Despite this, Chanel has stated its commitment to investing in new stores on the mainland to keep pace with competitors.
This summer, the Paris Olympics could further impact luxury sales, as parts of Europe's fashion capital become inaccessible to shoppers, delaying prospects for positive earnings momentum, according to UBS analyst Zuzanna Pusz. She forecasts organic growth of 4% for the sector this year, with a potential 7% growth in the second half.
As the luxury market grapples with these challenges, stakeholders remain cautious, closely monitoring economic indicators and consumer behavior in China.
Source: Reuters
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