In recent years, the luxury goods business has relied primarily on China and North America for growth, but recent Chinese economic numbers and a disappointing sales report from Cartier-owner Richemont show that both markets may be slowing.
Major luxury brands have spent millions of dollars to target new customers in the two regions, venturing outside the typical high-end shopping malls to create new stores in cities like Wuhan and Zhengzhou, or Charlotte and Nashville.
A post-pandemic splurge in the United States has already begun to wane, leaving investors to hope that Chinese buyers will continue the months-long shopping binge that has improved the sector's fortunes.
However, China's economy slowed in the second quarter, forcing J.P.Morgan, Morgan Stanley, and Citigroup to lower their growth expectations for this year.
Richemont, a Swiss company, reported poor sales for the three months ending in June on Monday. Sales in the Americas were down 4%, while those in Asia were also below forecasts.
Its stock fell 10.43%, with Hermes pulling it down 4.21%, LVMH falling 3.7%, and Kering falling 1.95%.
Chinese consumers will "not be going through a V-shape demand recovery but rather a multi-year consumption catch-up at home and abroad," Citi analysts forecast after speaking with Richemont officials.
Following double-digit quarterly growth for much of 2021 and 2022, first quarter earnings for brands like LVMH and Chanel had already indicated North American growth dropping to single digits. Comparing this time last year to this year, Kering and Ferragamo both experienced double-digit reductions.
The extent to which China's domestic and tourist demand recovers over the course of this year will determine whether luxury brands are able to counteract that mostly U.S. drop, according to analysts.
Although certain brands, like Hermes and Chanel, will perform better than others, luxury executives have been counting on China's recovery to propel the industry into positive territory in 2023 - likely around 5%, according to Bain forecasts. Their more affluent target customers are better protected from macroeconomic risks.
"The luxury industry seems to be outperforming the consumer market as a whole in China, but you know, really, almost everyone you speak to, there's a level of uncertainty," said Agility's managing director Amrita Banta.
"There's a level of not feeling entirely comfortable with their future economic position that is really affecting almost everybody in China."
According to consultants, jewellery is overtaking casual shoes, leather products, and apparel as the most popular product category in China. Strong sales of watches are also reported. Chanel, Dior, and Balenciaga recorded the biggest gains in sales of clothes and accessories in the most recent quarter.
The United States' spending slump is mostly a result of rising prices, increasing interest rates, and gradually deteriorating credit circumstances. The "aspirational" luxury clients who can easily live without another Gucci bag or a $900 pair of trainers are disproportionately impacted by these issues.
According to BCG, the average age of luxury buyers in China is 28. This is younger than the rest of the globe, which is something businesses had viewed as favourable for future growth.
However, the younger generation's increasing unemployment - China's youth unemployment rate increased to 21.3% in June from 20.8% in May, a new record high - could make it difficult to attract new customers, both inside and outside of luxury's elite companies.
"In the trends that I'm seeing in the U.S. and also in China, more aspirational younger consumers are feeling more of a pain," Morningstar senior equity analyst Jelena Sokolova said.
According to Morgan Stanley data, certain luxury brands, like Richemont, currently derive almost 40% of their global sales in China, which raises concerns about an excessive reliance on one market—especially one that is expected to become a future geopolitical flashpoint.
Erwan Rambourg from HSBC claims that the pandemic has, however, resulted in European luxury businesses beginning to focus more on local clienteles, potentially making them less susceptible to China threats than in 2019.
"This means the sector which used to be Japan-centric 25 years ago and China-centric pre-COVID is now really more of a play on global wealth rather than just one nationality. This is very healthy," Rambourg said.
"However, given the wealth creation in both China and the U.S. and a cultural awakening to luxury recently in the latter, these two markets should continue to account for the bulk of incremental growth."
(Source:www.reuters.com)
Major luxury brands have spent millions of dollars to target new customers in the two regions, venturing outside the typical high-end shopping malls to create new stores in cities like Wuhan and Zhengzhou, or Charlotte and Nashville.
A post-pandemic splurge in the United States has already begun to wane, leaving investors to hope that Chinese buyers will continue the months-long shopping binge that has improved the sector's fortunes.
However, China's economy slowed in the second quarter, forcing J.P.Morgan, Morgan Stanley, and Citigroup to lower their growth expectations for this year.
Richemont, a Swiss company, reported poor sales for the three months ending in June on Monday. Sales in the Americas were down 4%, while those in Asia were also below forecasts.
Its stock fell 10.43%, with Hermes pulling it down 4.21%, LVMH falling 3.7%, and Kering falling 1.95%.
Chinese consumers will "not be going through a V-shape demand recovery but rather a multi-year consumption catch-up at home and abroad," Citi analysts forecast after speaking with Richemont officials.
Following double-digit quarterly growth for much of 2021 and 2022, first quarter earnings for brands like LVMH and Chanel had already indicated North American growth dropping to single digits. Comparing this time last year to this year, Kering and Ferragamo both experienced double-digit reductions.
The extent to which China's domestic and tourist demand recovers over the course of this year will determine whether luxury brands are able to counteract that mostly U.S. drop, according to analysts.
Although certain brands, like Hermes and Chanel, will perform better than others, luxury executives have been counting on China's recovery to propel the industry into positive territory in 2023 - likely around 5%, according to Bain forecasts. Their more affluent target customers are better protected from macroeconomic risks.
"The luxury industry seems to be outperforming the consumer market as a whole in China, but you know, really, almost everyone you speak to, there's a level of uncertainty," said Agility's managing director Amrita Banta.
"There's a level of not feeling entirely comfortable with their future economic position that is really affecting almost everybody in China."
According to consultants, jewellery is overtaking casual shoes, leather products, and apparel as the most popular product category in China. Strong sales of watches are also reported. Chanel, Dior, and Balenciaga recorded the biggest gains in sales of clothes and accessories in the most recent quarter.
The United States' spending slump is mostly a result of rising prices, increasing interest rates, and gradually deteriorating credit circumstances. The "aspirational" luxury clients who can easily live without another Gucci bag or a $900 pair of trainers are disproportionately impacted by these issues.
According to BCG, the average age of luxury buyers in China is 28. This is younger than the rest of the globe, which is something businesses had viewed as favourable for future growth.
However, the younger generation's increasing unemployment - China's youth unemployment rate increased to 21.3% in June from 20.8% in May, a new record high - could make it difficult to attract new customers, both inside and outside of luxury's elite companies.
"In the trends that I'm seeing in the U.S. and also in China, more aspirational younger consumers are feeling more of a pain," Morningstar senior equity analyst Jelena Sokolova said.
According to Morgan Stanley data, certain luxury brands, like Richemont, currently derive almost 40% of their global sales in China, which raises concerns about an excessive reliance on one market—especially one that is expected to become a future geopolitical flashpoint.
Erwan Rambourg from HSBC claims that the pandemic has, however, resulted in European luxury businesses beginning to focus more on local clienteles, potentially making them less susceptible to China threats than in 2019.
"This means the sector which used to be Japan-centric 25 years ago and China-centric pre-COVID is now really more of a play on global wealth rather than just one nationality. This is very healthy," Rambourg said.
"However, given the wealth creation in both China and the U.S. and a cultural awakening to luxury recently in the latter, these two markets should continue to account for the bulk of incremental growth."
(Source:www.reuters.com)
