The luxury goods industry is encountering the challenge of a slowdown in performance in the Chinese market.
After ending his visit to China, Barclays released a report stating that it might take three to four years for the luxury goods market in China to improve. Therefore, the growth forecast for the luxury goods industry next year has been downgraded from 7% to 4%.
Luxury retail deteriorated further in the summer. Luxury goods sales in the domestic market dropped by 10% to 50% in July and August. It is expected that the growth rate of the luxury goods industry will decline from 7% to approximately 4% in 2025.
Barclays further pointed out that the growth of the luxury goods market in China has almost stagnated, and it is expected that the growth may be even weaker and last longer.
Due to market concerns about weak luxury goods demand in China, the share price of Kering, the parent company of Gucci, has dropped to a seven-year low, making it the stock that has been most impacted in the recent sell-off in the luxury goods sector.
As this decline occurred, Kering Group’s rivals LVMH and Hermès achieved a moderate rebound from last week’s sharp fall. The market’s main concern about demand in Asia, including China, triggered this round of decline.
According to data from Fashion Business Daily, in the first half of 2024, Kering Group’s revenue dropped sharply by 11% to 9.018 billion euros, operating profit plummeted by 42% to 1.582 billion euros, and net profit halved to 878 million euros. Among its core businesses, only Bottega Veneta achieved a 3% growth, while Gucci’s revenue dropped by 20% and Yves Saint Laurent declined by 9%.
Six years ago, Gucci restored its performance through bold measures to attract young consumers in a V-shaped recovery.
In 2017, Gucci’s revenue exceeded the 6 billion euro mark, surpassing Hermès for the first time. The growth rate of its brand value even exceeded that of LV at one point. In the first quarter of 2018, Gucci achieved a strong growth of more than 35% for five consecutive quarters. At that time, the CEO Marco Bizzarri once said that Gucci would replace LV as the largest luxury brand and set a goal of an annual revenue of 10 billion euros.
Alessandro Michele, the creative director, is undoubtedly a contributor to Gucci’s significant sales growth. During his eight-year tenure, he increased Gucci’s sales from 3.6 billion euros in 2015 to 10 billion euros. Specializing in creating a world of flowers, birds, and mythical creatures in design, under Alessandro Michele’s creative leadership, Gucci has won the favor of more and more young consumers and has continuously created several best-selling products such as velvet shirts, horsebit loafers, dad shoes, and the 1955 handbag.
However, since 2022, Alessandro Michele’s creativity has sparked controversy, and his influence has been declining. Although he tried to expand Gucci’s influence by opening restaurants, focusing on the metaverse, and collaborating with Adidas and Harry Styles, his highly consistent design style and basic products have begun to arouse people’s aversion rather than desire.
The luxury goods industry has a harsh elimination mechanism where one must keep advancing or be left behind. Alessandro Michele left Gucci in November last year. For Gucci, which has just appointed a new creative director, it is more important to focus on itself and not let the sense of competition overshadow the core development issues.
For Gucci, which is in a transitional period, how to truly give classic items appeal and achieve a balance with new products might be the real challenge.
It has been a year and a half since Sabato de Sarno took office. Due to the lack of experience in the position of creative director before, in the current increasingly fierce market competition, he still lacks strong support in the process of leading the brand transformation.
Armelle Poulou, the Chief Financial Officer of Kering Group, once frankly stated that Gucci is currently in the most difficult situation in the Chinese market. Due to the intensified polarization demand of local consumers between high-end and entry-level products, Gucci, which is in the middle position, is facing challenges.
At a time when the global luxury goods market is under pressure, the performance of LVMH’s Fashion & Leather Goods division, a competitor of Kering Group, declined both year-on-year and quarter-on-quarter in the first half of this year.
In the first half of this year, the revenue of LVMH’s Fashion & Leather Goods division, where LV and Dior are located, dropped by 2% to 20.8 billion euros, with an organic growth rate of 1%. It fell short of the 21 billion euros expected by analysts. In the same period of the previous year, the division’s revenue was 21.2 billion euros.
In the second quarter, the department’s revenue organically grew by 1% to 10.3 billion euros, with a significant slowdown in performance. In the first quarter of this year, the revenue organically grew by 2%, while in the same period of the previous year, the department’s revenue soared by 21%. Obviously, this is a collapse-like performance decline.
LVMH Group admits that the sales performance of handbags and low-end products is relatively unsatisfactory. The low-end category has been more affected under the circumstances of economic uncertainty and consumers’ tightened spending. Although these products are more attractive to new customers, existing customers tend to choose mid-to-high-end products when making purchases.
It is worth noting that Jean-Jacques Guiony, CFO of LVMH Group, repeatedly emphasized at the earnings conference that it is difficult to predict the Chinese market. He believes that the Chinese market is not just a demand game, and the stimulating effect of marketing on sales is still obvious.
Hermès cannot avoid the slowdown in growth in the Chinese market either.
Hermès’ revenue in the second quarter increased by 13.3% to 3.7 billion euros, exceeding the market consensus expectation of 3.65 billion euros. It is worth noting that the Asia-Pacific market, including China, slowed down rapidly in the second quarter, with revenue increasing by 5.5% to 1.6 billion euros, while the growth in the first quarter was nearly 14%.
Regarding the slowdown in growth in the Asia-Pacific market, including China, in the second quarter, Hermès explained that after the first quarter, which included the Lunar New Year, the number of visitors in the Chinese market declined. Moreover, the Asia-Pacific market performed well in the second quarter after the epidemic last year, and this year’s growth is also affected by a high base.
Axel Dumas, the Executive Chairman of Hermès Group, said at the analysts’ meeting after the release of the financial report that the number of aggressive consumers has decreased, especially Chinese consumers. This is mainly related to the macroeconomy, but also to the continuous phenomenon in the Chinese market since the 2010s, that is, luxury consumers do not consume with their income, but with the added value of their wealth.
The weakening trend in the domestic luxury goods market is also reflected in the performance of high-end retail real estate. Data shows that in the second quarter of this year, almost all high-end shopping malls in the country suffered losses. The performances of shopping malls under Swire Properties, Hang Lung Properties, and Wharf Holdings were all affected to varying degrees.
Some analysts point out that the growth of the luxury goods market in China is declining, mainly because many Chinese consumers choose to make purchases overseas, especially in Japan.
Furthermore, the Chinese market is under pressure. Part of the reason is that luxury goods in China are usually more expensive than in other countries, and consumers are waiting to purchase products abroad at more favorable prices. This waiting and observing attitude has affected the sales in the Chinese market to a certain extent.