Monday, November 4, 2024

Sluggish Demand In China Puts Pressure On LVMH And European Luxury Brands

Investors in French luxury giant LVMH are growing anxious as they await signs that China’s new fiscal stimulus efforts will revitalize consumer spending, especially in high-end European designer goods. The company, which houses iconic brands like Louis Vuitton, Dior, Tiffany & Co., and Sephora, reports its third-quarter earnings on Tuesday. Investors are particularly focused on how China, which has traditionally been a key growth engine for luxury sales, will respond to new government measures intended to boost confidence and consumer activity.

According to Bain & Co., global sales of personal luxury items—such as clothing, accessories, and beauty products—are expected to grow by between 0% and 4% this year on a constant currency basis. However, the slowdown in China, the world’s largest luxury market, is particularly pronounced, with many wealthy and middle-class shoppers showing signs of caution. This is despite the fact that China remains a key driver of global luxury growth, especially for expensive items such as designer handbags priced at over $4,000.

Shares of LVMH, along with rivals like Kering (Gucci’s parent), Hermès, and Richemont (owner of Cartier), have experienced volatility throughout the year. Analysts from Bank of America have noted that the Chinese consumer market, once the sector’s primary growth driver, is facing difficulties. The bank suggests that “the luxury consumer is all shopped out,” particularly as Chinese shoppers remain wary due to economic uncertainties, including a downturn in the property market. As a result, global sales for the luxury sector in the third quarter are expected to see the sharpest decline in four years, with a predicted 1% drop in year-on-year organic sales. Additionally, analysts have lowered earnings estimates for the sector by 17% for the coming year.

Markus Hansen, a portfolio manager at Vontobel, which holds shares in LVMH, Hermes, and Richemont, attributed this sluggish demand to a “lack of confidence” among Chinese consumers. He noted that, while China’s property market continues to struggle, even a slight resurgence in consumer confidence could lead to a rebound in luxury spending, given the country’s massive purchasing power.

Despite current challenges, there is optimism that Chinese shoppers will return to luxury goods eventually. Jefferies analysts, for instance, have expressed confidence that demand for high-end fashion will accelerate in 2025. To stay ahead of the competition and strengthen its market share in China, LVMH has deepened its partnership with Alibaba to utilize the tech giant’s e-commerce and AI capabilities. The company is also building a major shopping and entertainment complex on China’s Hainan Island, which is known for its tax-free shopping.

However, some experts, such as Patrice Nordey, CEO of innovation consultancy Trajectry, have warned that luxury goods companies could face up to a 10% decline in Chinese sales this year. This is a stark contrast to earlier projections, which had forecasted a 5% to 6% growth in sales. Nordey highlighted that the challenges extend beyond just the top-tier consumers and also include middle-class shoppers, Gen Z, and travel retail, suggesting that luxury brands have multiple hurdles to overcome.

For Kering, which reports its earnings on October 23, the stakes are high. A significant portion of the company’s sales comes from China, particularly through its Gucci brand, which derives 35% of its revenue from the Asia-Pacific region (excluding Japan). Analysts have pointed out that Gucci’s recent pivot towards “timeless” styles might not be resonating with Chinese consumers, who are increasingly looking for bold and fresh trends.

As LVMH and its competitors await their third-quarter results, all eyes remain on China to see if the country’s stimulus efforts can rekindle the luxury market and restore investor confidence.

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Alice
Alice
Alice is a seasoned jewelry designer renowned for her exquisite creations that seamlessly blend artistry with elegance. With a passion for craftsmanship and an unwavering commitment to quality, Alice has established herself as a distinguished figure in the world of fine jewelry. Drawing inspiration from diverse cultures and artistic movements, Alice brings a unique perspective to her designs, creating pieces that transcend mere accessories to become timeless works of art. Her meticulous attention to detail and insistence on using only the finest materials ensure that each creation reflects not only her artistic vision but also a commitment to unparalleled craftsmanship. Having honed her skills through years of dedicated practice and a keen understanding of evolving trends, Alice is adept at translating her clients' desires into bespoke, one-of-a-kind pieces. Her portfolio encompasses a range of styles, from classic and timeless to avant-garde and contemporary, showcasing her versatility and ability to cater to a diverse clientele.

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