China’s consumer sentiment has turned grim and spread into the luxury goods industry. The world’s largest luxury goods company, LVMH Group, recently announced that its revenue for the first half of the year fell below market expectations. At the same time, Kering, the parent company of Gucci, also issued a warning signal, expecting a potential 30% decline in the second half of the year following a significant 42% drop in revenue in the first half.
LVMH is considered a pioneer in the luxury goods industry due to its scale, with over 75 companies under its umbrella that cover a wide range of luxury products from watches, leather goods to travel items.
The slowdown in LVMH’s sales in the previous quarter was attributed to a decrease in purchases of expensive Louis Vuitton bags and Christian Dior haute couture by affluent shoppers.
Kering Group reported a larger-than-expected decline in sales for the second quarter, projecting a weak performance for the remainder of the year. The luxury conglomerate is striving to revive its flagship brand, Gucci, while grappling with subdued demand from Chinese consumers.
After a 42% drop in operating income to €1.6 billion in the first half of the year, the group indicated that operating income in the second half may decline by around 30%.
On Wednesday, LVMH Group led a global sell-off in luxury goods stocks, with its share price dropping by over 5%. Concerns over Chinese consumer demand and the outlook for the luxury goods industry led to declines in other luxury brand stocks as well.
Stocks of Hermès and Brunello Cucinelli briefly fell by 2.2%, Kering Group by 3.7%, Richemont, the owner of Cartier, by 2.3%, and Prada by 5.5%.
LVMH Group reported a 1% growth in organic revenue to €20.98 billion in the second quarter, below both the first quarter’s growth rate and the consensus expectation of 3%. Overall revenue for the first half of the year decreased by 1% to €41.68 billion.
In the second quarter, LVMH witnessed a 14% decline in organic sales in the Asia region (led by China) excluding Japan, further deteriorating from a 6% drop in the first quarter. Meanwhile, the group saw a 2% increase in organic sales in the U.S. market, a 57% increase in Japan, and a 4% increase in Europe.
During an earnings briefing, LVMH’s Chief Financial Officer, Jean-Jacques Guiony, mentioned that Chinese shoppers are holding off on purchases within the region, waiting for their next trip to Japan to take advantage of the weak yen. This shift has put pressure on the group’s profitability.
Thomas Chauvet from Citigroup wrote, “The luxury goods sector hasn’t experienced a miracle, and the industry may still face a period of ‘falling out of favor’.”
As more middle-class consumers exercise caution in spending on luxury items, brands like Burberry and Versace are offering significant discounts of up to 50% on Chinese e-commerce platforms.
Luxurynsight data shows that in 2024, the average discounts on Versace and Burberry products across all distribution channels in China sometimes exceed 50%, higher than the 30% and 40% discounts in 2023.
Some luxury brand executives express concerns that the ongoing structural economic weakness could lead consumers to shift from luxury to affordable brands, further pressuring industry giants like Louis Vuitton and Gucci.
(Credit: Reuters, The Wall Street Journal, Financial Times, and Bloomberg)