Luxury brand Gucci’s woes in China seem difficult to reverse, with its parent company, Kering Group, warning of a significant decline in profits in the first half of the year. The latest sales data of major European luxury brands do not inspire confidence in a revival of the demand for high-end fashion in China, casting a shadow over the luxury goods industry’s prospects in the country.
Kering Group announced on Tuesday (April 23) that due to weak demand in Asia, especially in China, they expect a 40-45% drop in recurring profits in the first half of this year. The group’s first-quarter sales fell by 10% to 4.5 billion euros, with Gucci’s sales plummeting by 18%, a stark increase compared to the previous quarter’s 4% decline. Gucci’s sales represent about half of Kering Group’s revenue and about two-thirds of its operating profit.
The stock price of Kering Group dropped more than 9% on Wednesday, hitting a six-year low.
Armelle Poulou, Chief Financial Officer of Kering Group, told reporters on Tuesday, “The Chinese market is currently polarized, with customers either demanding true luxury products or more affordable options. Gucci is positioned in the middle and is not benefiting from this polarization.”
Bloomberg reported on Wednesday (April 24) that Luca Solca, an analyst at Sanford C. Bernstein, wrote in a report, “In a weak demand environment, brands in transition may face greater difficulties, as consumers concentrate their spending on essential brands.”
“Nevertheless, the magnitude of the profit decline is surprising. Kering Group is evidently committed to ‘cleaning up’ and laying a more solid foundation for the future,” he said.
Kering Group’s first-quarter sales fell by 10% year-on-year, consistent with the warning issued by the group in March; the comparable sales of its second-largest brand, Yves Saint Laurent, dropped by 6%, while the brand Bottega Veneta grew by 2% in North America, Western Europe, and the Middle East.
Italian luxury goods group Ermenegildo Zegna reported a decline in revenue in the first quarter, dragged down by lower sales of its Thom Browne brand in the Greater China region.
Italian family-owned enterprise Prada is an exception, with the company reporting strong demand for its Miu Miu fashion brand and continued growth in Asia.
Moncler is set to release its report later on Wednesday, while Hermes will release its report on Thursday.
Reports released last week by luxury leader LVMH and beauty giant L’Oreal have helped boost confidence but have not eliminated concerns about domestic demand for high-end goods and the broader industry in China.
According to Reuters, Ira Kalish, Chief Global Economist at Deloitte, stated last week at the World Retail Congress in Paris that a “series of unfavorable factors” has led to sluggish economic growth in China, primarily the property crisis, stagnation in private sector investment, and trade disputes.
Nicolas Hieronimus, CEO of L’Oreal, said last week, “We have yet to see measures that can truly boost Chinese consumer confidence and subsequently their spending.”
LVMH reported a 6% decrease in sales of Louis Vuitton and Dior fashion and accessories, as well as Tiffany & Co. jewelry in the first quarter in Asia (excluding Japan).
The company noted that Chinese consumers are increasingly purchasing more goods when traveling to Japan and Europe. Prada also supports this view.