Luxury fashion is slowly coming unravelled. The sector, which once portrayed itself as a European competitor capable of taking on the American Magnificent Seven – including Microsoft, Apple and Nvidia – is showing signs of weakness in the face of the poor times in its main market: China. The Asian giant represents 33% of global luxury consumption, according to the English bank UBS, which has described the current market situation as “the longest slowdown in the European exclusive fashion sector”. After the favourable cycle following the pandemic, investors have harshly punished the cold market outlook: the sector has already accumulated losses of 240 billion dollars in market value (about 223 billion euros) since the peak reached in March, according to Goldman Sachs.
Everything points to the trend continuing for a considerable time. “Luxury spending began to fade in China after a strong recovery in the first and second quarters of 2023,” says Stefan-Guenter Bauknecht, senior portfolio manager for equities at DWS, who attributes this behavior to “the current crisis in the real estate market and the complex macroeconomic conditions in the country.” The industry benefited greatly from the reopening of tourism (particularly from China to Europe) and from the unbridled consumption following the relaxation of anti-Covid measures. But it now faces significant challenges because the Asian giant is recovering from the pandemic at a snail’s pace: according to various analysts (Goldman Sachs, JP Morgan and Bank of America, for example) it will grow this year below the 5% target.
High-end brands have been facing major challenges for years. Since 2021, a law in the Asian country allows censoring accounts of influencers that flaunt high-end items, which translates into a challenge for brands to reach buyers in a country that leads consumption online ((Online luxury goods sales grew by 27% in 2018 in China). But an even bigger challenge may come this year: Citi analysts expect a consumer tax reform in the first quarter of 2025, which will increase prices for these goods. Added to this is the impact of the US presidential election, which may lead to a new tariff war between the two countries. As things stand, European luxury companies will not recover until at least the second half of next year, according to Bauknecht, who predicts “organic growth of 6% for the luxury sector in 2025, with a languid first quarter.”
One symptom of this cooling, as Shirley Zhao reported for Bloomberg, is the silence reigning at the 1881 Heritage shopping mall in Hong Kong, which was the epicenter of shopping for luxury brands such as Louis Vuitton and Cartier and now has only three occupied stores out of a total of 30. The consumption boom brought about by the post-Covid world is over: the S&P Global Luxury Index, which brings together the 80 largest companies dedicated to the production or distribution of exclusive goods, rose 131% in 2021 compared to 2020. Today, however, the sector has accumulated a loss of market value of 9% so far this year in the Euro Stoxx 600.
José Luis Nueno, a professor in the marketing department at IESE Business School and holder of the Intent HQ Chair of changes in consumer behavior, explains that “normally, if you compare a very good year with a mediocre one, the numbers are down.” The numbers have turned red on a global scale: Kering —owner of Gucci and Hugo Boss— has lost almost half of its market value in the last year (44%). The industry giant, Moët Hennessy Louis Vuitton (LVMH), which used to be the largest company in Europe by market capitalization a year ago, now occupies tenth place in the Euro Stoxx 600 and has lost 19% of its price so far this year. The most dramatic case has been that of Burberry, which accumulated losses of 70% of its market value last year, which took it out of the London index (FTSE 100) after being listed on the stock exchange for more than 15 years. Only brands that cater to the wealthy, such as Hermès International or Brunello Cucinelli, have managed to avoid the fall.
The luxury market clings to youth and the richest
However, Nueno says that exclusive fashion companies “know what is happening and have begun to implement new strategies, including opening new stores in the local Chinese market and directly reaching the young generation Z segment.” Young people and wealthier and more loyal customers will be the key segments to revitalize the sector. According to Bauknecht, 5% of the most exclusive customers contribute 40% of the revenue. Nueno’s data indicates that 50% of loyal customers account for 80% of sales. In the long term, the sector has the upper hand. “The appetite for luxury goods is not broken because there are no local competitors that challenge European luxury brands, nor risks of disruption by new technologies —as there are in the automobile industry—, nor Chinese pride in this market, as is the case with sports or beauty products,” Bauknecht emphasizes. However, the brands’ strategy has not been enough to contain the bubble that inflated after the pandemic.
In the US, which according to Bank of America represents 23% of total revenues in the luxury sector, families with incomes of less than 50,000 dollars a year represent 27% of consumers in this market. This group of aspirational, non-loyal customers is spending less today due to the inflationary crisis and high interest rates. “The normal thing is that if you buy a watch this year, which is a durable good, you are not going to buy another one the following year,” adds Nueno.
Analysts agree: recovery will be slow
Several analysts have lowered their profit and share price expectations for this exclusive fashion sector. At Morgan Stanley, analyst Edouard Aubin names LVMH and Richemont as companies particularly vulnerable to the slowdown in China, which has led them to lower price expectations for these companies. Jefferies has also lowered the expected profits of the sector for 2025 by more than 5% below the initial estimates, arguing that “the European luxury market will have widespread difficulties.” Professor Nueno stresses that companies in the sector worth less than 500 million euros will have a very difficult time, but he is convinced of the resilience that the sector’s giants such as Dior, Louis Vuitton or Hermès will have.
The pain is already palpable in the short term: China will remain in a rut until at least the second quarter of 2025, and other regions still have to digest the supercycle after Covid. However, Bauknecht stresses, since the US is expected to avoid a recession, “above-average prices and consumption will soon be digested to support a gradual recovery in 2025.” The threads of the European luxury industry will return to being woven as usual until next year.
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