China's economy continues to slump, and the French luxury group LVMH predicts that this third quarter will be the worst season in four years. (Huang Yuyan/Dajiyuan)
[November 5, 2024] In June last year, LVMH CEO Bernard Arnault visited China and toured a five-story building in Beijing where Louis Vuitton (LV), one of the company’s top brands, planned to open a flagship store in the first half of 2024.
However, more than a year later, sources told Bloomberg that the store may not open until next year. This delay highlights the challenges facing European luxury brands like LVMH in China.
Since the COVID-19 outbreak, China’s economy has continued to slump, with consumers tightening their wallets, resulting in a decline in demand for luxury goods. The market value of these luxury brands has collectively lost around $251 billion since March.
Signs are mounting that China’s economic downturn will persist. Bloomberg reports that while sales managers were once overwhelmed by customers clamoring for the latest products, now it’s challenging to even get VIP clients to call back. Digital Luxury Group predicts that China’s luxury market will shrink by 15% this year.
European luxury giants are particularly concerned about signs of a permanent shift in demand. The CCP’s "common prosperity" and anti-corruption campaigns have made flaunting wealth potentially risky. Additionally, young Chinese consumers, facing tough job prospects, are increasingly spending on experiences like travel rather than luxury items.
Senior economist Gary Ng from Natixis told Bloomberg, "Policy-driven ‘luxury shame’ and economic challenges have slowed disposable income growth and reduced the wealth effect. For many, flaunting wealth may not be wise at this critical moment."
The future Louis Vuitton flagship store is located in a shopping center operated by Swire Properties, with adjacent buildings rented by LVMH brands Dior and Tiffany. Although repeatedly questioned, LVMH has not commented to Bloomberg on the opening timeline.
A Swire spokesperson said the Louis Vuitton store project is proceeding as planned, with the brand opening a temporary store in September at another location within the complex while the flagship store is under construction.
On October 15, LVMH reported a 3% decline in third-quarter sales, lower than expected and marking the group’s first quarterly sales drop since the pandemic. Sales in LVMH’s fashion and leather goods division, home to brands like Louis Vuitton and Dior, fell 5%, well below the 4% growth analysts had anticipated. This was the division’s first decline since 2020.
Jean-Jacques Guiony, LVMH’s Chief Financial Officer, noted that "sales in the fashion division improved slightly in Europe and the U.S., but performed poorly in China and Japan."
According to Reuters, Bernstein analyst Luca Solca stated that LVMH’s third-quarter sales were "significantly" below expectations, "falling short across the board."
Luxury giant Kering has also warned that sluggish demand in China is hindering the recovery of its flagship brand, Gucci, with annual profits expected to drop to their lowest level since 2016. In the third quarter, Kering's revenue from Chinese customers fell by approximately 35%.
Swiss watch exports to China dropped by 50% year-over-year in September, putting pressure on companies like Richemont and Swatch Group.
In addition to luxury brands, Western consumer groups in sectors such as beauty, beer, and automobiles have been heavily impacted by China’s slowdown in consumer spending. They believe that the measures announced by the CCP thus far will be insufficient to significantly boost economic growth in the coming months.
L'Oréal reported a 6.5% decline in comparable sales in North Asia last quarter, citing continued deterioration in China’s beauty market. Estée Lauder has withdrawn its earnings forecast for the year, citing weak demand in China, with sales in the Chinese market falling by double digits in the three months ending in September. Estée Lauder’s stock price also hit a record low.
These declining sales reflect a noticeable shift in Chinese consumer sentiment. Fernando Tennenbaum, CFO of Anheuser-Busch InBev, the world’s largest beer maker, told the Financial Times that Chinese consumers have become more cautious, going out less often, which has hurt AB InBev’s nightlife-focused beer portfolio.
With the real estate market further deteriorating, economic concerns are coming to the forefront, intensifying consumers’ pessimistic outlook. Social media users have dubbed the current era in China as the "era of historical trash."
Editor: Ye Ziwei
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