Input 2024.07.26 17:48
Last modified on 2024.07.27 01:49
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Global luxury brands shaken by ‘China risk’
A strategy to expand the customer base has turned toxic
Dilution of luxury brand image due to outlet store openings
Even Chinese consumers are turning away amidst the recession
LVMH, Kering, Burberry performance declinesDifferentiation through targeting the ultra-wealthy
Hermes Q2 sales up 13.3%
In Asia, including China, sales increased by 5%
Photo = REUTERS The luxury goods sector has been significantly impacted by the downturn in consumption that originated in China, rendering the traditional belief that luxury goods perform well during recessions irrelevant. Companies that enjoyed record-breaking success due to excess liquidity during the pandemic are now facing their worst results in the first half of the year, as consumers have begun to spend less. Among these, brands that emphasize rarity over mass appeal have reported relatively strong performance, suggesting that the luxury goods industry might refocus on the ‘ultra-wealthy.’
○ Luxury brand performance shock
The weakness of the Chinese market was particularly evident in the recent earnings reports of global luxury brands. This is attributed to affluent consumers in China cutting back on luxury purchases due to economic challenges.
LVMH, which owns more than 70 luxury brands including Louis Vuitton, Dior, and Tiffany & Co., reported only a 1% increase in sales for the second quarter of this year compared to the same period last year. Sales in Asia, excluding Japan, fell by 14%. Kering Group, the parent company of Gucci and Saint Laurent, experienced a significant decline in sales across the Asia Pacific (-25%) and Japan (-27%) in the first half of the year, while Richemont Group, owner of Cartier, saw sales drop by 27% in Hong Kong, Macau, and China during the first quarter. British luxury brand Burberry reported a 22% decrease in sales for the first quarter of its 2025 fiscal year on the 15th.
The Nihon Keizai Shimbun noted that the opening of outlet stores contributed to the decline in performance of Gucci and Burberry. These brands have a higher percentage of outlet sales, where excess inventory is sold at lower prices, compared to their competitors. It is argued that brands sold in outlet stores are perceived as less luxurious, damaging their brand image. The analysis suggests that even though their income has decreased, consumers are still inclined to prefer brands that do not offer discounts when purchasing luxury items, which is paradoxical.
○ Only Hermes records double-digit sales growth
French luxury brand Hermes has managed to evade the consumption slowdown by directly managing all of its stores and controlling its distribution channels. It stands out as nearly the only luxury goods company that has recently reported performance shielded from the decline in Chinese consumer spending. Sales at constant exchange rates for the second quarter increased by 13.3% year-on-year, and sales in Asia (excluding Japan), encompassing the Chinese market, also rose by 5.5% during the same period.
The Financial Times (FT) noted that Hermes’ emphasis on serving wealthy clientele differentiates it from rivals. Unlike competitors who focused on broadening their customer base through aggressive marketing and new, entry-level products during the pandemic, Hermes concentrated on its existing, narrow customer segment, effectively generating consistent demand. It has been recognized that this strategy of primarily targeting customers with a history of purchasing was productive.
Hermes’ leather goods segment, which includes the highly sought-after Kelly and Birkin bags, saw a 17.9% increase in second-quarter sales compared to the previous year. In contrast to its competitors, which have witnessed sharp declines in stock prices this year, Hermes has also performed well on the stock market, increasing by about 6%.
○ ‘Stealth Luxury’ anticipated to gain popularity
The luxury goods industry confronts a dire situation as even high-income consumers tighten their spending. In the Chinese market, the number of individuals with a net worth exceeding $30 million dropped by 2.4% year-on-year, while in the US, the share of discretionary spending (including clothing, travel, and dining) among those with an annual income over $100,000 has declined compared to the previous year.
As this trend continues, there are increasing calls for targeting the ultra-wealthy. The industry views the “stealth luxury” trend as a potential opportunity for encouraging spending. Consumers who prioritize rarity often opt to discreetly display their wealth through luxurious materials instead of flaunting prominent logos. A global consulting firm, Bain, explained, “China’s wealthy tend to prefer more understated fashion to avoid showcasing their wealth in times of economic strain.”
Hankyung Economy/Reporter Kim Se-min [email protected]
Input 2024.07.26 17:48
Last modified on 2024.07.27 01:49
surfaceA2
Global luxury brands shaken by ‘China risk’
A strategy to expand your customer base that has become toxic
Dilution of luxury brand image due to outlet store openings
Even the Chinese are turning away from the recession
LVMH, Kering, Burberry performance worsensDifferentiation through targeting the ultra-wealthy
Hermes Q2 sales up 13.3%
In Asia, including China, it also increased by 5%
The Impact of Economic Uncertainty on Luxury Goods
The luxury goods industry has recently faced significant challenges, particularly in the wake of economic sluggishness attributed mainly to a downturn in consumer spending in China. The global narrative that luxury items thrive even in recessions is currently being questioned as top-tier brands struggle against dwindling sales. Brands that thrived during the pandemic through expansive marketing are now revisiting their strategies. Understanding these challenges can shed light on the future direction of luxury brands.
Luxury Brand Performance Shock
Recent earnings reports from major luxury brands illustrate a stark reality: the Chinese market’s sluggishness has significantly impacted their revenue. LVMH (Louis Vuitton Moët Hennessy), Kering (Gucci, Saint Laurent), and Richemont (Cartier) are among those visibly affected by reduced spending among China’s affluent consumers. Below is a summary of performance metrics from various luxury brands:
| Brand | Sales Growth (Q2 2024) | Asia Sales Change | Notes |
|---|---|---|---|
| LVMH | 1% | -14% | Sales growth significantly hindered by Chinese market downturn. |
| Kering | N/A | -25% (Asia Pacific) / -27% (Japan) | Bright spots in Europe, but Asia facing significant challenges. |
| Richemont | N/A | -27% (Hong Kong, Macau, China) | Heavy reliance on Chinese consumer spending. |
| Burberry | N/A | -22% | Decline attributed to overexposure in outlet stores. |
One of the contributing factors to this decline is the opening of outlet stores. These venues dilute the luxury brand image as inventory is often sold at discounted rates, leading to decreased exclusivity and recognition among potential buyers.
Hermes’ Remarkable Resilience
In contrast to the broader industry, Hermes stands out with double-digit sales growth. By controlling its distribution network and retaining a focus on exclusivity, Hermes recorded a 13.3% year-over-year increase in sales during Q2. The following insights reflect the company’s strategy:
- Directly operated stores enhance brand control.
- Targeting an exclusive customer base fosters loyalty.
- Premium product offerings, such as the iconic Kelly and Birkin bags, secured unwavering demand.
This model underscores a broader trend: brands like Hermes that prioritize product rarity and focus on affluent customers are better insulated from downturns in consumer spending.
The Emergence of Stealth Luxury
Amidst tightening consumer expenditure across income brackets, a new trend is emerging – “stealth luxury.” This concept embodies a shift toward understated luxury where the focus is on quality and material rather than ostentation. Keypoints include:
- Wealthy consumers in China are gravitating toward brands that offer subtlety.
- Restrained fashion allows for a display of wealth without overt branding.
- The “stealth luxury” trend aligns with societal sentiments during economic downturns.
The rise of this trend signals an opportunity for luxury brands to recalibrate their offerings and marketing strategies to appeal to this discerning consumer base.
Adapting Strategies for Future Growth
As luxury brands navigate these choppy waters, several strategies can be effective in sustaining growth:
1. Focus on the Ultra-Wealthy
Shifting marketing efforts towards high-net-worth individuals rather than broadening target demographics can enhance brand prestige and customer loyalty.
2. Limit Discounting
Reducing reliance on outlet stores and discount promotions helps maintain the brand’s luxury image, which is critical during economic downturns.
3. Enhance Customer Experience
Create immersive shopping experiences to cultivate loyalty within the target demographic. Exclusive events or limited edition releases can entice repeat patronage.
4. Embrace Digital Transformation
Investing in e-commerce and digital marketing strategies can broaden reach while offering personalized shopping experiences resonating with today’s consumers.
Conclusion
The current landscape of the luxury goods market speaks volumes of the impact of global economic challenges. While many luxury brands encounter difficulties stemming from shifts in consumer spending behaviors, companies like Hermes demonstrate that through strategic positioning and targeted demographics, resilience is attainable. The future of luxury goods will likely emphasize exclusivity, quality, and understated elegance. Adapting to these cultural shifts and economic realities will be pivotal for brands aiming to not only survive but thrive in the evolving market.
