BLING PURVEYORS should be a little funk these days. China's economic outlook is mixed and US retail sales fell unexpectedly in September, for the first time in months. Hong Kong, the spiritual home of luxury in Asia, is rocked by a storm of rubber bullet grenades. Crystal-ball economic observers are cutting their forecasts: On October 15, the IMF warned that global GDP growth will fall to its lowest level since the financial crisis (see article). Who would shell out for a new gold-studded designer bag now?
Some buyers seem to have lost the dark headlines. On October 9, LVMH, the world's largest luxury group, reported stellar results. Sales at its Dior, Louis Vuitton and numerous other brands increased by 11% year over year (excluding acquisitions). This is almost twice the 6% growth rate of the trend in personal luxury goods, which includes everything from watches to ties and elegant heels. Its leading rivals, Kuc, owner of Gucci, and Hermes, should follow suit. All stock prices rose by about a third last year.
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Other brands were not so lucky. One day after LVMH's bright gains, Hugo Boss, a German fashion house, issued a second profit warning in months. In the United States, Tiffany & Co. and Tapestry, owner of Coach and Kate Spade, have been fighting. The same is true of midsize Italian companies like Prada and Tod. The shares of these smaller companies now have the price of last season's accessory, accumulating dust in a "factory shop" out of town.
Luxury has always been a cyclical industry: even those with plenty of money tend to spend more when times are good. Overall growth rates have declined since 2018, when sales increased by more than 10%. But the impact was not felt evenly. "What you see is the luxury pie expanding at a slower pace – and the biggest players are gaining a bigger chunk," says Rogerio Fujimori of RBC bank.
Take Hong Kong. Sales in China have fallen 50% in recent months, analysts estimate, mainly because visitors from mainland China have stopped shopping there. With the continuing anti-government unrest on the streets, few think the situation will improve anytime soon. The city represents 5-10% of sales to luxury groups. Smaller rivals with just one Hong Kong base, which traditionally served as a gateway to Asia, will lose most sales as a result. On the other hand, larger companies like Gucci have built vast store chains across the continent through which to recover some of these losses.
The main question for the industry is whether Chinese consumers will continue to spend generously. A crackdown on corruption was expected to dissimulate sales a few years ago, but hardly recorded. Chinese buyers account for 33% of all luxury sales, double their share in 2010, according to consultancy Bain. About two thirds of the industry's growth comes from China.
So far, the prospect of a trade war has not shaken Chinese consumer confidence, which has only recently reached its highest level ever. And a decline in sales would again be felt first by second-tier players. Especially among emerging middle-class buyers in places like China, consumers buy one product a year, says Luca Solca of Bernstein, a research firm. With a tight budget, they will choose the “brand of the moment,” stealing sales from lower rivals.
Companies such as LVMH and Kering continued to invest in marketing to maintain their healthy brand value. They also outperformed smaller rivals in their ability to sell their products online, a channel that represents about 10% of sales now, but is growing fast. In the United States, the fate of smaller luxury brands is tied to dying department stores. Larger brands have their own stores.
A headwind that would hit luxury companies of all sizes is the rise of protectionism. The retaliatory tariffs that the United States has recently imposed on Europe to offset illegal aerospace subsidies include some spirits, which LVMH also sells (champagne has been mercifully excluded). However, the conglomerate has created an elegant solution to mitigate future import taxes. This week, his boss, Bernard Arnault, opened the latest Louis Vuitton workshop – in Texas. ■