Louis Vuitton’s owner seems surprised at how quickly Chinese consumers have closed their wallets and abandoned its brands. It has no obvious place to turn to next for growth.
Shares in LVMH fell 7% on Wednesday morning after the world’s biggest luxury company released third-quarter results that were worse than expected. LVMH’s most important profit driver, its fashion and leather division which includes handbags, saw a 5% drop in sales compared with last year. Demand at its Christian Dior brand has slowed more than Louis Vuitton, a sign that the brand may have been damaged by a recent investigation into its Italian supply chain.
But the main reason for the slowdown is that Chinese shoppers have pulled back. China has been a huge growth story for luxury brands over the past two decades. Back in 2000, Chinese customers generated just 1% of global luxury sales, according to UBS estimates. Today, they account for a third.
LVMH doesn’t think the Chinese have lost their appetite for European luxury goods. But after watching the value of their homes fall, middle-class consumers aren’t in the mood to spend thousands of dollars on designer handbags and watches. Barclays estimates that the country’s real-estate crisis has wiped the equivalent of $60,000 off the net worth of Chinese households on average.
To add to LVMH’s pain, Beijing will slap tariffs on European cognac in response to the EU’s levies on Chinese electric vehicles. The company’s cognac brand Hennessey, which makes around a fifth of its sales in China, will be “collateral damage” in the trade war according to LVMH management.
Shares in Europe’s luxury goods companies did get a lift when the Chinese government announced plans to boost the economy late last month. But doubts are setting in. Details about the size of any stimulus remain scant and new measures to encourage consumption are more likely to benefit producers of staple consumer goods than luxury brands.
Other nationalities aren’t likely to pick up the slack. Credit card spending data from Bank of America showed that U.S. luxury spending fell 6% in August compared with the same time last year. European luxury spending peaked in early 2023 and has weakened ever since. Together with the Chinese, consumers in the three regions generate around 70% of global luxury spending.
Middle-income shoppers have been hobbled by inflation and higher interest rates, which is out of the luxury industry’s control. But brands have become too reliant on raising prices to drive growth: The average luxury product is 60% more expensive today than it was in 2019, HSBC estimates. To get aspirational shoppers back in stores and spending again, brands need to launch new products at realistic price points.
The slowdown will make it difficult for luxury companies to protect their margins. Big brands have high fixed costs, including some of the priciest retail rents, as well as high advertising budgets that can’t be cut quickly without damaging a brand’s image. So even a small slowdown in sales will quickly eat into profitability.
LVMH has long been considered one of the safest bets in luxury, so its slowdown is a bad sign for weaker rivals like Kering-owned Gucci, and Burberry. Both brands are in the middle of makeovers, which will be harder to pull off now that demand is drying up. If LVMH’s results are anything to go by, its competitors will be very weak this results season.
Write to Carol Ryan at carol.ryan@wsj.com