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Text | Consumer Bus

In many rounds of economic fluctuations in the past, luxury goods have been considered the most resilient, but in this summer when the report cards were submitted one after another, the industry still ushered in a collective avalanche.

According to the 2024 first-half report of Gucci's parent company Kering Group, its revenue fell 11% year-on-year to 9.018 billion euros, of which Gucci fell 20% and Yves Saint Laurent fell 9%.

Its profitability is not optimistic.The group's overall operating profit fell 42% year-on-year, nearly halving.Among them, the operating profits of Gucci, Yves Saint Laurent, Bottega Veneta and other brands fell by 44%, 34%, 28% and 80% respectively.

Screenshot source: Kering Group financial report

LVMH reported bad news a few days earlier than Gucci. In the first half of this year, its overall sales fell 1% to 41.7 billion euros, and its net profit fell 14% to 7.3 billion euros. The fashion leather goods division, which accounts for half of the group's revenue and includes LV Dior Celine, saw its revenue and operating profit fall by 2% and 6% respectively.

Performance continues to decline.LVMH boss Arnault's net worth has shrunk by $20 billion, making him the billionaire with the biggest wealth evaporation in 2024.

Luxury goods lose their sweet spot

The biggest chill facing luxury goods comes from the fact that they are losing the two major driving forces of their rapid growth - the middle class and the Chinese market.

60% of the luxury goods market's income comes from people below the high net worth standard, who spend no more than 2,000 euros a year on expensive bags, shoes, clothing and jewelry.

For this consumer group, which is mainly composed of the middle class, luxury goods are more like a symbol of their quality of life close to the upper class, or a reward for themselves after a period of time. It is also they who have driven the luxury industry to an average double-digit growth rate every year over the past decade.

However, this group has been hit the hardest by the economic downturn after the epidemic. Some of them have reduced their overall budget for non-essential spending, some have chosen more experiential consumption such as travel, entertainment, and offline services, and some have placed more emphasis on the practicality of products and have chosen sports products that can bring more health and functionality.

The light luxury sector, which has the largest share of middle-class consumers, was the first to show signs of trouble.In the first quarter of this year, sales of affordable luxury brands Michael Kors, Kate Spade and Coach fell by 9.7%, 4.7% and 2.3% year-on-year respectively. In order to clear inventory, they also increased the proportion of outlet stores.

The decline then spread to second-tier luxury goods and some vertical luxury goods. Burberry's revenue in the second quarter of this year fell 22% to 460 million pounds, a huge difference from the 18% growth rate in the same period last year. The company not only replaced its CEO, but also announced that it might suffer an operating loss in the first half of the fiscal year ending September 30, and suspend dividend payments for the 2025 fiscal year.

The "Italian shoe king" Tod's delisted after releasing its last financial report, which showed a 6.6% year-on-year decline in sales in the first three months of this year. The revenues of Jimmy Choo and Ferragamo fell by 9.3% and 19.2% year-on-year respectively.

In addition, second-tier luxury brands such as Balenciaga, Versace, and Givenchy have also gradually increased their discounts since this spring, seemingly in an effort to stabilize sales and clear inventory.

Eventually, the chill was passed down layer by layer to first-tier luxury brands such as LV and Gucci.

The Chinese market, once the main source of growth for luxury brands, is no longer their haven.The Chinese market has become the place where they are most powerless.

Kering's sales in the Asia-Pacific region excluding Japan shrank by 22% in the first half of the year, while LVMH's sales shrank by 10%. Although they both maintained double-digit growth in Japan due to exchange rate reasons, and most of their products were bought by Chinese tourists or purchasing agents, in absolute terms, the growth in Japan alone cannot offset the decline in the Chinese market.

Screenshot source: Kering Group (above), LVMH (below) financial reports

Take LVMH as an example. Its sales in Japan increased by 1.14 billion euros in the first half of the year, but its sales in the Asia-Pacific market excluding Japan decreased by 1.39 billion euros during the same period. The group also had to pay higher rent and labor costs for the Japanese market.

Survivors of the Great Debacle

There are survivors in the industry collapse, and one of them is brands that have always focused on high net worth individuals.

With the "noble legend" that has been circulating for a long time, that it shows status, is hard to buy, and requires matching, Hermès still maintained a 15% growth in the first half of the year when there was widespread grief, with sales reaching 7.5 billion euros - butEven Hermès' growth rate in the Asia-Pacific market excluding Japan in the first half of the year was only 10%, the slowest growth among all regions.

Screenshot source: Hermès financial report

Hermès has never "bent" for the middle class, and the top high-net-worth individuals who can still afford Hermès have not been affected much by the economic downturn. According to statistics from Boston Consulting, although the richest customer group is only about 2.5 million people, they can spend more than 20,000 euros on luxury goods each year, accounting for 10% of the industry's sales.

Also focusing on high net worth individuals, Richemont's jewelry division, which includes high-end jewelry brands such as Cartier, Van Cleef & Arpels and Buccellati, grew 4% to 3.66 billion euros in the second quarter of this year.

According to jewelry analyst Lu Xi,The super-rich have long been accustomed to the ups and downs of the stock market and real estate. They will not feel pressured by the economic downturn in the short term. Instead, they need more abundant investment channels.High-end jewelry has become their choice for preserving and increasing value besides finance, real estate and art, and can also be worn.

Eyewear has become another "fire" that is still growing. Even with a poor report card, Kering's "eyewear and corporate business" still rose by 23%. Luxury eyewear manufacturer EssilorLuxotticazai's revenue increased by 5.3% to 13.3 billion euros in the first half of this year. In addition to Sunglass Hut and Ray-Ban, it also manufactures licensed glasses for brands such as Prada, Chanel, Ralph Lauren, and Burberry.

It seems that when people are hesitant to buy luxury bags, shoes and clothes that cost tens of thousands of yuan, luxury glasses that cost thousands of yuan can not only show their status, but also maintain fashion through diverse designs.

But in the entire luxury industry, whether it is high-end jewelry that caters to high-net-worth individuals or glasses with low thresholds, they are only a small piece of the big pie. For most luxury brands in the middle ground, they have to make a choice - whether to "save their lives" first and lower prices to maintain sales, or continue to "save their image" or even move closer to high-net-worth individuals.

Some brands have already made their choice.

According to media reports, Burberry has reduced the price of its medium-sized Knight handbag by 22%, and the price of all bags designed by the brand's creative director Daniel Lee since 2022 has been reduced by an average of 5%. The price of the small Loulou bag of Saint Laurent, a subsidiary of Kering Group, has been adjusted from US$2,950 in January this year to US$2,650.