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Guandian.comThe world's two largest luxury groups, LVMH and Kering, felt the chill brought by weak demand for luxury goods this summer.

The situation took a sharp turn for the worse within half a year. Although the market began to weaken in the second half of last year, most analysts still believe that this is a manifestation of the "normalization" of the growth rate of luxury consumption after the overheated growth since the outbreak of the epidemic.

In the fourth quarter of last year, the sales growth rate of the top luxury groups rebounded, which also eased people's concerns about the slowdown of the industry. According to data, in the fourth quarter of 2024, LVMH's revenue increased organically by 10% to 240 euros.

At the time, Citi analysts wrote in a research note that management’s optimism “supports our view that 2024 could be a smooth rather than difficult year of normalization for LVMH.”

But can the latest financial report data still support such an optimistic view? Especially when the highly anticipated revenue engine, the Chinese market, has not remained resilient.

Correspondingly, how will the luxury shopping mall operators, who are about to enter the financial reporting season in August, perform?

Lost in China

The post-epidemic boom in the luxury goods industry once helped LVMH become the company with the highest market value in Europe, but now it is faced with a cold reality.

The financial report shows that LVMH Group's sales revenue in the first half of 2024 was 41.7 billion euros, a year-on-year decrease of 1% and an organic growth of 2%, which was lower than analysts' expectations of 42.2 billion euros.

Looking at the quarterly breakdown, the company's sales revenue fell 2% year-on-year to 20.7 billion euros in the first quarter; while the second quarter data fell 1% year-on-year to 21 billion euros.

Looking at the departments, the core fashion and leather goods department, which includes the two major brands Louis Vuitton and Christian Dior, saw sales revenue fall 2% year-on-year to 20.8 billion euros, lower than the expected 21 billion euros, and also declined from the first quarter, with organic growth of 1%.

It is worth noting that products in the fashion and leather goods sectors have experienced multiple rounds of price increases since 2023, and have increased prices at least 10 times in the past three years.

During the same period, LVMH Group's operating profit fell 8% to 10.7 billion euros. Affected by exchange rate fluctuations, net profit was only 7.3 billion euros, a year-on-year decrease of 14%.

The more important reason is that the Asian region (excluding Japan), led by China, which is the largest market of the LVMH Group, has clearly fallen into a period of weak performance.

LVMH's sales revenue here fell 10% year-on-year and fell 14% in the second quarter, making it the only major market to see a decline in growth. The group has 2,026 retail stores in the region.

In comparison, LVMH has 1,780 stores in Europe (including France), a 3% increase in the first half of 2024; it has 1,151 stores in the United States, a 2% increase over the same period.

Japan was the best performing market during the period, with a growth of 44%, and its contribution to the group's total revenue increased to 9%. As the yen interest rate continued to fall, LVMH Group pointed out that Japan has become the most attractive shopping destination for Asian consumers, especially Chinese consumers.

Other Chinese consumers who went abroad to shop again went to Europe.

In summary, the momentum of luxury consumption returning to the Chinese market has been curbed during the epidemic, but other regional markets cannot replace China's position for the time being.

Jean-Jacques Guiony of LVMH Group said in a conference call that although the company's growth in the Japanese market has been surging, Japan's rent volatility is high and companies are restricted in increasing operational efficiency and expanding their business scale, so the profit margin is lower than in China.

The CFO also revealed that in the second quarter, the overall sales contribution of Chinese consumers, including those traveling around the world, still maintained high single-digit growth, but it was still slowing down compared with the first quarter, suggesting that wealthy Chinese consumers have become cautious in spending.

However, he also stressed that China is obviously a very important market for the LVMH Group. "Brands that have invested less in marketing in China in the past few quarters have been penalized more than other brands. Customer response to marketing stimuli is still very important in China."

Jean-Jacques Guiony said that the company will continue to invest in this market and strengthen marketing in the future. However, as he said in the first quarter earnings conference call, he also mentioned that the Chinese market is becoming increasingly unpredictable.

Coincidentally, LVMH is not the only luxury group that is troubled by the Chinese market.

Cartier's parent company Richemont Group achieved sales growth in almost all regions in the first quarter of 2024, with only Greater China, including mainland China, Hong Kong and Macau, seeing a significant decline in sales, down 27% year-on-year.

In the first quarter of the fiscal year ending June 29, same-store sales in China, an important pillar of revenue for British luxury brand Burberry, fell by 21%.

Swiss watch giant Swatch Group saw its first revenue decline since 2021 in the first half of 2024. The company said in its financial report: "The decline in sales was due to a sharp drop in demand for luxury goods in Greater China (including Hong Kong and Macau)."

Kering, the parent company of Gucci and Yves Saint Laurent, also announced weak first-half results. The Asia-Pacific market, excluding Japan, is the most important market, with revenue falling by 20% during the period, including a 23% drop in the second quarter.

Only the Hermès Group has maintained strong performance, as the company has stronger pricing power than other luxury goods companies. Data shows that Hermès' sales in the second quarter increased by 13.3% at a constant exchange rate, and its revenue in the Asia-Pacific region increased by 5.5%, higher than the expected 4.75%.

Currently, Hermès is considered likely to surpass LV and become the brand with the highest revenue in the luxury industry in the next few years.

Luxury shopping malls

China became the world's largest luxury consumption market for the first time in 2021. Three years later, the situation has changed a lot.

According to the "2024 Global Luxury Market Research Mid-Year Update" released by consulting firm Bain, the Chinese luxury market is facing pressure.

First, outbound tourism has gradually picked up, dispersing purchasing power. Second, weak domestic demand due to increased economic uncertainty has weakened the confidence of middle-class consumers and triggered a "luxury shame" phenomenon similar to that which occurred in the Americas during the global financial crisis of 2008-2009.

A report by Bernstein, a well-known international asset management company, also pointed out that China's luxury consumption growth rate in 2024 will be lower than expected.

The report, released in mid-June, said that the customer flow of domestic luxury shopping malls has been declining in single digits since the beginning of this year, while luxury goods sales have declined at a double-digit rate during the same period. The main reason is that too many shopping malls opened in 2023.

The boom in luxury consumption in the past few years has given luxury mall owners a very optimistic outlook. But now that the tide has receded, how resilient can luxury malls that compete head-on maintain? This will be an angle worth paying attention to in the future.

At present, in addition to strong local projects such as Beijing International Trade Center, Nanjing Deji Plaza, Changchun Zhuozhan Shopping Center, and Wuhan Wushang Plaza, there are seven major players in the domestic luxury shopping mall landscape, including Hong Kong-funded enterprises represented by Hang Lung Group, Sun Hung Kai Properties, Swire Properties, Wharf Holdings, and Hongkong Land, as well as two mainland luxury commercial giants represented by China Resources Vanke and SKP Holdings.

Among them, Hang Lung Group uses Hang Lung Plaza as its brand line, and its representative projects include Shanghai Hang Lung Plaza, Shanghai Grand Gateway 66, Wuxi Hang Lung Plaza, Kunming Hang Lung Plaza, etc.

In 2023, Hang Lung Properties' overall rental income increased by 3% to HK$10.316 billion. The company expects to announce its first-half 2024 results on July 30.

Sun Hung Kai Properties owns IFC, ITC and IAPM as its high-end product lines, with representative projects including Shanghai IFC, Nanjing IFC and Shanghai IAPM; in Hong Kong, the Hong Kong International Commerce Centre has been completed.

Sun Hung Kai Properties' total rental income fell 2% year-on-year to HK$24.322 billion in the 2022/23 fiscal year ending June 2023. For the six months ending December 31, 2023, the company's total rental income rose 4% to HK$12.454 billion.

The announcement date of Sun Hung Kai Properties' full-year results for 2023/24 has not yet been confirmed, but is expected to be in September.

Swire Properties' product lines include Taikoo Hui and Taikoo Li, with representative projects including Taikoo Hui in Guangzhou, Taikoo Li in Chengdu, Taikoo Li Qiantan in Shanghai, etc.; its major projects in Hong Kong include Pacific Place, etc.

In 2023, Swire Properties' rental income increased by 9.6% year-on-year to HK$13.525 billion, of which retail property rental income increased by 22% year-on-year to HK$7.143 billion. However, in the first quarter of 2024, its operating data performed poorly.

Swire Properties expects to announce its first-half 2024 results on August 8.

Wharf's high-end shopping mall product line in the Mainland is IFS, with representative projects such as Chengdu IFS and Changsha IFS. In Hong Kong, it owns two core luxury shopping malls, Harbour City and Times Square.

Wharf Properties, which mainly holds investment properties in Hong Kong, saw its investment property income increase by 2% to HK$10.916 billion in 2023. Wharf Group, which mainly invests in the Mainland, saw its investment property income fall slightly by 1% to HK$4.843 billion, but in RMB terms, its Mainland investment property income increased by 4%.

Wharf Property is expected to announce its first-half 2024 results on August 6. The date for the Wharf Group's board meeting has not yet been announced. Last year it was August 9.

Hongkong Land's high-end product line in mainland China is Central, and its representative project is Beijing Palace Central. The company has many properties in Hong Kong, and its most famous luxury project is Landmark. Hongkong Land has not been listed on the market.

As for mainland enterprises, Hualian SKP owns the country's highest-selling luxury shopping mall - Beijing SKP. According to data from third-party institutions, the project's sales will reach 26.5 billion yuan in 2023; other projects include Chengdu SKP, Xi'an SKP, Wuhan SKP, etc.

China Resources Land & China Resources MixC (collectively referred to as China Resources) is the company with the most commercial positioning among all the above-mentioned companies. Its high-end shopping mall product line is MixC. It has 13 projects in China, and representative projects include Shenzhen MixC, Hangzhou MixC, etc.

As it has multiple product lines with different positioning, China Resources may not be affected too much by the decline in luxury consumption. In 2023, China Resources Land's shopping mall rental income will be 17.9 billion yuan, a year-on-year increase of 29.7%, and China Resources MixC's operating shopping mall owner rental income will be 22 billion yuan, a year-on-year increase of 38.8%.

The date of the performance release has not yet been announced. Last year, the date for China Resources Land was August 31, and for China Resources Vanguard Life it was August 30.