2024-08-06
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Dingjiaoone original
Author | Su Qi
Editor | Wei Jia
The Paris Olympics in France is currently in full swing, and one of the financial backers behind it is the French luxury group LVMH.
It is reported that LVMH Group has provided 150 million euros (RMB 1.181 billion) in sponsorship for the Olympics, and the group has also been "full of presence" during the Olympics. In the opening ceremony alone, there were "ridiculous" shots of LVMH Group-related products, such as the torch being stored in LV suitcases, the Olympic medals being designed by Chaumet, and the volunteers' uniforms being made by LV.
But the LVHM Group, which owns brands such as LV, Dior, Celine, Fendi, Bulgari, and Hennessy, did not have such an easy time. On July 23, the LVMH Group, which owns brands such as LV, Dior, Celine, Fendi, Bulgari, and Hennessy, released its financial report for the first half of 2024.
The financial report shows that in the first half of 2024, the group's revenue fell 1% year-on-year to 41.677 billion euros, and net profit fell 14% year-on-year to 7.267 billion euros. The decline in LVMH Group's performance triggered a shock in its stock price. As of the close of European stocks on July 24, LVMH Group's stock price fell 4.66%, and once fell by more than 9% during the session.
Gucci and its parent company Kering are also "unsaleable". In the first half of 2024, Gucci's revenue fell by 20%, Kering's revenue fell by 11% year-on-year, and its net profit attributable to the parent company fell by 51% year-on-year.
The decline in the performance of the giants seems to have revealed the fact that the global luxury industry is "in the cold", but these luxury groups have all mentioned the decline in sales in the Chinese market.
For luxury groups, the Chinese market has always been one of their most promising markets, but the Chinese middle class is becoming more and more "rational." When luxury goods are no longer the first choice for family consumption and gift-giving among the middle class, how should luxury groups adjust their strategies and market expectations?
Luxury giants are making money slowly, and their financial reports collectively expose this.
The financial report shows that LVMH Group achieved revenue of 41.7 billion euros in the first half of 2024, a year-on-year decrease of 1%, which is lower than analysts' expectations; and achieved a net profit of 7.267 billion euros, a year-on-year decrease of 14%.Since entering 2024, LVHM's growth has been lower than expected for two consecutive quarters, and the second quarter showed a further slowdown.
Image source: LVMH Group 2024 Semi-annual Report
LVMH did not disclose performance by single brand, but by business line. Fashion and leather goods business including LV, Dior and other brands is the largest source of income for LVMH Group. However, according to the financial report, in the first half of 2024, the profit of this business fell by 6% year-on-year. In addition, LVMH's wine and spirits, watches and jewelry businesses also fell by 26% and 19% year-on-year respectively.
Image source: LVMH Group 2024 Semi-annual Report
The financial report attributed the group's decline in champagne sales in the first half of 2024 to the drag of weak local demand for Hennessy Cognac in the Chinese market, while at the same time attributed the decline in watch and jewelry revenue in the same period to the significant impact of exchange rate fluctuations.
From a regional perspective, in the first half of 2024, LVMH Group's sales in the Asian market (excluding Japan) fell 10% year-on-year, especially in the second quarter, when sales in the region fell 14%.
The financial report explained that revenue in Japan achieved double-digit growth, with the performance benefiting from purchases by Chinese tourists.
In other words, the LVHM Group believes thatChinese consumers reduced their purchasing power in their home country, affecting local performance, but made purchases when traveling to Japan, boosting the Japanese market.
Another group that is also having a hard time is Kering, the world's second largest luxury group after LVMH. The company's brands include Gucci, Bottega Veneta, Balenciaga, Boucheron, Qeelin, etc.
Judging from the overall performance, Kering Group's decline in the first half of the year was more severe than that of LVMH.In the first half of this year, Kering Group achieved revenue of 9.018 billion euros, a year-on-year decrease of 11%. On the profit side, Kering Group's decline was even greater, with net profit attributable to the parent company falling 51% year-on-year to 878 million euros.
Image source: Kering Group 2024 semi-annual report
From the perspective of Kering Group’s brands,Gucci's performance dragged down Kering's overall performance.Gucci contributed nearly half (45.5%) of the group's revenue in the first half of 2024, reaching 4.085 billion euros, but it fell 18% year-on-year. YSL's revenue was 1.441 billion euros, down 7%. BV, which only achieved revenue of 836 million euros, increased slightly by 3%, becoming the only sub-brand whose revenue did not decline.
Image source: Kering Group 2024 semi-annual report
Financial statement explanation,The decline in revenue of major brands was affected by the decline in performance in the Asia-Pacific region.In the first half of 2024, Kering Group's revenue recorded an 8% positive growth only in Japan, while other regions (Western Europe, North America, Asia Pacific) all declined. Among them, the Asia-Pacific region, the group's highest-revenue region, saw its revenue drop by 22% year-on-year, the largest decline, and its impact can be imagined.
Image source: Kering Group 2024 semi-annual report
The financial report also attributed the growth in sales in Japan to an increase in the number of tourists from other parts of Asia (especially China), as the yen depreciated and the trend of travel consumption and purchasing agents in Japan continued to rise.
The difficulties faced by LVMH and Kering are not isolated cases. They reflect the common challenges faced by the entire luxury industry - weak demand. Other luxury groups have also faced performance declines to varying degrees.
The Burberry Group recently released its financial report for the first quarter of fiscal year 2025 (the 13 weeks of the natural year ending June 29, 2024). On the same day, the company's CEO Jonathan Akeroyd announced his resignation.
The financial report shows that Burberry's retail revenue was 458 million euros during the reporting period, down 22% year-on-year. In terms of regions, Burberry's store sales in EMEIA (Europe, Middle East, India and Africa) fell 16% year-on-year in the quarter, and fell 23% in Asia Pacific and the Americas. In the Asia Pacific region, except for Japan, which achieved positive sales growth, sales in other regions suffered a severe setback: the Chinese mainland market fell 21% year-on-year, the South Asian market fell 38%, and the Korean market fell 26%.
Source: Burberry’s first quarter financial report for fiscal year 2025
Another example is Hermès, whose revenue in the first half of 2024 was 7.5 billion euros, a year-on-year increase of 15%, and is still on the rise. However, in the second quarter of this year, the growth rate in the Asia-Pacific region was 5.5%, which was significantly slower than the 14% in the first quarter.
Without exception, the above luxury brands mentioned that the trend of slowing revenue and profits was related to the Chinese market.
In addition to the above-mentioned brands, brands such as Hermès, Cartier's parent company Richemont Group, and Germany's Hugo Boss have also stated that their business in the Chinese market is facing a severe situation due to changes in the customer base of the Chinese market.
A report in the Wall Street Journal shows that the LVMH Group is headquartered in Paris, even though Europe is the home of the empire of its founder, Bernard Arnault.But over the past 30 years, the engine of LVMH's amazing growth has come from China, China accounts for about 20% of LVHM Group’s global sales.
As Chinese outbound tourism resumed, many people began to consume luxury goods in Japan, where the exchange rate was more favorable, and the performance of luxury goods in the Chinese market declined. At the same time, because Japan's exchange rate was cheaper, it affected the overall profits of luxury groups.
However, a marketing expert told Dingjiao that the decline in performance in the Chinese market is not due to the shift in consumption space, but rather that the main consumer groups began to consume rationally after their assets shrank, reducing their desire to consume luxury goods with large premium space. And the people who choose to consume luxury goods in Japan due to the exchange rate are not the main consumer group of luxury goods. These are two groups of people. He believes that this explanation in the financial report is an effort by the government to regain the market's favor.
Zhuang Shuai, founder of Bailian Consulting, has the same view.The impact of outbound tourism on luxury goods sales is not as great as imagined.
The reason he gave was that luxury brands would launch different styles and products in different countries to differentiate between tourist shopping and local store operations. Especially after the 2008 financial crisis, everyone went to duty-free shops in Europe and the United States to make use of exchange rate fluctuations for purchasing, so luxury brands adopted the above strategy for differentiated competition. Therefore, those who are willing to consume luxury goods across borders are more likely to be those who care less about style and more about price. They are non-fixed consumers of luxury goods.
Image source/Unsplash
Market competition also affects the market share of luxury brands to a certain extent. Some brands that focus on cost-effectiveness have also begun to develop "high-end" through acquisitions, such as Anta's acquisition of FILA, Descente, Arc'teryx and Salomon, all of which are moving up. This kind of competition between brands is becoming more and more intense in China, and is also competing with luxury brands for users.
Faced with the weakness of the Asia-Pacific market and declining performance, major luxury brands have adopted almost opposite strategies.
Some luxury brands have entered the "discount era".In luxury e-commerce and online channels such as Tmall, brands such as Versace, Valentino and Givenchy have recently launched discount activities; while brands such as Burberry and Balenciaga have lowered the prices of some handbags to regain the favor of consumers.
Another part of the brands has set off a new round of "price increase wave".On January 1 this year, Hermès completed the price increase of all its products, including the Mini Kelly generation increased by 10,000 yuan to 56,500 yuan, and the Birkin 30 handbag increased from 92,750 yuan to 105,000 yuan. LV recently completed the price increase, and the increase of some popular handbags reached 6%. LV has increased prices at least 10 times in the past three years; Chanel also increased prices again in March this year, with the small CF handbag breaking through the 80,000 yuan mark and the large CF price exceeding 90,000 yuan, approaching Hermès.
Zhuang Shuai commented,The top luxury goods industry is very similar to the real estate and stock markets, in that you buy when prices are high and don’t buy when prices are low. The worse the economy is, the more luxury goods prices will increase.Once top luxury goods start to lower their prices, it will create conflicts and contradictions with the consumption psychology of luxury goods users, affecting their consumption expectations.
Luxury brands that still need to stimulate sales through price regulation are likely to become younger and even popular. From this, we can also see that some brands of Kaiyuan Group have already taken a different brand development direction from LVHM.
According to Deloitte's 2023 forecast, the size of China's luxury market will account for 25% of the world's total luxury consumption. By 2030, this proportion will rise to 40%. By then, China will surpass Europe and America to become the world's largest single market.
As an important luxury market, the middle class, the main consumers of luxury goods in my country, have gradually become rational in their attitude towards luxury goods.
Bella used to be a member of the luxury goods consumer army. She would go to the store every time the season changed and new products came out. If she felt like buying something, she would go shopping directly. She would also buy some luxury goods as gifts for customers.Now, luxury goods are neither in her gift choices nor in her daily consumption list.
Since last year, Bella has found that her friends go to Hong Kong more for investment and financial management or medical examinations and beauty treatments, and their enthusiasm for shopping, especially luxury goods, has greatly decreased. She and her friends have a consensus that "bags, luxury cars, watches, jewelry, etc. are already owned, and now they pay more attention to personal health and stable investment. These are actually 'luxury goods', but not luxury goods in the traditional sense of the past."
This also affected her choice of gifts. She replaced luxury goods with gold. In the past, she gave luxury goods because people could find out the market price of a Chanel bag. But now, if you give a bag, firstly, the other party may not be interested in it, and secondly, it is more troublesome to sell it for cash. It is better to give gold, the value of which can be seen at a glance, and it is also convenient to sell.
Nana, another former senior executive of a large company, told Dingjiao that in the past, when people bought luxury bags and jewelry, they needed some "outfits" to cheer themselves up or to fit into the social circle at that time. But now that they have started their own business, they have no spare money and no use scenarios, so they no longer spend time and energy on the luxury market.
Nana currently has two consumption concepts:One is to pursue the tone and texture of the product rather than the brand, and the other is to explore niche brands for mix and match.
For example, when buying a cashmere coat, you don’t have to buy MaxMara, Brunello Cucinelli or Loro Piana. You can go to the source factory to find good fabrics, but you no longer have to pay for the logo and brand story of luxury goods. In addition, when exploring domestic designer brands, mid-to-high-end local brands, and high-end custom brands, you can enjoy better services, a higher degree of matching with your own style, and a sense of accomplishment brought by mix and match.
The reason why luxury goods can become luxury goods is that they have liquidity in the second-hand market. However, this year, the price of luxury goods in the second-hand market has dropped significantly, and the value preservation and appreciation are not as good as before. This also affects the consumption desire of the middle class for luxury goods.
A second-hand luxury store owner said that the second-hand luxury market has been gradually falling since the second half of last year, which is consistent with Bella's experience. This year, she sold a batch of previously unused bags, jewelry and diamond watches to second-hand luxury stores and found that the recycling price was significantly lower than in previous years.
For Bella,In the past, luxury goods not only had value as decoration, but also had use value and investment value. However, under the current market conditions, luxury goods seem to have only value as decoration.This also makes her more cautious about consuming luxury goods.
However, consumers' rationality has not dissuaded high-end luxury brands.
There are many signs that LVMH Group will not give up the Chinese market - it is currently renovating its Beijing store and is also carrying out a gorgeous renovation for its flagship store in Hainan. In addition, LVMH Group plans to build the first seven-star luxury retail and leisure and entertainment resort in Yalong Bay, Sanya, Hainan - DFS Difei Shi Yalong Bay Project. The duty-free department of LVMH Group said that the project is expected to attract 1,000 luxury brands and 16 million tourists per year by 2030.
Luxury brands also need to pay attention to the shift in consumption trends. The McKinsey China Consumer Report 2024 points out that Chinese consumers are shifting their spending focus to services and experiences. Experience, emotional and spiritual consumption with clear goals are the main trends, education, travel and health products are the media, and third- and fourth-tier cities and Generation Z are important driving forces.
Image source: Screenshot of McKinsey video account
Laurent Boillot, CEO of Hennessy under the LVMH Group, once said that his answer to the question "Where is the next big luxury market after China?" has always been "After China, it's still China." But under today's consumption trends, luxury groups need to adjust their operating strategies as soon as possible to adapt to new market trends.
*The title image is from Unsplash. At the request of the interviewees, Bella and Nana are pseudonyms in this article.
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