The luxury industry is falling from its elevated heights
The gleaming flagship stores of Louis Vuitton, Chanel and Gucci in the Ginza district of central Tokyo are no one’s idea of discount outlets. They were designed by top architects and offer sumptuous displays of luxury goods in Japan’s most expensive patch of ground.
But they have been filled with bargain hunters in recent months — Chinese tourists who have flown to Japan’s capital to buy items more cheaply than at home. The yen’s weakness has provided an opportunity for those who would once have shopped in mainland China, or acquired clothes and accessories in Hong Kong or Europe.
China’s aspirational consumers, who have helped to drive the growth of the global luxury industry in the past two decades, are watching their money carefully. The fragile domestic economy has made them more cautious and they have pulled back from a surge of “revenge shopping” after lockdown. The Asia-Pacific sales of brands such as Burberry and Gucci have fallen sharply outside Japan.
The broader fall in luxury consumption has come as a shock to an industry accustomed to attaining ever greater heights, apart from in its pandemic slump. Gucci’s parent company Kering has been hit particularly hard by the change in mood: its shares fell by 8 per cent on Thursday morning after it warned that operating income could decline by up to 30 per cent in the second half of this year.
This pushed the value of Kering, which also owns brands including Yves Saint Laurent and Balenciaga, to a seven-year low of €37bn, a fraction of the €326bn of the behemoth LVMH. As Kering’s founder François-Henri Pinault struggles to restore Gucci’s gleam, his traditional rivalry with Bernard Arnault, LVMH’s patriarch, has become lopsided.
Even LVMH, owner of 75 “maisons” including Louis Vuitton and Dior, is feeling the pain: it reported weak sales growth and its value has dropped by 9 per cent this year. Jean-Jacques Guiony, chief financial officer, said it was relying on the “timeless appeal of our flagship brands amid fast evolving consumer tastes” to see it through.
Its sheer size also helps. Louis Vuitton is by far the world’s biggest luxury brand, with earnings before interest and tax of €12bn on revenues of €23bn last year, according to Morgan Stanley. It sells a lot of bags and accessories to aspirational shoppers, and a net profit margin of more than 50 per cent justifies many Vuitton stores.
Smaller, second-tier luxury brands are more exposed to trouble. Burberry said this month that it was replacing its chief executive after its attempt to achieve the same cachet and pricing power of a Chanel or Louis Vuitton stuttered. Its value is in turn a fraction of Kering’s at £2.6bn, and that ambition now looks beyond reach.
Meanwhile, brands that appeal to the richest shoppers, and can charge the highest prices, are doing fine. Hermès, the French maker of the Birkin bag, defied the gloom this week by announcing a 13 per cent rise in sales in its second quarter. Brunello Cucinelli, whose Italian founder is known as the king of cashmere, is expanding rapidly in Asia.
But the lesson of the week is that what the industry calls brand elevation — steadily making luxury labels more exclusive and expensive — is getting harder. There was room to achieve it as consumers kept on being drawn into the luxury status game by globalisation, but it takes years of dedication and growth to polish an image.
Even LVMH, which has the smoothest brand elevation operation, is fallible. It paid $16bn for the US jewellery chain Tiffany & Co in 2020 and has been investing heavily to redesign stores and sell more expensive pieces. But LVMH’s watch and jewellery sales fell in the first half of this year and Arnault commented recently that “you cannot do things instantly”.
This puts others without its capacity to remain patient in a tricky spot. Gerry Murphy, Burberry’s chair, admitted this month that it “probably went a bit too far too fast” in raising prices. Luca Solca, a luxury industry analyst at Bernstein, argues that it might do better to settle for being a British version of Coach, the US premium brand.
Burberry has already sent a strategic signal by appointing Joshua Schulman, a former chief executive of Coach and Jimmy Choo, to lead the company. It will not be the only one to reconsider whether it can rely on the permanent expansion of luxury to remake itself in finer garb. The industry has become so used to moving upwards that it is not used to operating in another way.
Many still hope that 2024 will prove an aberration after the excitement of last year, and that growth will resume in 2025. History suggests this is a fair bet — the personal luxury goods market has more than doubled in value since 2010, according to the consultancy Bain. That would leave luxury labels bruised, but able to maintain their ambitions.
There is no guarantee of it, though. Even the companies that confidently assured the doubters earlier this year that it was a temporary blip sound less confident now. By definition, luxuries are not necessities and no one really needs a new Hermès bag or Dior suit. If the industry forgot that, it has been reminded this week.
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