Luxury Brands Are in a Winner-Takes-All Phase

Hermès captured more than 100% of the incremental growth in the industry in the latest quarter. Luxury shoppers spent €440 million—equivalent to $477.6 million at current exchange rates—more in the French brand’s stores than they did in the same period of last year. They spent €400 million less on all other luxury brands combined, based on analysis by Bank of America. 

This points to a double whammy for high-end brands, which face challenges at both ends of the consumer spectrum they serve.

It has been clear for months that middle-class shoppers in the U.S. and China, the luxury industry’s two most important markets, have reined in their purchasing.

Chinese consumers are saving rather than spending because the value of their homes is falling. Lower-income and middle-income Americans who developed a taste for luxury during the pandemic have pulled back sharply as they have burned through excess savings.

Now, wealthy consumers, too, seem to be getting choosier about which brands they will and won’t buy. Hermès Chief Executive Axel Dumas said there is a “flight to quality” under way in the luxury industry. This shift is benefiting the Birkin handbag maker, which has a reputation for timeless designs.

Chinese buyers in particular are avoiding flashy and logo-heavy brands as worries about the country’s economy and real-estate challenges grow.

Jewelry sales are also holding up as shoppers look for goods that are more likely to hold their value than clothing or handbags. Cartier’s owner Richemont said its jewelry sales rose 4% in the quarter, although the company’s overall sales were weighed down by weak demand for its watch and fashion brands. Kering jewelry labels Boucheron and Pomellato were rare bright spots in its portfolio.

The outlook is harsh for brands such as Gucci and Burberry BRBY 4.18%increase; green up pointing triangle that are in turnaround mode. The latter issued a profit warning earlier this month and replaced its CEO in an admission that a yearslong push to make the British trench-coat maker more exclusive had failed. Its shares have fallen to levels not seen since 2010. 

Both brands face an uphill battle to lure shoppers. Neither Gucci nor Burberry is known for the classic designs now in vogue. The labels might also have exacerbated the slump, as the sharp price increases that luxury brands implemented in recent years have sidelined aspirational shoppers. 

Luxury stocks are diverging. Shares in Richemont and Hermès have gained 15% and 8% respectively so far this year, with everyone else in the red.

Investors are taking their cue from wealthy shoppers: In troubled times, the most exclusive brands are the safest bet.

Write to Carol Ryan at carol.ryan@wsj.com

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