LVMH said sales fell in the third quarter, with double-digit sales declines in China. The company is a leader in the luxury goods industry, which is expected to continue to struggle. Despite the challenging macroeconomic environment, there are some bright spots in the market.
The luxury recession isn’t going anywhere, and fashion and leather goods manufacturers around the world need to take note.
Luxury conglomerate LVMH, the largest luxury conglomerate, announced its third-quarter results this week, and the results were grim. Louis Vuitton owner’s sales fell 3%, the first time since the pandemic that sales in the company’s largest fashion and leather goods division have fallen. Other divisions, including watches and jewelry, wine and spirits, and perfumes and cosmetics, fell short of analysts’ expectations, and the company’s stock price fell.
Salvatore Ferragamo, which also announced its results this week, saw an even bigger decline in sales.
Word on the street is that things in the industry could get much worse before they get better.
“We see a difficult backdrop for luxury spending and expect the next six months to be challenging,” Goldman Sachs analysts said in a note after LVMH’s results.
Over the next week, Kering, owner of Gucci and Balenciaga, and Hermès are scheduled to announce their financial results. Richemont, Moncler and Burberry follow.
In a sense, the slump may have been inevitable.
“This is largely cyclical and we’re in something of a trough or trough right now, so there needs to be a significant amount of weathering across the industry,” said Skye Canaves, principal analyst at EMARKETER. Ta. This was revealed by Business Insider’s sister company.
The luxury goods industry has had its ups and downs before, with prices particularly and perhaps artificially inflated by a surge in spending due to the pandemic. Consumers had savings or stimulus checks but had nowhere to go, so they spent the extra cash on things like bags and wallets.
Economic uncertainty has affected countries around the world in recent years, but the real estate crisis and high youth unemployment in China, one of the world’s largest luxury goods markets, have hit the region particularly hard. There is. LVMH’s sales in Asia ex-Japan in the quarter were down 16% from a year earlier.
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LVMH Chief Financial Officer Jean-Jacques Guiony told analysts on an earnings call that “consumer confidence in mainland China today is back to its lowest level ever recorded due to the impact of the coronavirus pandemic.” said.
He added that it was too early to tell whether the country’s economic stimulus package and recent holidays would boost sales.
According to EMarketer data, sales of personal luxury goods in China increased by more than 37% annually from 2019 to 2021, but the annual growth rate is not expected to exceed 4.2% until 2028. .
How can brands recover?
Still, regardless of macroeconomic conditions, the contraction in luxury spending may not need to be as sharp as it once was. There are levers brands can use to stop or magnify losses.
“The big question is whether weak consumer confidence is the sole cause of weak consumer confidence, or whether there are more structural issues,” Adam Cochran, retail and luxury stocks analyst at Deutsche Bank, told BI in an email. The question is whether there is.”
For example, pricing is within a company’s control, and some companies are too lenient with price increases. Brands such as Louis Vuitton and Chanel have more than doubled the prices of their signature bags, the Never Full and Classic Flap, respectively, over the past decade, according to Sotheby’s data. Brands have accelerated price increases since 2020, causing customers to leave. .
Hermès, on the other hand, raised prices more modestly.
Canaves said more modest price increases are attractive to customers, who may not buy products they could have bought five years ago for significantly less.
LVMH defended the price increase. “Do you really think we would be having double-digit (growth) today if we hadn’t raised prices the way we have? I really don’t think so,” Guiony said.
Birkin maker Hermès has consistently outperformed its luxury rivals this year and has been wise to expand its product range slowly and deliberately. It has relied heavily on its wealthy consumer base, rather than the aspirational customers that fueled the growth of Louis Vuitton and Gucci. These motivated customers are the first to go when the economy becomes unstable.
There are some other bright spots as well.
Sales at LVMH’s jewelry and watches business were down just 4%, and “the Tiffany rebrand has been well received,” Deutsche Bank’s Mr. Cochran wrote in a note. That could mean “less negative consequences” for Cartier owner Richemont, he said.
Brunello Cucinelli, the Italian brand best known for its cashmere, reported increased sales in the third quarter, including in China.
Brands that innovate more are likely to do better going forward.
EMARKETER’s Kanabeth pointed to the move toward collaborations and streetwear that helped some brands emerge from the last luxury recession. This time, labels may look to experiences such as hospitality and service to appeal to consumers, she says.
HSBC’s Erwan Lambourt wrote in a note earlier this month that Louis Vuitton sells everything “from chocolates to bespoke jewellery.” Earlier this year, LVMH made headlines when it acquired the Parisian restaurant Chez Rami Louis.
Of course, expanding into new categories shouldn’t take attention away from handbags and clothing, which are revenue drivers for luxury brands.
“It’s time for brands to take creative risks and start laying the foundation for when consumers come back and seek opportunities,” Kanaves said.