China headwinds buffet Kering, LVMH’s profitability

In a challenging year for the luxury goods market, industry leaders Kering and LVMH are grappling with slowing demand in China, their most crucial growth engine. Both companies have reported disappointing results for the first half of 2024, signaling a broader slowdown in the luxury sector. Kering, the French luxury group behind big brands like Gucci and Bottega Veneta, reported a significant drop in sales and forecasted a weak second half of the year. The company's second-quarter sales fell to 4.5 billion euros ($4.9 billion), an 11% YoY decline on an organic basis, missing analyst expectations. Group revenue generated from Chinese consumers, at home and abroad, declined 25% during the quarter, Kering Chief Financial officer Armelle Poulou said on an earnings call. Kering warned that second-half operating income could fall by around 30%, following a 42% drop in the first half. Gucci, Kering’s flagship brand, experienced a 19% sales decline in the second quarter, showing no improvement from the first three months. The brand is undergoing a revamp under new creative director Sabato De Sarno, aiming to cater to wealthier clients who are more resilient to economic headwinds. Despite the overall sales slump, Gucci’s new Ancora collection has been well-received in China, generating significant buzz on social media platforms like Weibo and Xiaohongshu. LVMH, the world’s largest luxury group, also reported slower-than-expected sales growth. The company’s quarterly results missed expectations as sales rose only 1%, offering few signs of an imminent rebound. Sales in Asia, excluding Japan, fell 14% in the second quarter, exacerbating concerns about luxury demand in China. Losing steam Both companies are feeling the impact of China’s economic challenges, including a teetering real estate market, shaky consumer confidence and the government’s crackdown on displays of wealth. Chinese consumers, who have been the driving force behind the luxury industry’s growth in recent years, are tightening their belts due to economic uncertainty and high youth unemployment. The Chinese government’s efforts to reduce displays of conspicuous consumption have led to a purge of wealth-flaunting content on social media platforms like Weibo, Douyin, and Xiaohongshu. This move has implications for luxury brands’ digital marketing strategies, which often rely on influencers and celebrities to showcase their products. Despite these challenges, there are some bright spots. Japan has emerged as a strong market for both Kering and LVMH, benefiting from Chinese tourists taking advantage of the weak yen. LVMH reported 32% revenue growth in Japan for the first quarter of 2024. Survival of the fittest Looking ahead, both Kering and LVMH are adapting their strategies to navigate the changing market. Kering is focusing on the gradual rollout of new collections for Gucci, which are expected to drive 25% of sales in the second quarter. LVMH is doubling down on digital expansion in China, with brands like Tiffany & Co. and Hublot opening flagship stores on Tmall Luxury Pavilion. Both groups are also placing greater emphasis on cultivating high-net-worth individuals (HNWIs) and very important customers (VICs). This strategy, which has proven successful for brands like Hermès, may help insulate them from economic fluctuations. As the luxury market faces a period of normalization after years of strong growth, industry leaders are cautiously optimistic about the future. However, with China’s economic recovery still uncertain and global economic headwinds persisting, Kering, LVMH, and their peers in the luxury sector face a challenging road ahead in maintaining growth and profitability in their key markets.

Kering, LVMH grapple with China slowdown

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Kering, LVMH grapple with China slowdown