Shanghai, China – June 8, 2024: Louis Vuitton retail store at Shanghai Hongqiao International Airport
getty
Luxury market leader LVMH just posted disappointing results in the third quarter, with group-wide organic growth down 3%. Starting in 2023, when sales rose 14% to $93.4 billion (86.2 billion euros), quarterly sales have slowed from 3% growth in the first quarter and 1% growth in the second quarter.
By the third quarter, LVMH had brought in $65.9 billion (60.8 billion euros), making it increasingly unlikely that LVMH would emerge from the doldrums by the end of the year. Most notably, the company’s cash cow, Fashion and Leather Goods (FL&G), which accounts for almost half of group revenue, fell 5%.
ISTUD’s Professor Barossini Volpe said: “The decline in quarterly sales for LVMH’s Fashion and Leather Goods division is too large to ignore,” especially since the division only increased by 1% in the first half of the year. . The F&LG segment includes industry-leading fashion brands such as Louis Vuitton, Christian Dior, Celine, Loewe, Givenchy, Fendi, Marc Jacobs and Loro Piana.
Chief Financial Officer Jean-Jacques Guiony described the performance as a “cyclical downturn” and pointed to a 16% decline in Asia, excluding Japan, its largest market. However, sales in the second-largest market, the United States, were flat in the third quarter. Asia and the US together account for 54% of revenue, with Asia 29% and the US 25%.
As a market share leader, LVMH is a bellwether of what’s happening across the broader personal luxury goods market. And with the company’s FL&G and two major markets dictating the pace of LVMH Group’s performance, LVMH’s performance could be similar to what happened during the Great Recession of 2008-2009, when the luxury goods market suffered. It’s an early warning that we’re headed for a decline that could be worse. The personal luxury goods market fell 8%, according to Bain.
“The overall personal luxury goods market is very likely to register negative growth in 2024, and probably also in 2025,” Barossini-Volpe predicted.
Luxury goods recession alarm bell
TD Cowen reported in LVMH’s earnings report that “the luxury goods sector remains under recessionary pressure as we closely monitor consumer confidence” and predicted “further deterioration in demand, particularly in China.” he added.
In the year of the recession, LVMH faltered from 2008 to 2009, with sales down just 1%, but back then LVMH was a very different company, less than a quarter of its current size and FL&G a third. It was only slightly above the top 1 in the rankings. of the group’s revenue. However, the company’s FL&G business remained strong during the recession, growing 5% that year.
Now TD Cowen warns: “The decline of the F&LG business is unfortunately uncharted territory. This ‘recession’ is different in that LVMH appears to be affecting wine and spirits, watches and jewellery, and fashion and leather goods across the board. ”
In the third quarter, Wine & Spirits fell 7% and Watches & Jewelry fell 4%. And although the company achieved strong results in perfumes and cosmetics and Selective Retailing (Sephora, Le Bon Marche Rive Gauche, and La Sammartine) with increases of 3% and 2%, respectively, this year, Growth has slowed in both countries. This suggests that declines may continue to occur in these segments as well.
Bernstein luxury goods analyst Luca Sorca offered a sober assessment of LVMH’s position, once a bright star in the industry. “We see LVMH as the weakest among luxury brands. We believe Richemont will do better and Hermès will be the best.”
China in sight
China is a big question mark for the luxury goods market in general and LVMH in particular. China’s economy is in a slump, and the government is working on stimulus measures.
Guiony tried to put a positive spin on the news from China during the earnings conference. “Against this backdrop, it is not particularly surprising that demand for luxury goods has slowed, especially considering that it was still growing in double digits in the second half of last year. However, demand in China in the first half of this year ‘s strength is the latest evidence of Chinese customers’ continued appetite for luxury goods.
However, the data disputes China’s claims of “strength” in the first half of this year, with Asia ex-Japan falling -6% in the first quarter and -14% in the second quarter. Guiony said candidly: “Most of our markets, including mainland China, are currently facing economic challenges.”
TD Cowen is concerned about the “significant slowdown in business for Chinese consumers”. According to the report, China accounted for more than 50% of the company’s growth before the coronavirus outbreak. And the F&LG division is particularly dependent on China, with TD Cowen saying Asia excluding Japan accounts for about 40% of the division’s revenue, with “the majority of its composition based in Greater China.” It is estimated that
Mainland China and Asia combined were the world’s largest personal luxury goods market last year, at $61 billion in China and $60 billion in Asia, according to Bain. If weakness in this sector continues, it could have a significant impact on LVMH and the overall personal luxury goods market.
“China’s slowing growth is having knock-on effects across the planet,” Nick Maro, principal global trade analyst at the Hong Kong-based Economist Intelligence Unit (EIU), told South China Morning. told the Post. “The prolonged weakness in demand seen in China is already a substantial drag on global activity.”
Weakening of fashion and leather goods
As troubled as China is right now, LVMH’s fashion and leather goods performance could be even more important for the company and what it means for the luxury market as a whole. I don’t know.
Leather goods ($88 billion), apparel ($81 billion), and footwear ($30 billion) will account for 53% of the total personal luxury goods market in 2023 and a significant share of the overall market’s 4% growth last year. was rather due to price increases. than demand growth.
It’s difficult to know exactly how much the price of Louis Vuitton handbags has risen, but Reuters reported last year that prices could rise by up to 20% in China, and ParsVap estimates Prices in the United States and Europe rose 7% last year, it said. year.
Nevertheless, Guiony defended the company’s price increases. “All the players did the same thing, all the players. And with this in mind, I really think if we hadn’t raised our prices the way we have, our prices would have been in double digits today. Do you? I really don’t think so.”
However, F&LD growth rate was 14% last year, but -5% in the third quarter. Yes, F&LG has fared well this year compared to last year’s high-level comparators, but in Q3 2023, it’s still as high as 9% in Q3 2023, compared to 20% in H1 2023. It wasn’t. The slowdown was already taking hold in the second half of last year.
“Customers learn that the price of the same bag has doubled in less than five years, with no explanation other than greed, and at the same time hear that subcontractors are using low-paid, undocumented workers. They feel angry, they feel cheated. Their sense of trust is broken,” Barossini-Volpe said.
Guiony said the current decline in the F&LG sector is “more demand-driven than offer-driven.” However, Barossini-Volpe points out that demand from luxury consumers could be dampened by a lack of trust or a perceived unfair offer.
Looking ahead, Guiony said there is no reason for the company to change direction, but rather to continue with what it does best: luxury goods.
“The offer in the luxury sector has been a key strength for many years. This is not to say that we are ignoring the pressures we are under from demand, but we are not necessarily looking at changing the offer completely in the very short term. “We still believe in staying true to the secrets of our long-standing success,” he said.
double down
Despite the deterioration in business performance, Guiony stressed that “we have no intention of changing our strategy.” Instead, the company will double down on innovation to overcome what he sees as part of the normal business cycle.
One successful innovation from the past quarter mentioned in the earnings call was the Neverfull Inside Out bag, launched in partnership with actress Sophie Turner.
But it’s not really innovative at all. Fashionistas have known for years that by flipping the Neverfull tote bag with the logo side facing out, you can stand out from the crowd carrying this ubiquitous handbag. LVMH did not provide any comments or photos of the Neverfull Inside Out bag to explain this story, but you can see them displayed here.
Whether the luxury market is simply undergoing a normal cyclical downturn or on the verge of an even deeper trough, LVMH needs more significant innovations in its quiver.
“So, as I say again and again, our job is not to predict the business, but to adapt, and this is what we are trying to do,” Guiony concluded. “We’ve been through ups and downs. The only thing we know is that even when business gets bad, it usually gets better afterwards.”
See also:
