The middle class is starting to make careful calculations, and luxury goods can't be sold?
Recently, a number of luxury groups have successively released their performance reports for the first half of 2023, and the trend of market differentiation is becoming more and more obvious. LVMH's revenue and net profit both declined, demonstrating the challenges it faces amid global economic uncertainty. At the same time, Kering's net profit has also been cut in half, reflecting the intensification of competition in the high-end market and changes in consumer demand. In addition, Burberry's performance continued to be sluggish and failed to effectively reverse the decline.
In stark contrast to the above-mentioned brands, Hermès has maintained steady growth, showing the strong appeal of its brand and the success of its market positioning. The Prada Group, on the other hand, has bucked the trend thanks to the performance of its Miu Miu sub-brand, demonstrating the effectiveness of its diversification strategy.
In the Chinese market, a number of luxury groups have pointed out a decline in store traffic. This trend has prompted brands to take a more cautious approach to expansion. Since the beginning of this year, the pace of new store openings for luxury brands has stabilized, replaced by the opening of pop-up stores with various marketing themes, as well as the renovation and upgrading of existing stores.
Generally speaking, the luxury industry has been relatively resilient in the face of economic fluctuations, mainly because its customer base is leading the way in the overall consumer market in terms of its ability to pay. These consumers usually have a higher disposable income and a more stable demand for luxury goods. However, it is surprising that even the world's top luxury brands have recently suffered a general downturn in the market. Luxury companies have seen a decline in revenues and profits, and stock prices have also suffered, with many investors expressing concern. In addition, the decline in the performance of commercial entities and the real estate market, including airport stores, further reflects the challenges faced by the luxury industry. This phenomenon not only surprised industry insiders, but also triggered deep thinking about future consumption trends.
Photo source / LVMH Group's 2024 semi-annual report
On the grand stage of the Paris 2024 Olympic Games, LVMH Group has demonstrated its strong brand influence and market position as one of the key sponsors of the event. The group provided up to 150 million euros (about 1.181 billion yuan) of sponsorship for the Olympic Games, which not only filled the "line" of the event, but also highlighted the important role of the luxury industry in the global large-scale events. At the opening ceremony, a number of LVMH Maisons frequently appeared on the camera, which attracted attention. For example, the torch was stored in LV's luxury luggage, the Olympic medals were designed by Chaumet, and the costumes of the volunteers were made by LV, all of which allowed LVMH to showcase its unrivalled brand appeal to a global audience.
However, despite LVMH's shine during the Olympics, it wasn't all smooth sailing off camera. Just on July 23, the group released its financial results for the first half of 2024, showing some of the challenges ahead. Although it owns many well-known brands such as LV, Dior, Celine, Fendi, Bulgari, Hennessy, etc., LVMH has experienced some financial pressure due to market volatility and changes in the economic environment. The release of the earnings report sparked a lot of attention in the industry, with analysts discussing the future of the luxury market and how LVMH can maintain its leadership position in the midst of global economic uncertainty.
In the first half of 2024, the performance of LVMH, the world's largest luxury group, has attracted widespread attention in the market. According to the latest financial report, LVMH's sales revenue fell 1% year-on-year to 41.68 billion euros, failing to meet analysts' expectations. In addition, net profit also declined significantly, to 7.27 billion euros, down 14% year-on-year. This data not only reflects LVMH's own challenges, but also reveals to some extent the difficult situation facing the global luxury industry. With the changes in consumer purchasing power and the uncertainty of the market environment, the growth momentum of the luxury market seems to be weakening, and the decline in LVMH's performance may indicate the adjustment and transformation of the industry as a whole. Nevertheless, LVMH, as a leader in the industry, will continue to attract attention from all parties in the future and become an important bellwether in the industry.
Photo source / LVMH Group's 2024 semi-annual report
In the first half of 2024, the revenue of the luxury brand Gucci plummeted by 20%, the revenue of the parent company Kering also fell by 11% year-on-year, and the net profit attributable to the parent company fell by 51%. This decline not only raises doubts about the future of the luxury industry, but also reveals the "cold" trend of the global luxury market. In the face of this challenge, luxury groups have cited the sharp drop in sales in the Chinese market as one of the main reasons for the poor performance.
For a long time, the Chinese market has been seen as a treasure trove of potential for luxury consumption, especially in the context of the rise of the middle class, luxury goods seem to have become a popular choice for home consumption and gift consumption. However, as the economic environment changes, the consumption concept of China's middle class is also quietly changing, and they have become more rational and have begun to re-examine the value of luxury goods. This change has made luxury no longer the first choice for household consumption, and in some cases, the appeal of luxury goods is waning.
In the face of this challenge, luxury groups need to carefully adjust their market strategies and expectations. First of all, they should strengthen their research on consumer needs, understand the consumer psychology and behavior of the middle class, and ensure that products and services can better meet their expectations. Secondly, the shaping of brand image also needs to keep pace with the times, emphasizing the uniqueness and sustainability of products to attract more rational and selective consumers. In addition, luxury groups can also explore new sales channels and market layouts, such as online sales and the development of emerging markets, to cope with the shrinking of traditional markets. Only in this way can luxury brands remain competitive and sustainable in an ever-changing market environment.
In recent years, Hang Lung Properties and Swire Properties, as important representatives of high-end commercial entities, have faced unprecedented performance challenges. According to the latest data, the revenue performance of many plazas under Hang Lung Properties has declined to varying degrees. Specifically, the revenue of Shanghai Hang Lung Plaza fell by 8% year-on-year, Shanghai Ganghui Hang Lung Plaza fell by 4%, Shenyang Municipal Government Hang Lung Plaza faced a decline of 14%, and the squares in Kunming and Wuhan also fell by 1% and 2% respectively. Meanwhile, Swire Properties' performance in Chinese mainland was also sluggish, with sales declining in five of its six retail properties, notably HKRI Taikoo Hui in Shanghai and Taikoo Li Chengdu, down 19.6% and 17.2% respectively year-on-year.
This weakness in the performance of high-end commercial entities is closely related to the overall decline in luxury sales. The UBS report noted that domestic luxury sales in China have fallen by about 10 percent so far this year. The pace of new stores opened by luxury brands in China is expected to slow between the second half of the year and 2026. This change has not only affected the market layout of luxury brands, but also brought significant pressure on the performance of high-end commercial entities.
Luxury goods have long been regarded as the "spiritual highland" in the consumer field, and its strong brand effect and continuous price increases have made it occupy an important position in the market. However, when consumers become more rational in their purchasing behavior, it will be difficult for even these top brands to continue harvesting in the Chinese market. The cessation of the prosperity of high-end commercial entities calls for real estate companies to rethink their business models and market strategies to cope with the changing market environment.
In the luxury market, a similar situation is not limited to luxury brands, with many ultra-premium products also facing serious challenges. According to data released by Porsche on July 9, in the first half of this year, the brand's global sales were 155,900 units, a year-on-year decrease of 7%. In particular, in the Chinese market, the number of new cars delivered was only 29,600, a year-on-year decline of 33%. This trend is also evident in the ultra-luxury car segment, where overall import data shows that sales of ultra-luxury cars plummeted by 48% in the first half of this year. Specifically, the performance of the major brands is also not encouraging: Bentley's sales are down 28 percent, Maserati is down 70 percent, Ferrari is down 30 percent, ·Aston Martin is down 50 percent, and McLaren is down 92 percent. This series of data reflects the increasing pressure on the ultra-premium car market, and the impact of changes in the consumer market on these brands is profound and complex.
In recent years, luxury brands have invariably faced a slowdown in revenue and profits, especially in the Chinese market. Brands such as Hermès, Cartier's parent company Richemont and Germany's Hugo Boss have also spoken out, pointing out that their business in the Chinese market is experiencing a severe situation. Behind this phenomenon, it is mainly due to the change in the source structure of the Chinese market. A report in the Wall Street Journal noted that despite the Paris-based headquarters of the LVMH group and its founder, Bernard · Arnault's empire, LVMH's phenomenal growth over the past 30 years has been largely due to the Chinese market, which now accounts for 20% of LVMH's global sales.
However, with the resumption of Chinese outbound travel, more and more consumers choose to spend luxury goods in Japan, where the exchange rate is more cost-effective, resulting in a significant decline in the performance of the Chinese market. At the same time, Japan's exchange rate advantage also affected the overall profit of luxury goods groups. Although some marketing experts pointed out that the decline in the performance of the Chinese market is not only a shift in consumption space, but the shrinkage of the assets of the main consumer groups has made them begin to consume more rationally and weaken the desire to buy high-premium luxury goods. In addition, there is a clear difference between the people who choose to consume luxury goods in Japan and are not the main consumer group of luxury goods.
Experts believe that the explanation of this phenomenon in the financial report is actually an effort by luxury brands to restore confidence in the market, as a way to ease the concerns of investors and consumers. Therefore, the challenge faced by the luxury industry in the Chinese market is not only the transfer of consumption, but also the change of consumer psychology and market environment at a deeper level.
According to statistics released by the National Bureau of Statistics on July 15, from January to June 2024, the total retail sales of consumer goods reached 23.6 trillion yuan, a year-on-year increase of 3.7%. Although the overall consumer market has shown some growth, the consumption of cosmetics and gold, silver and jewellery has continued to be sluggish, far underperforming the broader market. Especially in June this year, the total retail sales of cosmetics were 40.5 billion yuan, down 14.6% year-on-year, the largest decline in a single month this year. This phenomenon is also the first time in nearly 10 years that the total retail sales of cosmetics fell in June.
In the first half of the year, the total retail sales of cosmetics amounted to 216.8 billion yuan, a slight increase of only 1% over the same period last year. At the same time, the consumption of gold, silver and jewellery also fell by 3.7% year-on-year in June, and only slightly increased by 1% year-on-year in the first half of the year. More and more consumers are showing indifference to the price increase of luxury goods and seem to have become accustomed to such market fluctuations. "It rises with it, and the bright moon shines on the hills. It rises with it, and I clutch my wallet tightly. This sentence has become a true portrayal of consumers' rising prices for luxury goods. The strategy of relying on price increases to create a sense of urgency no longer seems to be able to "fool" China's wealthy consumers, and the calm and rationality of the market is gradually replacing the blind following of the past.
In the current consumer environment, luxury brands must pay close attention to the shift in consumer trends. The 2024 McKinsey China Consumer Report clearly points out that Chinese consumers' spending focus is gradually shifting towards services and experiences. This change not only reflects consumers' lower demand for material goods, but also highlights their desire for emotional and spiritual consumption. Education, travel and health care products are becoming the focus of consumer choice as important mediums for experiential consumption. At the same time, the rise of third- and fourth-tier cities and Gen Z has injected new vitality into this trend. These groups are more inclined to pursue personalized and unique consumer experiences, and luxury brands that can capture and respond to this change in a timely manner will help them stay ahead of the curve in a highly competitive market. Therefore, luxury brands should re-examine the positioning of their products and services to better meet the needs of consumers in the new era.
Image source / Screenshot of McKinsey Video Account
As a socio-cultural phenomenon, the deep-seated roots of luxury goods can be traced back to the historical background of material poverty and scarcity. Luxury is not only a symbol of material wealth, but also a manifestation of social status and identity. In the era of material scarcity, luxury goods often become an important criterion for people to define themselves, and the scarcity of wealth, status and capital makes individuals in society forced to rely on these external material signs to obtain a sense of identity and belonging. This dependence not only reflects the level of economic development of the society, but also reveals the underlying cultural concepts behind it.
In periods of economic underdevelopment, social stratification was often based on material wealth, and luxury goods became an important tool to distinguish classes. However, with the rapid development of China's economy, more and more people have emerged from the predicament of material scarcity and turned to pursue more diverse values and lifestyles. This shift means that the notion of defining human values in terms of material signs is gradually diluting, and people are beginning to value inner literacy, individuality, and quality of life. It is foreseeable that with the development and change of society, this backward concept of separating people by things will gradually withdraw from the stage of history, and will be replaced by the values of the new era that pay more attention to individual connotation and spiritual pursuit.