Industry metrics company LVMH reported lower than expected sales growth, with global luxury stocks leading the decline on Wednesday. Analysts believe that although the benefits of high-end luxury goods manufacturers far exceed those that mainly target the middle class, in the long run, middle class consumers are still the main customer group for big brands. Some brands have quietly begun to cut prices, hoping to win back middle class consumers.
Global luxury stocks led the decline on Wednesday as industry indicator company LVMH reported lower than expected sales growth. The stock price of LVMH, the world's largest luxury goods group, fell by more than 5% to 650 euros per share, reducing its market value to 323 billion euros, a cumulative decline of 9% this year.
Other luxury goods stocks also fell, with Hermès (Hermès) and Brunello Cucinelli shares both falling 2.2%, while Gucci (Gucci) parent company Kering Group (Kering)) fell 3.7%. Richemont Group (Richemont), which owns the Cartier (Cartier) jewelry brand, fell 2.3%, and Prada fell 5.5%.
According to the financial report of LVMH, the world's largest luxury goods company, the company's revenue increased by only 1% in the second quarter to 20.98 billion euros. The growth rate was slower than in the first quarter and lower than the 3% increase generally expected by the market. Excluding the abnormal decline during the pandemic, this is the company's lowest level of growth since 2009.
LVMH's much-publicized fashion and leather goods division (its largest division in terms of revenue and profit) slowed to 1% in the second quarter, while operating profit fell 6%. The Group's operating profit for the first half of the year was 10.7 billion euros, which also fell short of analysts' expectations, particularly under pressure from its wine and spirits division and watch and jewellery division.
Due to the size of LVMH and the luxury goods of its more than 75 subsidiaries covering everything from watches and bags to travel, it is considered a trendsetter for the industry. According to media reports, in the past year, as the industry slowed down, LVMH was in a midstream position. Kering Group and Burberry were already in trouble, while high-end brands such as Hermes and Brunello Cucinelli had an advantage, mainly benefiting from the higher net worth of their customer base.
Ice and fire are two heavens: high-end products are sought after, and the middle market is sluggish
Analysts believe that the luxury goods industry is facing headwinds, mainly due to the economic slowdown in several major consumer markets. However, luxury goods companies have a duality of ice and fire. Companies that focus on high-end products are doing well, while companies that mainly target the middle class are facing many difficulties.
LVMH does have a top customer base and popular brands, but in the wine and spirits sector, “there is a serious problem with champagne demand.” For middle class customers, LVMH is trying to increase sales of the jewelry brand Tiffany while cutting engagement ring expenses for its core consumers.
As a result, LVMH's overall growth rate lags behind Brunello Cucinelli, and the company expects sales to increase 10% this year. Also, Hermès, whose products are more expensive, is also doing well. LVMH itself has confirmed this. The company said that customer demand for more expensive products (such as designer clothing) is more sustainable than its cheapest handbag.
In contrast, brands that sell to ordinary consumers appear more vulnerable. Burberry warned last week that it could lose money in the first half of this year, stop paying dividends, and part ways with CEO Jonathan Akeroid.
Kering, on the other hand, is trying to elevate its flagship brand Gucci to the high-end market, but it seems to have been hit hard. Kering Group's earnings report released on Wednesday showed that same-store sales fell 11% in the second quarter, exceeding analysts' expectations of an 8.8% decline. Gucci sales fell 19%, higher than analysts' expectations of a 15.9% drop. Continuing operating income is expected to drop by about 30% year over year in the second half of the year.
Finally, brand appeal is critical. Analysts believe that Burberry and Gucci are struggling because they mainly face middle class consumers, and their brand transformation has yet to be effective. Meanwhile, the Cartier and Van Cleef & Arpels jewelry brands under Cie Financiere Richemont SA shine brightly and are highly respected.
However, even with these highlights, all gains in luxury stocks since January have been undone, when LVMH CEO Bernard Arnault said the industry was returning to normal rather than a sharp decline.
Analysts believe that although any meaningful recovery is delayed until at least 2025, the high-end market should continue to benefit from increased global revenue in the long run. And as the most powerful LVMH, it should be possible to gain more sales share when the situation improves.
Is middle class consumption the only way to “sink”?
In fact, brands including Burberry and Yves Saint Laurent are taking steps to win back important middle class customers by cutting prices.
Analysts believe that middle-class consumers don't personally spend much on designer products, yet they are still an important customer group for big brands. According to Boston Consulting Group, more than half of the world's luxury purchases are made by around 0.33 billion people, who spend no more than €2,000, or about $2,180, each year on expensive handbags, clothes, and jewelry.
In contrast, the very wealthy customer base, which spends more than 0.02 million euros on designer products every year, is around 2.5 million people, accounting for 10% of luxury sales. Despite these customer contributions, much of the past decade's growth has been driven by so-called “aspiring” shoppers, particularly in Asia.
However, the contraction in consumption in major markets has put pressure on weaker luxury brands. Some brands are raising prices so high that many middle class consumers can't afford them. To boost the brand, Burberry releases new handbags that are on average 58% more expensive than the old ones, according to Bernstein's analysis. This strategy alienates its traditional customers without getting compensation from wealthy shoppers.
Meanwhile, in order to attract shoppers back, some brands are quietly cutting prices. However, this kind of price reduction used to be taboo in the luxury goods industry because it sent a signal that the brand misjudged the value of the product.
According to Bernstein's data, Burberry recently cut the price of the medium Knight handbag by 22%. All handbags designed by the brand's creative director Daniel Lee since 2022 have been cut by an average of 5%. Joshua Schulman, Burberry's new CEO, previously worked for the affordable luxury brand Coach and wanted the brand to once again reach its core customers. This means there will be a wider range of new entry-level products, and perhaps even more price cuts on existing products.
Yves Saint Laurent, which is affiliated with Kering, has reduced the price of most sizes of the best-selling Loulou bags in US stores. According to Wayback Machine data, the small bag, which sold for $2,950 in January, now costs $2,650. However, it is still much more expensive than the price of $2,050 at the end of 2020.
Analysts say if luxury brands continue to snub middle class shoppers, more affordable brands will fill this gap. In any case, the luxury industry needs to re-examine customers and establish connections from the ground up.