The trend of slowing global consumption continued, and luxury goods companies did not perform well in the second quarter.

According to a research report released by Bank of America Merrill Lynch analysts Ashley Wallace and Daria Nasledysheva on August 27, luxury goods companies' Q2 revenue remained flat. The average profit for the first half of the year fell 12% year on year, and since May, stock price performance has lagged behind the market by an average of 5%, and the market consensus forecast has also dropped 5%.

These signs all indicate a weak trend and prospects for luxury consumption. Specifically, Bank of America also discovered the following major trends.

Zero growth in luxury revenue, serious brand polarization

The report data shows that in the second quarter, the weighted average revenue growth rate of the luxury goods industry was 0%, down from 2% in the first quarter, the lowest level since the 15th quarter.

Judging from the annual growth rate, revenue growth in the second quarter also showed a slowing trend. The report shows that based on a 5-year compound annual growth rate, the industry's revenue growth rate slowed by 0.9% to 8.8% in the second quarter. Based on the 2-year compound annual growth rate, the industry's revenue growth rate slowed by 0.4% to 6.8% in the second quarter.

The report also pointed out that demand for luxury goods peaked in the first quarter of 2023 and continued to normalize thereafter. By the second quarter of this year, the revenue growth rate calculated at the 5-year compound growth rate was 0.2% lower than the long-term average, which means that the post-COVID-19 “overconsumption” wave has ended.

As far as individual brands are concerned, there are serious differences in revenue performance. According to the report, Prada's revenue increased 18% year over year, the strongest of all brands. Burberry's performance was the weakest. Same-store sales grew -21% year over year, and the difference in growth rate with Prada reached 39%.

As far as the absolute value of revenue is concerned, Hermès has almost driven the industry's revenue growth by “doing it alone.” Compared to the same period last year, Hermes' second-quarter revenue increased by 0.44 billion euros, while consumer spending on other luxury brands decreased by a total of 0.14 billion euros. Looking at the first half of the year, Hermès' revenue also increased by 1 billion euros year-on-year, while total consumer spending on other luxury brands only increased by 0.4 billion euros.

The performance of hard luxury is inferior to soft luxury, and the brand is more important than the category

Luxury goods can be divided into two categories: soft luxury and hard luxury. The former mainly includes perfume and bags, while the latter mainly includes watches and jewelry.

Judging from the second-quarter revenue performance, the weighted average revenue of Hard Luxury was -1%, while the average revenue of Soft Luxury remained the same. In the hard luxury category, watches are more cyclical than jewelry. The best performing jewelry brand is Pandora; among soft luxury brands, the best performing brands are Miu Miu, Hermes, and Cucinelli.

The report points out that the performance of hard luxury is lower than soft luxury, which is somewhat “counterintuitive”, especially at this stage where demand is normalized. Bank of America says this means that product categories are not the key factors in determining relative revenue growth. Instead, the following three factors are more decisive: 1) brand appeal and momentum; 2) fashion content and novelty; 3) brand investment cycle and management execution.

Price increases+promotions “go hand in hand”, but sales may turn negative this year

In fact, starting in 2022, luxury brands such as Chanel, Dior, Louis Vuitton, and Rolex began to rise in price, causing the average price of the entire industry to rise 7% between 2022 and 2023, which is in line with the global CPI growth rate.

Today, this wave of price increases continues. According to the report, most brands have implemented slight price increases this year. The average price increase in the industry is expected to rise 4%-5% this year, with the biggest price increase in the Japanese and Chinese markets; the average price increase in the global industry is expected to be 2-4% this year and next two years, which is still slightly higher than the long-term trend.

Take Hermès as an example. The brand saw the biggest price increase in the US and Japanese markets, the smallest in Europe. Among the categories, the smallest price increase was for beauty products, and the most popular products were Oran sandals, men's ties, and Avalon blankets.

At the same time, considering the background of weak consumer demand for luxury goods, brand promotion activities have also intensified.

According to the report data, 52% of women's clothing products were discounted on luxury e-commerce websites in June, up from 48% the previous year, and the discount intensity also increased.

Despite the brand's multiple initiatives, industry sales are likely to turn negative in 2024.

The report said that between 2019 and 2023, price and product mix were the most important drivers of revenue growth during this period, contributing almost 60% to the industry's growth.

For 2024-2025, Bank of America believes that price and product portfolio will still be the biggest growth factor, but global growth will mainly come from product portfolio optimization rather than average price increases, and sales will decline for the first time, especially in the European and US markets.

Demand in the US has deteriorated, and local demand in Europe is still weak

By region, demand in the US market worsened month-on-month.

The report points out that American consumers are “canaries in coal mines” and often show early signs of global consumption trends. However, since the US monthly consumption data trend did not show substantial improvement, it indicates that there is still a downside risk in the global luxury industry in the second half of the year.

According to Bank of America credit and debit card summary data, the US luxury consumption rate in the second quarter was -12%, 1 percentage point lower than -11% in the first quarter.

The growth rate of luxury revenue in North America also slowed from 4% in the first quarter to 2% in the second quarter. Although the trend was better than Bank of America credit and debit card data, it also recorded a continuous deceleration.

Europe's second-quarter earnings report was slightly better than expected, but Bank of America believes it is mainly driven by tourism, and local demand is still weak.

According to the data, travel spending accounts for about 50% of the European luxury market. According to Planet data, total tax rebates for international tourists in Europe increased by 8% in the second quarter, while the overall European luxury goods market recorded low single-digit growth (4%), which meant that local consumer spending was slightly negative.