Luxury sector slows after ‘bonkers’ post-pandemic spending spree

29-07-23

Luxury groups are bracing for the end of the post-pandemic recovery boom as Chinese and US consumers become more selective in their purchases.

The sector has had several years of exceptional growth driven by two engines: China and the US, luxury’s biggest market where pandemic-era savings and financial stimulus generated new shoppers in droves. 

Now there are signs that the pace of growth may be reaching its peak, particularly in the US. “There is a slowdown in the US, but compared to an absolutely crazy base. People got out of the pandemic and went bonkers,” said Michael Kliger, chief executive of luxury ecommerce platform Mytheresa. 

Big luxury groups Hermès and LVMH have posted strong growth so far this year, lagged by Gucci-owner Kering, which has struggled to reboot its flagship brand. However, companies ranging from LVMH, to Italy’s Prada, to Richemont — the Swiss-based owner of Cartier — have reported slower sales growth in the US. The rebound in China from last year’s harsh pandemic lockdowns is also continuing, but has been slower than some had anticipated. 

“The global mood is not one of revenge buying like we saw in 2021 and 2022, so we’re talking more about normalisation than anything else,” said Jean-Jacques Guiony, chief financial officer of LVMH, the world’s biggest luxury company and the industry’s bellwether. 

Industry growth broke records in 2022 growing by around a fifth to €345bn, according to consultancy Bain and Italian industry group Altagamma, as demand for indulgences ranging from Birkin handbags to luxury travel exploded. Luxury is still expected to more than double its size by 2030, but annual growth for 2023 is expected to be at a far lower 5 to 12 per cent. 

Much to the surprise of policymakers and economists, consumer spending in the US has held up surprisingly well despite central banks’ efforts globally to damp demand through sharply higher borrowing costs. But as labour markets have cooled, wage gains have slowed and the spectre of a recession looms large, some buyers have begun to pull back on the margins. 

Spending on boats, aircraft, jewellery and other discretionary goods have softened, retrenching to pre-pandemic levels. 

Investors have reacted strongly to the latest set of earnings. Richemont shares tumbled 9 per cent last week, pulling other names in the sector down with it, after reporting lacklustre US sales in its most recent quarter. Industry leader LVMH grew sales 17 per cent to €42.2bn in the first half of the year, but investors balked at a 1 per cent contraction in the US in the second quarter, sending shares down nearly 4 per cent after it released its results this week. 

Luca Solca, analyst at Bernstein, predicts a change in what investors look for in the sector “from a momentum play chasing one positive surprise after the other, to a steady state, as consumer demand normalises after the post-pandemic euphoria.” 

“This transition is likely going to produce some turbulence, as we have seen recently with Richemont. But, in the absence of a hard landing recession, the sector should soon find an even keel,” he added. 

Hermès is the exception, where long waiting lists for products, lesser dependence on tourist spending in favour of local clientele and ultra-premium positioning produced another set of bumper results with no fall off in sales in the US, according to the company. A dip in China owing to lockdown restrictions at the beginning of the year was also less pronounced than for competitors. 

Kering, which owns brands including Saint Laurent, Gucci and Bottega Veneta, is hoping that some dealmaking, including an agreement to take 30 per cent stake in Italian fashion house Valentino, and a leadership reshuffle at Gucci will help revive its fortunes. Its first half sales grew only 2 per cent to €10.1bn while those at Gucci, which accounts for half of group revenue, contracted.

Federica Levato, partner at Bain in Milan, cautioned there is no “‘one size fits all’ performance for the market in the US right now”.

“The performance of the brands are very fragmented and dispersed. There are brands that are growing 30 per cent in the US, and there are brands that are decreasing 30 per cent,” she said. However, she added that the categories that are suffering the most are streetwear, small bags and entry-level sneakers — all categories exposed to so-called aspirational consumers, who have been more affected by inflation. 

A salesperson at Bergdorf Goodman, the high-end Fifth Avenue department store in New York City, who did not want to give her name, offered a mixed picture of spending. Tourists from Canada, China and India are still willing to spend $10,000 or more in a single transaction, she said. “I haven’t been making many transactions that are discounted . . . [but] people are a little bit more careful than before, for sure.”

James Knightley, chief international economist at ING, said “economic realities” are setting in, especially with credit card borrowing rates above 20 per cent. “People are still spending on luxury, just at a more normal rate.”