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Luxury brand investors are bracing to see if China's aggressive stimulus measures could be enough to pull its faltering luxury market out of the woods.
In July, key industry players like LVMH and Burberry reported double-digit year-over-year revenue declines in Asia, excluding Japan, during the first half of 2024. Many companies don't break out China-specific results.
While Beijing's recent moves to inject liquidity and lower interest rates have sparked some hope in pulling Chinese shoppers out of their spending slump, experts are skeptical of an immediate revival of China's luxury market. Even if the stimulus spurs more shopping in the coming months, the late September moves are unlikely to show up in financial results that typically reflect July through September revenue.
Instead, the luxury sector's third-quarter results for China are expected to reflect its weakest performance in four years, driven by dwindling consumer confidence among Chinese shoppers, Markus Hansen, a Vontobel portfolio manager, told Reuters on Monday.
LVMH will be an early indicator of how the rest of the industry fared, with third-quarter revenue slated to be published on Tuesday.
In July, the Paris-based luxury retailer reported a 13% drop in sales in Asia, ex-Japan, during the first half of the year, to 12.4 billion euros, or $13.4 billion— 30% of the company's total revenue.
LVMH did not respond to a request for comment.
Luxury companies could face a potential 10% drop in China sales this year, a far cry from the 5% to 6% growth initially projected at the start of the year, Patrice Nordey, CEO of Shanghai-based consultancy Trajectry, told Reuters.
"The growth problem is everywhere, the top end consumers, the middle class, the Gen Z, travel retail — there's too many problems for the brands to solve," Nordey said.
The luxury market's slowdown is largely due to Chinese shoppers pulling back on spending amid economic uncertainty, dragged by the country's ongoing property crisis, geopolitical tensions, and high youth unemployment rates.
While China's poor economic growth had deterred luxury spending for some, others continued their luxury shopping sprees — outside China.
Japan became a hotspot in China's luxury shopping exodus, where the yen's 40-year low against the US dollar attracted Chinese tourists. LVMH saw a 57% sales surge in Japan during the first half of 2024.
In China, many brands turned to heavy discounting to clear stock. Balenciaga cut prices by up to 40%, and Marc Jacobs offered discounts exceeding 50% on Alibaba's Tmall.
However, not all brands were affected equally. For the first half of the year, Hermès defied the trend by posting a 7% sales increase in Asia, excluding Japan, driven by its affluent, recession-resistant customers.
China's economy had been bogged down by a trend of decelerating demand, with August's retail sales only growing by 2.1%, falling short of the 2.5% analysts had expected, Reuters reported in September.
Inflation inched to its slowest pace in three years as the core consumer price index, which excludes food and energy prices, rose by a mere 0.1% in September compared to the previous year, per Wind Information data cited by CNBC on Monday.
Although the outlook for China's luxury market remains bleak in the short run, Jefferies analysts are expecting a recovery as soon as 2025, Reuters reported.
