LVMH investors on edge as weak Chinese demand slows growth in luxury sales

Photo : Reuters

Investors in the French luxury group LVMH are anxiously watching for signs that China’s new fiscal stimulus measures might finally revive spending among wealthy and middle-class Chinese consumers. The hope is that these shoppers, who have been reluctant to splurge on high-end goods recently, will begin to indulge in luxury purchases such as $4,300 designer leather handbags, particularly ahead of Singles' Day, China’s biggest shopping event of the year.

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LVMH, widely regarded as the global bellwether of the luxury industry, is set to report its third-quarter revenue on Tuesday. The company's vast portfolio includes iconic brands like Louis Vuitton and Dior for fashion and accessories, Tiffany & Co. for jewelry, and Sephora for cosmetics. With the luxury sector facing a global slowdown, LVMH’s results will be scrutinized for any indication of a rebound in the Chinese market, which has been notably sluggish this year due to economic uncertainty.

According to consultancy Bain, global sales of personal luxury goods—ranging from fashion and accessories to beauty products—are expected to see little to no growth this year, with estimates ranging from flat to a modest 4% increase year-on-year, at constant rates. However, the most significant slowdown has been observed in China, where the economic downturn has made middle-class shoppers more cautious, and even wealthier consumers are opting for less ostentatious purchases.

LVMH’s shares, alongside other major luxury players like Gucci-owner Kering, Hermes, and Richemont (owner of Cartier), have experienced a turbulent year. Analysts noted that “the luxury consumer is all shopped out,” with a particular decline in sales to Chinese consumers, who had been the key growth drivers in the first half of the year.

The third quarter is predicted to be the worst for the luxury sector in four years, with organic sales expected to decline by 1% compared to last year. Analysts have also reduced earnings-per-share estimates for next year by an average of 17%, reflecting the industry's growing concerns.

Markus Hansen, a portfolio manager at Vontobel, which holds shares in LVMH, Hermes, and Richemont, explained that Chinese shoppers continue to lack confidence, largely due to the country’s slumping property market. However, Hansen expressed optimism that if consumer confidence improves, luxury spending in China could rebound strongly.

While analysts are cautious in the near term, they remain confident that Chinese consumers will eventually regain their appetite for high-end fashion. Some forecasts indicate a notable acceleration in demand from China by 2025.

To strengthen its foothold in China, LVMH has been increasing its efforts to capture market share. The company has deepened its partnership with e-commerce giant Alibaba, utilizing the firm’s cloud and artificial intelligence technologies to boost its presence in the country. Additionally, LVMH’s travel retail division, DFS Group, is developing a major shopping and entertainment complex on the tax-free Hainan island, further cementing its commitment to the Chinese market.

Despite the global economic challenges, luxury goods are unlikely to become a target of China’s ongoing trade retaliation against the European Union. However, the outlook for the luxury sector in China remains uncertain, with some experts predicting a 10% drop in sales this year, compared to earlier forecasts of 5-6% growth.

Patrice Nordey, CEO of a Shanghai-based consultancy, explained that luxury brands are grappling with numerous challenges. “The growth problem is everywhere,” he said, citing issues with top-end consumers, the middle class, and Gen Z shoppers, as well as the travel retail segment.

Analysts recently adjusted their sales expectations for LVMH, lowering third-quarter organic sales growth estimates to 2.9%. They also downgraded their forecasts for Kering, expecting a 10.4% drop in organic sales, and for Richemont’s second quarter, which ended in September, forecasting growth of just 2%.

Kering, which will report its sales on October 23, relies heavily on the Chinese market, particularly through its flagship brand Gucci. The Asia-Pacific region, excluding Japan, accounts for 35% of Kering’s revenue. However, analysts suggested that Gucci’s recent focus on “timeless” styles rather than trendy designs may not have resonated with Chinese consumers, who tend to be drawn to bold, exciting looks when making luxury purchases.