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The global luxury groups’ first-half financial figures are all in. The big takeaway? Hermès aside, luxury executives and analysts alike say America is a weak spot, with sales slipping back after a period of post-lockdown euphoria.
That means a return to rates of growth that might be termed ‘normal’. “The results have mostly been in line with expectations. That contrasts with the growth rates reported in the first quarter, which were mainly above market expectations,” says Carole Madjo, Barclays head of European luxury goods research.
“Some normalisation is likely to happen. The growth rates seen in the sector over the past few years have been quite high. We would expect the sector to see a gradual return towards more sustainable growth levels (high-single/low-double digits),” she adds.
For the personal luxury market, Boston Consulting Group forecasts a base scenario of 7-9 per cent year-on-year growth and an optimistic scenario of 11-13 per cent for 2023. That compares unfavourably with 2022, which was up 16 per cent.
However, Hermès and LVMH are expected to do better: “We forecast 2023 LVMH group sales up 15 per cent year-on-year on an organic basis, including a 16.5 per cent increase for the fashion and leather goods division,” says Citi head of luxury goods equity research Thomas Chauvet.
Édouard Aubin, head of Morgan Stanley’s luxury goods team, notes the stark contrast between the pace of acceleration in China versus deceleration in the US. He also notes that the luxury sector is not recruiting new customers, relying instead on high-net-worth individuals to be the sector’s growth driver. “It’s one of the reasons for the quiet trend,” Aubin says. “It’s largely a function of who shops. HNWIs tend to favour more discreet luxury products,” he says.
Aubin notes the increasing polarisation between blue-chip brands and smaller labels, with higher barriers to entry because of the massive marketing clout of megabrands and the competitive edge they have in everything, from malls to media.
The US conundrum
Most luxury players have felt the pinch in the US as aspirational customers pulled back on spending. Richemont reported global sales up 19 per cent in the quarter ending 30 June, below consensus expectations (at 20 per cent) — with a 2 per cent fall in revenue from the Americas. The US performance sent Richemont shares tumbling by 6.5 per cent. “People weren t expecting the US market to grow much, but they were not expecting it to be negative. So, I think that sent out a few alarm bells,” says HSBC global head of consumer and retail research Erwan Rambourg.
LVMH shares decreased 3.7 per cent after the group reported sales up 17 per cent with a 1 per cent decline in the US. “We experienced a bit of pressure with the American customer, to varying degrees amongst brands,” LVMH CFO Jean-Jacques Guiony said. “We are experiencing drops with entry-price products, online sales and second-tier cities, which is a clear sign that the aspirational customer is not shopping as much as they used to.”
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Hermès bucked the trend, posting sales up 19 per cent in the Americas. Hermès executive chairman Axel Dumas said: “We have seen in the US the incredible desirability of the house and our products. We didn’t see that fading during this semester, with a mix of very faithful clients, traffic continuing to grow in our stores, and the good resistance of our digital sales. Maybe it’s uncommon compared to the rest of the industry.” He said that large stores, notably in Los Angeles and New York, performed particularly well.
HSBC’s Rambourg explains: “The very wealthy consumer is still engaged. This is true between brands — Cartier or Chanel will be outperforming the likes of Gucci or Burberry — but, it’s also true within the brands. So, if you look at Vuitton or Gucci, the higher-end products will be a lot more resilient than the access products. Access is struggling a lot more in the US than in Europe and Asia. The reason for that is you had what a lot of brand managers have called ‘helicopter money’ in the US after Covid, which led to a lot of consumers walking into luxury stores and spending $500 or $1,000. There are consumers who (in hindsight) should never have spent that type of money on luxury items.”
The outlook remains positive though, helped by an easier comparison starting in Q4. Rambourg says: “Q3 will still be tough but we are expecting a bit of a pickup in Q4, which is partly linked to the basis of comparison. Most brands started to suffer in October last year, partly linked to FX… You’re not getting the type of deal that you were getting just a year ago so there might be a slight repatriation of growth.”
He adds: “Everyone has been talking about a recession for the past 18 months, but the reality is the equity markets are actually pretty good in the US. The employment rate is still very solid and the Dow Jones is at an all-time high.”
Chinese consumers
The rate of economic growth in China is slowing: second-quarter gross domestic product was up by 6.3 per cent from a year ago, below expectations of 7.3 per cent. But the luxury sector has not been affected, and the Chinese luxury market is, in fact, rebounding.
A return of Chinese tourists is underway, albeit gradually. In June 2023, spending on luxury from Chinese shoppers in Europe was 52 per cent of the figure of June 2019 (pre-Covid), according to the Global Blue monthly tax-free shopping business update. That’s up from 45 per cent in April/May 2023.
The recovery of Chinese tourist spending has been faster in Asia-Pacific. In June, the same measure of spending by mainland Chinese shoppers hit 83 per cent, sharply up on 52 per cent in April/May. “There’s evidence that spending is picking up, even though we re not back to 2019 levels, far from it. That has to do with airline capacity coming back in a very gradual manner,” Rambourg says.
Barclays’s Madjo agrees: “LVMH flagged that offshore spending from Chinese [rose] from 15 per cent last year to 30 per cent this year. We would expect this ratio to increase as Chinese gradually return to Europe. Overall we think that the strength in Asian markets could offset the weakness of the US and potential slowdown of Europe.”
Rambourg adds that the profile of Chinese travellers is different. “No one is expecting group tours to come back in the short term,” he says. “But individual wealthy travellers are already going back to Hong Kong, Macau, Seoul, Tokyo, Bangkok, Paris etc. The consumer profile is such that they tend to favour the higher-end brands.”
The increasing cost of doing business
Luxury players have spent heavily on events in the first half. LVMH staged a blockbuster show for the debut of Pharrell Williams at Louis Vuitton Men’s, while Moncler put on a Genius show in London. Hermès’s communication spending was up 30 per cent to €260 million year-on-year. “On earnings, there has also been a lot of focus on higher advertising and promotion costs, which have impacted the margins of some players like LVMH in the first half,” says Barclays’s Madjo.
Is this level of spending a new normal? “I don’t think so,” says Guiony of LVMH. “We had in the first half of the year a number of events… On top of [the cost of the event] there’s also marketing support on advertising and media that we have to do to make them more efficient. The cost of all these initiatives was quite high.” An estimated total of 1.1 billion views on social media for Pharrell Williams’s debut show was “worth the investment”, he insists.
Hermès said it plans to spend €600 million this year. Gucci’s new interim CEO Jean-François Palus will focus on “amplifying” the new aesthetic developed by creative director Sabato de Sarno, with windows, events and campaigns, “to make sure that we have an immediate impact on all the product categories, on all existing products, as soon as the aesthetic is brought to the market, even though the product availability is not yet here”, said Kering chairman and CEO François-Henri Pinault. “If there is a need to invest more, we won’t hesitate,” Kering CFO Jean-Marc Duplaix noted.
Meanwhile, Kering is to start looking for a permanent CEO at Gucci in September. The new CEO “will come from the industry or not — all options are open”, Pinault said. “The CEOs in our industry that are already experienced at that size are very few, so it’s also a good reason to open to the external world.” Among names circulating are Roberto Eggs, chief business strategy officer at Moncler Group. Valentino CEO Jacopo Venturini has also been cited, although that option may be lower on the list now Kering has taken a 30 per cent stake in the Italian brand.
Key takeaway: Most luxury companies did not beat expectations in Q2 and reported negative growth in the second quarter in the US, with the exception of Hermès. The sector is expected to grow in the high-single/low-double digits for the full year, a period of normalisation after spending boosted by post-lockdown euphoria. Sales at LVMH and Hermès are expected to grow by double digits. The US market should improve in Q4, benefitting from an easier comparison basis, while Chinese tourism is expected to gain further momentum in the second half.
Correction: Citi s forecast for LVMH s 2023 group sales was updated on 17/08/23
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