Panda Bearish Luxury Markets

Umar Zulkefli

The luxury sector, long fueled by robust consumer demand, is now facing challenges as global consumption patterns shift. LVMH, the world’s largest luxury conglomerate, recently reported a sharper-than-expected decline in third-quarter sales, driven primarily by weakening demand in China. Shares in the group, which owns iconic brands like Louis Vuitton and Dior, dropped after revenues fell 3%, with sales in Asia (excluding Japan) plummeting 16%. This reflects broader concerns about the Chinese economy, where slowing growth, a slumping housing market, and declining consumer confidence are hitting high-end spending.

China, once a powerhouse of growth for luxury brands, is now presenting a more subdued outlook. While the country posted a 4.6% year-on-year economic expansion in the third quarter, this was below the government’s full-year target and signals faltering momentum. Beijing has rolled out stimulus measures to support the economy, but so far, these efforts have failed to reignite consumer demand in key sectors like luxury goods.

The pressure isn’t confined to China. Kering, LVMH’s main competitor and owner of brands like Gucci, has seen its stock fall by more than 40% this year, with Gucci sales expected to drop 23% year-on-year. In response, the luxury market is facing a significant “reset” as consumers rethink spending priorities. Analysts point to overreliance on price hikes to drive growth, with brands like Dior increasing prices on key products such as the Lady Dior bag by 50% and the Dior Saddle Bag by 20% (between 2020 and 2023), now struggling to justify those costs to a more cautious customer base.

In contrast, the U.S. luxury market is showing surging resilience, despite slowing job growth and rising debt delinquencies. American consumers continue to spend, buoyed by declining gasoline prices and a strong stock market. However, economists warn that the drop in personal savings rates could signal trouble ahead, with future consumer spending potentially becoming unsustainable.

As luxury brands grapple with these shifting dynamics, the challenge will be sustaining growth while maintaining brand desirability in an increasingly uncertain global economic landscape.

However, there are glimmers of hope from China’s recent stimulus package. The country’s stock market saw a record turnover of Rmb3.48tn ($141bn) in early October, highlighting renewed investor enthusiasm following government interventions. With additional reforms aimed at boosting corporate governance and liquidity, China’s policy measures are beginning to show signs of success. If these efforts continue to gain traction, they could help restore consumer confidence and stimulate demand, offering the overall economy and also luxury brands (like Kering) a chance to regain lost ground in one of their most critical markets.