Chinese consumers have long pushed luxury brands to new heights. But analysts are less sure these shoppers can steer the luxury goods industry out of the downturn amid questions about China’s economic downturn and changing consumer tastes. New stimulus measures announced by the Chinese government in late September have reignited interest in the country’s economic prospects – fueling hopes that they will revive luxury consumption among this key group. But analysts say the measures may not target the consumers the industry relies on most. Even if it does, the taste for luxury brands may disappear as consumers look more carefully at brands closer to home. “I personally don’t think the Chinese have the same appetite to spend,” said Ben Harburg, portfolio manager at Core Values Alpha. “The wool has fallen out of people’s eyes. Even though they have more at their disposal. Revenue, they may not come back to the market as historically.” Chinese nationals accounted for about a third of luxury goods companies’ revenue from 2003 to 2019, according to Morgan Stanley. The contribution rate to industry growth exceeds 50%. Ashley Wallace, an analyst at Bank of America, said that the decade from 2002 to 2012 can even be defined as the “Chinese luxury boom” because of the surge in Chinese demand for luxury goods. A post-pandemic spending surge led luxury brands like LVMH to hit record highs in early 2023, but that quickly changed. Wallace said China is currently experiencing “the most severe consumption downcycle since China joined the WTO in 2001” as demand shocks and deflation put pressure on the economy. “Consumer confidence in mainland China today has returned to the historic lows reached during the COVID-19 epidemic,” LVMH Chief Financial Officer Jean-Jacques Guiony said Tuesday during the company’s July quarter earnings call as the company reported its third quarter. Organic growth fell 3%. Bank of America predicts that as Chinese consumer confidence remains sluggish, industry-wide margin pressure and slower revenue growth in the broader luxury goods industry are likely to continue into next year. “The consumption slowdown has only just begun to show up in the third quarter of 2024. We believe that even reaching our forecast of year-on-year luxury growth in China in 2025 will require a boost in confidence and sentiment,” Wallace noted. Luxury goods stocks are feeling the pressure – U.S.-listed shares of major players LVMH and Kering are down about 17% and 41% respectively so far this year. Moncler fell 2.3%. Traditional defensive stock Hermes is up 7% this year, still significantly lagging the S&P 500’s 23% gain. Prada bucked the trend, rising 24%, while Richemont is up nearly 7% so far this year. LVMUY CFRUY,.SPX Year-to-date LVMH and Richemont share prices will be high relative to the S&P 500 China’s recent economic stimulus measures – which include financial support for real estate, interest rate cuts and investment Looser rules for real estate purchases – leading to a roller coaster ride for China’s stock market. However, it wasn’t just Chinese companies that experienced the initial surge; there were other companies as well. Luxury goods stocks also rose 16% in the first few days after the stimulus news broke, according to Bank of America. However, when subsequent announcements from Chinese government officials disappointed investors and triggered a sharp sell-off in mainland China, luxury brand shares fell. To be sure, more measures for the real estate industry and fiscal stimulus have since been announced, stimulating more investment and consumption. Analysts and investors are divided on whether China’s stimulus measures can revive consumer spending on luxury goods and provide meaningful impetus to luxury goods companies. Measures such as lowering bank deposit rates could spur more spending. The average savings rate of Chinese consumers tends to be as high as 31%, while the average savings rate in the United States is only about 4%, which means household savings are about $21 trillion, which means that in the long run, there is still more to the luxury industry Space penetration and growth in China. Morgan Stanley analyst Edouard Aubin wrote in a client note on September 12 that this could trigger the deployment of a “Great Wall of Capital.” skeptical about the actual impact of the product. Wallace said that while “improving stock market, real estate and economic prospects may indirectly boost consumer confidence, which in turn would have a positive impact on luxury goods. We do not expect fiscal support to be targeted at luxury customers.” Back to “Bullish on prosperity”? It’s not just economic pressure that’s causing Chinese consumers to spend less on luxury goods. Consumer tastes and habits have been changing over the past few years. Harberger of Core Values said the difficulties in the real estate industry and poor stock market performance caused households to save money and started a “consumption downgrade narrative, with Chinese consumers paying more attention to domestic brands.” Consumers have begun to engage in “import substitution,” purchasing domestic alternatives to foreign brands in areas such as clothing, cosmetics, and automobiles. He added that queues at luxury stores in Chinese malls are no longer as long as they were before the pandemic. While Harberger’s fund is long-only, he said he would short luxury giants if he could as China’s consumer trends change. The Chinese government’s anti-corruption crackdown targeting senior officials and wealthy individuals has resulted in less ostentatious and obvious displays of wealth. This creates a trickle-down trend, where the upper and middle classes have different demands for luxury goods and status symbols. “You don’t want Sauron’s eyes turning on you,” Harburg said. “In general, Chinese consumers are cautious and conservative. They just don’t have that optimistic enthusiasm to spend money irrationally or emotionally because there is uncertainty.” If Chinese consumers don’t spend as much, luxury Whether the food industry can continue to grow at the same level remains in doubt. Luxury brands may have to rely more on smaller luxury markets, which could lead to lower profit margins in the industry. “It’s normal for people to ask if this is entirely structural and will never come back quite the same way. Maybe,” LVMH’s Guiony said. “But we still very much hope that the luxury goods industry can continue to develop and ride the wave of the rise of the middle and upper classes, just as we have done for the past 55 years.”
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