Due to the industry benchmark company LVMH reporting sales growth lower than expected, luxury stocks led the global decline on Wednesday. The stock price of the world's largest luxury goods group LVMH fell by over 5% to €650 per share, bringing its market value down to €323 billion, a 9% decline year-to-date.
Other luxury stocks also followed suit, with Hermès and Brunello Cucinelli both dropping by 2.2%, while the parent company of Gucci, Kering, fell by 3.7%. Richemont, which owns the Cartier jewelry brand, dropped by 2.3%, and Prada fell by 5.5%.
The financial report of the world's largest luxury goods company LVMH showed that the company's revenue only grew by 1% in the second quarter, reaching €20.98 billion, slower than the first quarter and below the market's general expectation of 3% growth. Excluding abnormal declines during the pandemic, this is the company's lowest growth level since 2009.
The highly anticipated fashion and leather goods division of LVMH (its largest division in terms of revenue and profit) saw its growth slow to 1% in the second quarter, with operating profit declining by 6%. The group's operating profit for the first half of the year was €10.7 billion, also below analysts' expectations, especially due to pressures in its wine and spirits division, as well as the watch and jewelry division.
Due to LVMH's scale and its luxury brands spanning over 75 subsidiaries covering various areas from watches and handbags to travel, it is seen as an industry bellwether. Media reports indicate that in the past year, as the industry slowed down, LVMH was in a midstream position, while Kering and Burberry have faced difficulties, and high-end brands like Hermès and Brunello Cucinelli have taken advantage, mainly benefiting from their higher net worth customer base.
<h2>Two Extremes: High-end Products Thrive, Middle Market Struggles</h2>
Analysts believe that the luxury goods industry is facing headwinds mainly due to the slowdown in major consumer markets. However, luxury goods companies are experiencing two extremes, with companies focusing on high-end products performing well, while those targeting the middle class face significant challenges.
LVMH indeed has a top-tier customer base and popular brands, but in the wine and spirits sector, &#34;champagne demand is facing serious issues.&#34; For middle-class customers, LVMH is trying to boost sales of the jewelry brand Tiffany while cutting engagement ring expenses for its core consumers.
As a result, LVMH's overall growth rate lags behind Brunello Cucinelli, which expects a 10% increase in sales this year. Additionally, the higher-priced products of Hermès are also performing well. LVMH itself has confirmed this, stating that customer demand for more expensive items (such as designer clothing) can be sustained better than for its cheapest handbags.
In contrast, brands selling to ordinary consumers appear more vulnerable. Burberry warned last week of a possible loss in the first half of the year, suspended dividend payments, and parted ways with CEO Jonathan Akeroyd
Kering is trying to elevate its flagship brand Gucci to the high-end market, but seems to have suffered a heavy blow. The company announced its financial report on Wednesday, showing an 11% decline in same-store sales in the second quarter, exceeding analysts' expectations of an 8.8% drop. Gucci's sales fell by 19%, higher than the expected 15.9% decline by analysts. It is expected that the operating income in the second half of the year may decrease by about 30% year-on-year.
Ultimately, brand attractiveness is crucial. Analysis suggests that Burberry and Gucci are facing difficulties because they mainly target middle-class consumers, and their brand transformation has not yet taken effect. Meanwhile, Cartier and Van Cleef &amp; Arpels jewelry brands under Cie Financiere Richemont SA are shining brightly and highly respected.
However, despite these bright spots, all gains in luxury stocks since January have been wiped out. Bernard Arnault, CEO of LVMH at the time, stated that the industry is returning to normal rather than sharply declining.
Analysis suggests that although any meaningful recovery is at least delayed until 2025, in the long run, the high-end market should continue to benefit from global income growth. And as the strongest player, LVMH should potentially gain more market share when the situation improves.
<h2>Middle-class consumption is the key, is &#34;sinking&#34; the way out?</h2>
In fact, brands including Burberry and Yves Saint Laurent are taking measures to win back important middle-class customers by lowering prices.
Analysis suggests that middle-class consumers may not spend much on designer goods individually, but they are still an important customer group for major brands. According to data from the Boston Consulting Group, over half of global luxury purchases are made by approximately 330 million people who spend no more than 2,000 euros, about $2,180, a year on expensive handbags, clothing, and jewelry.
In contrast, there are about 2.5 million very wealthy customers who spend over 20,000 euros a year on designer goods, accounting for 10% of luxury sales. While these customers contribute significantly, most of the growth over the past decade has been driven by the so-called &#34;aspirational&#34; shoppers, especially in Asia.
However, the contraction in major markets is putting pressure on weaker luxury brands. Some brands have raised prices too high, making it unaffordable for many middle-class consumers. In an effort to enhance the brand, Burberry's new handbags are on average 58% more expensive than the old ones, according to Bernstein's analysis. This strategy has alienated its traditional customers without compensation from affluent shoppers.
At the same time, to attract shoppers back, some brands have quietly lowered prices. Lowering prices in the luxury industry used to be a taboo, as it sent a signal of misjudging the value of the goods.
According to Bernstein's data, Burberry recently reduced the price of its medium-sized Knight handbag by 22%. All handbags designed by the brand's creative director Daniel Lee since 2022 have seen an average price reduction of 5%. Burberry's new CEO, Joshua Schulman, previously worked at the affordable luxury brand Coach, and he hopes to make the brand accessible to its core customers again
This means there will be a wider range of new entry-level products, perhaps even more price reductions on existing products.
Yves Saint Laurent, a subsidiary of Kering, has reduced the prices of most sizes of its best-selling Loulou handbag in American stores. According to data from the Wayback Machine, the small size bag that was priced at $2950 in January is now priced at $2650. However, it is still much more expensive than the price of $2050 at the end of 2020.
Analysts suggest that if luxury brands continue to neglect middle-class shoppers, more affordable brands will fill this gap. In any case, the luxury goods industry needs to re-examine its customers and establish connections from the ground up

LVMUY

Industry benchmark company LVMH reported sales growth below expectations, leading global luxury stocks lower on Wednesday. Analysis suggests that while high-end luxury manufacturers far outperform companies mainly targeting the middle class in terms of profitability, in the long run, middle-class consumers remain the main customer base for major brands. Some brands have quietly started to lower prices in hopes of winning back middle-class consumers

A sharp decline across the board! Is "sinking" the way out for LVMH?