Viewpoint Network: LVMH and Kering, the world's two luxury goods groups, felt the chill brought by the soft luxury goods demand this summer.
The situation took a sharp turn for the worse within six months. Although the market began to weaken in the second half of last year, most analysts still believe that this is a &#34;normalization&#34; of growth after the overheated luxury goods consumption since the outbreak of the epidemic.
In the fourth quarter of last year, the data showing a rebound in the sales growth rate of the top luxury goods groups also alleviated concerns about the industry slowdown. Data shows that in Q4 2024, LVMH's revenue organically grew by 10% to 240 billion euros.
At that time, Citigroup analysts wrote in a research report that the management's optimistic attitude &#34;supports our view that 2024 may be a year of stabilization rather than difficulty for LVMH.&#34;
But can the latest financial data still support such an optimistic view? Especially when the highly anticipated revenue engine—the Chinese market—has not been able to maintain its resilience.
Correspondingly, how will the operators of luxury shopping malls, who are about to enter the financial reporting season in August, perform?
Faltering in China
The prosperity of the luxury goods industry after the epidemic once helped LVMH become the highest-valued company in Europe, but now it is facing a cold reality.
Financial reports show that LVMH Group's sales revenue in the first half of 2024 was 41.7 billion euros, a year-on-year decrease of 1%, with organic growth of 2%, falling short of analysts' expectations of 42.2 billion euros.
Looking at the breakdown by quarter, the company's sales revenue in the first quarter fell by 2% year-on-year to 20.7 billion euros; the second quarter data showed a 1% year-on-year decline to 21 billion euros.
In terms of departments, the fashion and leather goods department, which includes the two major brands Louis Vuitton and Christian Dior, saw a 2% year-on-year drop in sales revenue to 20.8 billion euros, below the expected 21 billion euros, with a 1% organic growth compared to the first quarter.
It is worth noting that the products in the fashion and leather goods department have experienced multiple price increases since 2023, with at least 10 price increases in the past three years.
During the same period, LVMH Group's operating profit fell by 8% to 10.7 billion euros, and due to exchange rate fluctuations, net profit only reached 7.3 billion euros, a year-on-year decline of 14%.
The most important reason is that the largest market for LVMH Group—Asia excluding Japan, with China at the forefront—clearly experienced weak performance.
Sales revenue in this region for LVMH decreased by 10% year-on-year, with a further 14% decline in the second quarter, becoming the only major market with declining growth, and the group has 2,026 retail stores in this region.
In contrast, LVMH has 1,780 stores in Europe (including France), with a 3% growth in the first half of 2024; and 1,151 stores in the United States, with a 2% growth during the same period.
Japan was the best-performing market during the period, with growth as high as 44%, contributing to 9% of the group's total revenue. With the continuous decline in the yen exchange rate, LVMH Group pointed out that Japan has become the most attractive shopping destination for Asian, especially Chinese, consumers
Some Chinese consumers who have resumed outbound shopping have gone to Europe.
Overall, the momentum of luxury goods consumption returning to the Chinese market during the epidemic has been curbed, but other regional markets are temporarily unable to replace China's position.
Jean-Jacques Guiony of LVMH Group stated in a conference call that although the company's performance in the Japanese market has surged, the high volatility of Japanese rents limits the company's ability to increase operational efficiency and expand its business scale, resulting in lower profitability compared to China.
The CFO also revealed that in the second quarter, overall sales contributions from Chinese consumers traveling globally continued to grow at a high single-digit rate, but the growth rate slowed compared to the first quarter. This implies that affluent Chinese consumers are becoming more cautious in their spending.
However, he also emphasized that China is clearly a very important market for the LVMH Group. &#34;Brands that have invested less in marketing in China over the past few quarters have been penalized more than other brands. Customer response to marketing stimuli remains quite important in China.&#34;
Jean-Jacques Guiony pointed out that the company will continue to invest in this market and strengthen its marketing efforts. However, as mentioned in the first quarter earnings conference call, he also mentioned that the Chinese market is becoming increasingly unpredictable.
Interestingly, LVMH is not the only luxury goods group facing challenges in the Chinese market.
In the first quarter of 2024, almost all regions of the Richemont Group, the parent company of Cartier, saw sales growth, except for the Greater China region, including mainland China, Hong Kong, and Macau, where sales decreased significantly by 27% year-on-year.
British luxury brand Burberry saw a 21% decline in same-store sales in its key Chinese market in the first quarter of the fiscal year ending June 29.
Swiss watch giant Swatch Group experienced its first revenue decline since 2021 in the first half of 2024. The company stated in its financial report: &#34;The reason for the decline in sales is a significant decrease in demand for luxury goods in the Greater China region (including Hong Kong and Macau).&#34;
The latest performance of Kering Group, the parent company of Gucci and Yves Saint Laurent, was also weak in the first half of the year. The Asia-Pacific market, excluding Japan, as the most important market, saw a 20% decrease in revenue during the period, with a 23% decline in the second quarter.
Hermès Group alone maintained strong performance, with the company having stronger pricing power than other luxury goods companies. Data shows that Hermès achieved a sales growth of 13.3% in the second quarter at constant exchange rates, with revenue in the Asia-Pacific region growing by 5.5%, higher than the expected 4.75%.
Currently, Hermès is considered likely to surpass LV in the coming years and become the highest-earning brand in the luxury goods industry.
Luxury Shopping Malls
In 2021, China became the world's largest luxury goods consumption market for the first time, but three years later, the situation has changed significantly.
According to the &#34;2024 Global Luxury Goods Market Research Mid-Year Update&#34; released by consulting firm Bain, the Chinese luxury goods market is facing pressure
First, outbound tourism is gradually recovering, dispersing purchasing power; second, increased economic uncertainty has led to weak domestic demand, undermining the confidence of middle-class consumers and triggering a phenomenon similar to the &#34;luxury shame&#34; seen in the Americas during the 2008-2009 global financial crisis.
A report from the internationally renowned asset management company Bernstein also points out that the growth rate of luxury goods consumption in China in 2024 is lower than expected.
This report released in mid-June states that the foot traffic in domestic luxury shopping centers has been declining in single digits since the beginning of this year, while luxury sales have been declining at a double-digit rate. The main reason is the excessive number of shopping centers opened in 2023.
In the past few years, luxury goods consumption has been booming, giving luxury mall owners very optimistic expectations. But now that the tide is receding, how will luxury malls facing face-to-face competition maintain their resilience? This will be an aspect worth paying attention to in the future.
Currently, in the domestic luxury mall landscape, apart from strong projects in places like Beijing's China World Trade Center Mall, Nanjing Deji Plaza, Changchun Zhuozhan Shopping Center, and Wuhan Wushang Plaza, there are 7 main participants in the luxury mall sector. These include Henderson Land Development, Sun Hung Kai Properties, Swire Properties, Wharf Real Estate, Hong Kong Land and other Hong Kong-funded enterprises, as well as two major mainland luxury commercial giants represented by CR Land and Hualian SKP.
Among them, Henderson Land Development uses Henderson Malls as its brand line, with representative projects such as Shanghai Henderson Mall, Shanghai Ganghui Henderson Mall, Wuxi Henderson Mall, and Kunming Henderson Mall.
In 2023, Henderson Land Development's overall rental income rose by 3% to HKD 10.316 billion, and the company is expected to announce its first-half performance for 2024 on July 30.
Sun Hung Kai Properties owns IFC International Finance Center, ITC, and K11 as its high-end product line, with representative projects such as Shanghai IFC International Finance Center, Nanjing IFC International Finance Center, and Shanghai K11; in Hong Kong, it has completed the Hong Kong International Trade Plaza.
For the fiscal year 2022/23 ending in June 2023, Sun Hung Kai Properties' total rental income decreased by 2% year-on-year to HKD 24.322 billion. For the six months ending on December 31, 2023, the company's total rental income increased by 4% to HKD 12.454 billion.
The announcement date for Sun Hung Kai Properties' full-year performance for 2023/24 has not been confirmed yet, but it is expected in September.
Swire Properties' product line includes Taikoo Hui and Taikoo Li, with representative projects such as Guangzhou Taikoo Hui, Chengdu Taikoo Li, and Shanghai Xintiandi Taikoo Li; its main projects in Hong Kong include Pacific Place.
In 2023, Swire Properties' rental income increased by 9.6% year-on-year to HKD 13.525 billion, with retail property rental income increasing by 22% to HKD 7.143 billion. However, its operational data performance in the first quarter of 2024 was not satisfactory.
Swire Properties is expected to announce its first-half performance for 2024 on August 8.
Wharf Real Estate's high-end mall product line in mainland China is IFS International Finance Center, with representative projects such as Chengdu IFS and Changsha IFS, while in Hong Kong, it has two core luxury malls, Harbour City and Times Square
In 2023, Kowloon Development, which mainly holds investment properties in Hong Kong, saw a 2% increase in investment property income to HKD 10.916 billion. The main investment properties in mainland China under Kowloon Development Group experienced a slight decrease of 1% to HKD 4.843 billion, but when calculated in RMB, the investment property income in mainland China increased by 4%.
Kowloon Development is expected to announce its first-half performance for 2024 on August 6. The time for Kowloon Development Group's board meeting has not been announced yet, with last year's meeting held on August 9.
In mainland China, China Resources Land's high-end product line is named &#34;The Ring&#34; (中環), with its representative project being Beijing Wangfujing The Ring. The company owns numerous properties in Hong Kong, with the most famous luxury project being The Landmark. China Resources Land is not listed.
On the mainland enterprise side, China Resources SKP owns the highest sales luxury shopping mall nationwide - Beijing SKP. According to third-party data, the sales of this project reached 26.5 billion RMB in 2023. Other projects include Chengdu SKP, Xi'an SKP, Wuhan SKP, etc.
China Resources Land &amp; China Resources Vientiane Life (referred to as China Resources) cover the most diverse commercial positioning among the aforementioned companies. Their high-end shopping mall product line is Vientiane City, with 13 projects nationwide, including representative projects such as Shenzhen Vientiane City, Hangzhou Vientiane City, etc.
Due to having multiple product lines with different positioning, China Resources may not be heavily impacted by the decline in luxury goods consumption. In 2023, China Resources Land's shopping center rental income was 17.9 billion RMB, a year-on-year increase of 29.7%, while China Resources Vientiane Life's rental income from shopping centers on the landlord side was 22 billion RMB, a year-on-year increase of 38.8%.
The performance release dates have not been announced yet, with China Resources Land's date last year being August 31, and China Resources Vientiane Life's on August 30

LVMUY

The financial reports of LVMH and Kering Group show that soft demand for luxury goods has led to a decline in sales revenue. Especially in the Chinese market, LVMH's sales revenue has decreased year-on-year, falling short of expectations. Despite multiple rounds of price increases in the fashion and leather goods divisions, there is still a downward trend in sales revenue. Both operating profit and net profit of the LVMH group have been affected. This news has had an impact on the performance of operators in the high-end luxury market

Will the chill of luxury goods from LVMH and Kering spread to the high-end luxury market?