Luxury Brands Feel the Sting as Chinese Growth Slows

Expectations for the second-quarter earnings season were already low in the luxury sector, but the slew of bleak reports have dashed hopes of a recovery in the second half.

China’s economy grew much more slowly than expected in the last quarter as a protracted property slump and job insecurity hampered a fragile recovery. Profit warnings from Burberry and Hugo Boss and a 27 percent drop in quarterly sales in China, Macau, and Hong Kong from Richemont this week have reinforced concerns about weakness in China, where middle-class shoppers have cut spending on big-ticket items. According to consultancy Bain, China accounted for 16 percent of 362 billion euros ($393.8 billion) of global luxury spending last year.

Analysts said that Cartier owner Richemont’s quarterly sales report had confirmed their fears about lacklustre demand in mainland China. China’s wealthiest people are now favoring more discreet fashion over flaunting their wealth. Jitters about China have spooked investors, wiping 180 billion euros off the sector since March, with significant losses from LVMH, which was overtaken by ASML in June as Europe’s second-most valuable listed company.

Flavio Cereda, co-manager of GAM’s luxury brands investment strategy, said, “We’re not seeing it,” referring to the awaited pickup in discretionary spending. The luxury sector has relied heavily on China’s strong appetite for premium goods, with its market tripling between 2017 and 2021. The wealthy and middle class spent on luxury items in early 2023 after lifting Covid lockdowns, but this pent-up buying lost steam as the property crisis deepened.

Brands may slow expansion plans in China, although Chanel intends to invest in new stores on the mainland. This summer’s Paris Olympics could further weigh on luxury sales, affecting the earnings momentum for luxury companies. UBS analyst Zuzanna Pusz forecasts 4 percent organic growth for the sector this year, with 7 percent growth in the second half.

By Mimosa Spencer