As Global Luxury Sales Fall, the High-Fashion Industry Grapples
CEO of LVMH Bernard Arnault arrives at the presentation of the group's 2019 results during a press conference, in Paris, Tuesday, Jan. 28, 2020. (AP Photo/Thibault Camus)
Post COVID-19, the luxury industry has taken hits after hits from multiple angles and aspects. The novelty is wearing off for entry-level consumers which discourages mass purchases, and the purchase power weakening amongst a massive revenue source - Chinese customers - waning economic prospects. The only hope they have right now is the interest rate-cuts by the U.S. Federal Reserve, the saving grace for America’s feat in capitalism, hopefully enough to suffice for reviving brands’ U.S market. Regardless, disappointing predictors has investors worried about their prospects, and its shows in the market shares.
The Wall Street Journal recently reported that the world’s largest luxury company, LVMH, is one of many brands in the sector that are facing a revenue drop, signifying a weakening economic front for luxury consumers. WSJ reported a 5% revenue drop in the company’s fashion and leather product division, consisting of major carriers like Louis Vuitton and Dior. Kering’s net profits dropped 50% earlier in the year, while Richemont showed slumps in profits particularly in Asia pacific, where sales dropped by 18%.
A man walks past a Dior store in Beijing Saturday Aug. 25, 2007. After generations of poverty many Chinese can now afford to buy luxury goods, providing a new market for many of the world's major luxury brands. (AP Photo/Greg Baker)
A main contender for causing this downward slope is the declining purchasing power of Chinese buyers, who make up at least 16% of luxury revenue. China is facing internal economic turmoil, with a crumbling housing market that crashed by 7% in July, following the ongoing saga of the real estate bubble burst dating back to 2021. With empty lots unsellable due to oversupply in its aging population, as well as abandonment by management’s thrashed budgets sunk under debt, luxury is no longer a priority for those who could previously afford it. Now, even middle class buyers who were formerly generous about purchasing have weaned interests. With this in mind, luxury sales are expected to drop 7% in China this year.
Recent reports cite the hopeful outcome for the Chinese market. The government’s announcement of stimulus checks has made luxury stocks boom. An initial $500 billion Renminbi ($ USD) is on hand as a subsidy for Chinese investors in buying stocks and bonds markers, based on market predictions of a consumer market reengagement. For an economy that seemed to head in a gloomy trajectory, now has the potential to boost spending and hopefully help China’s retail numbers regain momentum.
The American economy has continued to show stability in economic strength, pushing away the vices of a recession despite the Federal Reserve raising interest rates in the last year between 5.25 to 5.5%. However, retail revenue has been hit with gloomier prospects, reported last year by Forbes that more affluent consumers have cut back on generous spendings. With lingering uncertainties surrounding the Russia-Ukraine and Israel-Gaza conflicts, as well as worries around increased tax margins, many of these buyers have expressed their conservative approaches to making financial decisions.
Despite sharing the same economic footing as the luxury industry, companies producing consumer staples like Coca-cola, Walmart and Procter & Gamble have seen relative increases in their profit margins. The Federal Reserve has recently dropped rates by 0.5% to a range of 4.75 to 5%, after statistics reporting on stable trends in the job market. Unfortunately for creative and non-essential industries like tech and fashion, negative consumer perceptions around global economic health has seeped into their downward spiral of profit performance.
Economists across the board have come to a consensus about future interest rate cuts from the Federal Reserve, however diverge in predictions about pacing. Some believe that interest rates could sink down to 4.4% at the end of 2024, a more positive outlook on the year-end prediction of 4.9% from earlier view. Whether the luxury market can pull through with a year-end revenue success may depend on the internal structures of companies. With the recent exodus of head designers from major fashion labels, including Karl Lagerfeld’s short-lived Chanel successor, Virginie Viard, the state of luxury is on a tightrope, ready to be saved.