With yachts bobbing along the Mediterranean coast and preparations for the Formula One Grand Prix under way, there was little sign of pessimism among executives gathered for the Financial Times’ Business of Luxury summit in Monaco this week, the principality a perennial favourite of the wealthy who have powered the recent boom in luxury goods.
Top figures in the industry expressed confidence that business would continue to thrive, driven by affluent buyers globally, despite fears of a slowdown that wiped off almost tens of billions of dollars in market value from the sector as they spoke.
The sell-off was spurred by concerns that demand — which has been driven by China and the US — could finally be moderating, as expressed in a note by analysts at Deutsche Bank as well as at a Morgan Stanley investor conference.
Shares in sector leader LVMH were down 5 per cent on Tuesday, while those of Hermès and Kering lost 6.5 per cent and 3 per cent respectively.
The trio continued to fall on Wednesday in line with declines in the wider European market, as global equity investors worried about growth prospects and the unresolved debt ceiling debate in the US.
However, speaking earlier at the FT summit in Monaco, LVMH executive Sidney Toledano cautioned against such bearishness and said top brands such as Louis Vuitton or Dior would remain resilient, even if there were a slowdown, because of their global reach, “genuine creativity” and marketing knowhow.
“The world is not just China and the US,” said the LVMH veteran, who used to be chief executive of Dior and now oversees a number of the group’s fashion brands, including Céline and Loewe.
“Europe is doing extremely well, with the return of wealthy travellers, with Americans in France, Spain or Monaco. On top of that you have the markets of tomorrow, like India and Africa . . . and others in Asia that are thriving, like South Korea and Thailand.”
He pointed to last month’s reopening of the Tiffany flagship store in New York as a sign of how LVMH, which recently became the first European company to achieve a $500bn market valuation, was confident in the US and investing for the long term. “The US is slowing down, yes, but only for the brands with no genuine creativity, real service or the right marketing,” he said.
He added: “There are many concerns out there like the tensions between the US and China, the war in Ukraine, the debt ceiling fight in the US. You can be afraid every morning, but we are not.”
Economists, however, cautioned that heightened international tensions could lead to further uncertainty, with Europe vulnerable to competing interests between the world’s two largest economies. “The situation in Europe is very uncertain, because you have the war [in Ukraine] and inflation pressures . . . plus the US and China dynamics,” said Hélène Rey, professor of economics at London Business School.
Although most analysts expect the luxury industry to continue to expand by low double digits in the coming year, it will probably be at a slightly slower pace than the outsized growth the sector experienced in recent years.
There is growing evidence that a slowdown in the US, especially among more middle class luxury consumers who are more sensitive to changes in the economy, is under way.
“Performance in the US was relatively more subdued, albeit with management teams still pointing to a soft landing . . . driven by weakness in the aspirational consumer in particular,” Morgan Stanley noted.
China is the other question mark for the industry, after zero-Covid lockdowns at the end of last year hit regional performance at most luxury companies in the fourth quarter. “It’s a rebound, but a much slower one than expected . . . there is still a real psychological dent,” said Michael Kliger, chief executive at luxury ecommerce retailer Mytheresa.
Sarah Willersdorf, global head of luxury at the Boston Consulting Group, said China was “the big unknown” for growth next year while noting that she was “seeing a strong recovery across most categories” in the country.
Chinese tourism to Europe, another big driver for luxury shopping, has also started to return, but remains well below previous peaks. By April, travel from China was back to 47 per cent of 2019 levels, according to Morgan Stanley, but flight shortages and difficulties obtaining visas remain barriers.
“As China continues to open up, where the tourist traffic flows will be very different,” Willersdorf said, noting that she expected tourists would return to Asia-Pacific first, followed by Europe, and the US last, given ongoing tensions between the two countries. “You’re going to need to be able to serve a Chinese customer well in Australia, versus in US cities.”
Buying trends are also changing, according to Kelly Kowal, chief platform officer at online luxury marketplace Farfetch, as Chinese consumers purchase more athleisure, homeware and understated “quiet luxury” pieces such as expensive cashmere. “We’re seeing consumer trends shift a little bit, but we are seeing a turn in the market,” she said.
The expansion of the Chinese middle class that has driven growth in the luxury sector in the past decade is unlikely to wither anytime soon. “We have seen the emergence of a huge middle and upper middle class in China, and we are still experiencing this momentum which is not going to end tomorrow,” said Rey at the LBS.