Yves here. A fashionista colleague has been telling me for some time that luxury brands have been in the crapper for some time, confirmed by occasional stories at the Financial Times about the sorry state of big name luxury brandmesiters like LVMH as well as the soft state of the art market. Her point is that the very rich are doing fine, but the merely affluent and “aspirational” luxury buyers, who might spring for a high end bag, pair of shoes, or scarf have cut back or stopped entirely their fancy goods buys.
As for readers who might dispute the claims about the state of China’s economy, I suggest you read Michael Pettis on what Chinese GDP figures amount to: https://carnegieendowment.org/china-financial-markets/2019/01/what-is-gdp-in-china. A Reuters story on China’s latest GDP report confirms that the disconnect between official statistics and what many Chinese citizens are experiencing persists: “”The data China released was different from what most people felt”.
I can tell you here from the sex capital of Asia that China is in the crapper. The decline in tourism this high season v. last year is astonishing. The Europeans, Russians, and Australians tend to peak over Christmas and New Year although some stay well into January; the Chinese peak, natch, is before and a bit after Chinese New Year (this year, January 26). although many also come over Christmas-New Years.
Last year, traffic was awful from mid Dec to a week after Chinese New Year. Similarly, the big farang oriented malls were busy the entire time, often with long lines at registers and shopper buying many items.
This year, we had a long weekend bad stretch in November when three famous performers came for a music festival. Aside from that, the busy time was a few days before Christmas to New Year and even then not bad if you went out before 4 PM. Even the weekend after New Year was slack, activity-wise.
The entire time, the number of big Chinese tour busses is way down. Similarly, my building, which has a lot of short term rental units, was regularly noisy in the corridors and in the evening due to people talking loudly and often music and parties nearby and on the premises
This year, dead quiet. Creepily so.
Mind you, the dramatic shortfall was underway before the period when Chinese started dropping scheduled trips due to a high profile kidnapping of a Chinese actor, so that is only partly the cause. And one might think where I am would be somewhat insulated due to distance from Myanmar and the, erm, special local attractions.
By Teresa Sádaba, Dean at ISEM Fashion Business School, Universidad de Navarra. Originally published at The Conversation
Alarm bells are ringing across the high-end sector. 2024 did not end as luxury brands had hoped, and the figures published by the sector’s main conglomerates painted a picture of slowdown and some signs of exhaustion during the last quarter of 2024.
The weakening Asian market is one obvious cause, but consumers’ unusual reactions to sharp price rises has also been striking. Aspiration and distinction – which were part of luxury brands’ DNA until recently – are taking on new dimensions thanks to phenomena such as ultra-fast fashion and “dupe” culture (low-cost products that are inspired by or imitate luxury goods).
Poor Financial Results
The largest luxury goods conglomerate Louis Vuitton Moet Hennessey (LVMH) – owner of 75 brands including Louis Vuitton, Christian Dior, Moёt & Chandon, Hennessy and Veuve Clicquot – has presented quarterly results showing growth of only 3%, well below the 14% seen in 2023. In fashion, growth fell by 5%, and in wines and spirits, 7%.
For Kering, the sector’s second largest company – whose portfolio includes brands like Gucci, Balenciaga, Yves Saint Laurent and Bottega Veneta – revenues decreased by 6% and 4% on a comparable basis. The list of examples goes on, with legendary houses like Burberry and Lanvin publishing similar figures.
The results could be analysed in light of the last year’s growing panorama of global instability. 2024 saw intense geopolitical turmoil, with multiple serious open conflicts, burgeoning technological rivalries, and more than 70 elections around the world. This all brings with it a strong degree of economic uncertainty.
However, we cannot forget that the luxury market has been very resilient in times of crisis. The sector’s post-COVID crash results were surprisingly good: digitalisation accelerated, and the buoyant behaviour of consumers with a desire to splurge – a phenomenon known as “revenge spending” – helped significantly.
So what might this change in consumption mean, and what lessons can we learn from it? There are several significant factors that may herald a transformation in the world of luxury, and companies’ strategies will have to change if they want to keep up.
The Asian Dragon Economies Are Getting Weaker
One of the decisive factors in these results is the fading idea of China as a place of unstoppable growth.
In recent years, breaking into the Chinese market was the main ambition for these brands, their natural place of expansion and growth. Between 2009 and 2019, for instance, the LVMH group went from having 470 outlets in Asia to 1,453 (excluding Japan). The same is true for Kering, which went from 152 to 609 shops.
Collections and marketing strategies also shifted towards this market, targeting a growing and thriving middle class, which seemed to have no end in sight. However, the dragon economies are now showing signs of slowing down, and in the luxury sector, the drop in sales is becoming quite pronounced.
In the figures published by LVMH, a 16% drop in Asian sales (again, excluding Japan) is projected. This is especially pronounced in China, which previously accounted for 50% of the French group’s growth.
Lack of consumer confidence and restrained spending on luxury goods may explain this new outlook. But if China is not what it used to be, where can luxury brands find new winning strategies?
Prices Going Up and Up
The strategy of the luxury groups has been based in recent years on an extraordinary rise in prices. The escalation has been unstoppable, with the value of an Hermès bag doubling, and some Chanel bags reaching €10,000. Some of these pieces have also doubled in value on the second-hand market. The price of watches is another clear example, with increases of more than 20%.
It is natural for luxury brands to use price as a barrier to entry for mass consumption and as a way of preserving its exclusivity. It appeals to the ultra-rich or extremely wealthy, with the purpose of creating eternal aspiration – the Veblen effect, by which higher prices generate higher demand, has worked in this market.
The concept is named after Thornstein Veblen, economist and author of The Theory of the Leisure Class: An Economic Study of Institutions. In chapter seven of this work, entitled “Dress as an Expression of the Pecuniary Culture”, Veblen explains that fashion and luxury are status indicators. If aspiration is not constructed, luxury becomes meaningless.
However, there seem to be other reasons for this striking price increase. One widely reported reason is the higher cost of raw materials, but geopolitical uncertainty and runaway inflation in recent years have also contributed to the rise.
The Cost of Distinction
The entry of new players into the fashion world at the bottom of the pyramid has forced everyone to move up the ladder, and to find what sets them apart. Ultra-fast fashion has made mid-market brands want to be perceived as more aspirational, and this movement in turn leads luxury brands to seek greater distance from new competitors.
Some also point to “dupe” culture as the culprit for this steady price progression. Copies of luxury products – or imitations with slight modifications – have flooded social media, especially TikTok, forcing brands to distance themselves further from this type of consumption. Authenticity comes at a price.
The big question right now is how far this price escalation will go. Some people have asked whether the consumers targeted by these brands, no matter how great their fortune, also have reservations about spending for spending’s sake. In other words, do they really find value in the product?
Quiet Luxury: A New Approach
It seems that it is no longer enough to position oneself as a luxury brand – these companies also have to find a way to create and demonstrate value. Price increases need to be justified by two of the levers that have always been the essence of luxury: creativity and quality.
Additionally, luxury is no longer synonymous with brands. The trend of quiet luxury shows a desire to distance oneself from flashy aggressiveness by avoiding or hiding any logo or characteristic detail that makes its brand obvious.
This means brands are only recognisable to those who have a more cultivated knowledge of luxury products. Silent luxury potentially broadens the market to clients who, beyond products themselves, are also interested in their own wellbeing and a more relaxed way of life.
https://carnegieendowment.org/china-financial-markets/2019/01/what-is-gdp-in-china?lang=en
January 16, 2019
What Is GDP in China?
Analysts are increasingly skeptical that China’s very high reported GDP growth rate provides a meaningful picture of the economy’s health. There are, however, at least three very different ways that reported GDP can fail to reflect the underlying economy.
By Michael Pettis
The profitability of high fashion and luxury is a thing of wonder. Just look at the list of richest people in the world – there is a very strong bias towards what is in global terms, a relatively small industry. The raw profitability of an LV or Gucci is staggering. Much the same applies of course to a range of ‘top end’ brands, whether cars or boats or whatever.
The industry itself will be fine. The advantage of having a strong fashion brand is not having to invest too much in fixed assets. Much of the ‘product’ is made by sub-contractors, so the people who will suffer most are the highly skilled craftspeople who make these products, not the owners. Even their shops are cheap to dispose of – the highest end companies rarely have to pay full rent (landlords consider them a ‘lure’ for other tenants). The exception may well be in the more highly engineering oriented sectors of ‘luxury’, such as luxury cars – there is a potentially vast over capacity issue which is particularly noticeable at the top end.
It should be noted of course that one big problem for western and Japanese/Korean luxury brands, which have been having many happy and profitable years in China, is that they are increasingly facing competition from new Chinese indigenous fashion companies, particularly in the ‘mid’ zones of cost.
The mismatch between China’s GNP and the ‘real’ wealth of ordinary Chinese people has been obvious to those paying attention for well over a decade, a time when Chinese GNP figures lost any connection with real world conditions (familiar to those of us in Ireland, who know well that ‘GNP’ can be entirely meaningless). As Pettis has been pointing out for years, Chinese GNP is an input into the economy, not an output in terms of real economic growth (however you define it). Even shadow measures, such as energy outputs, have become less useful in assessing real growth (technology changes has resulted in this applying equally to many other countries). Chinese ‘growth’ over the past few decades has been undeniable of course – but how much of this is real productive capacity (as opposed to inflated overinvestment) is a technical question and I doubt you’ll find any unambiguous answers to this question. But the only real certainty is that GNP is an entirely meaningless figure for assessing the real health of the Chinese economy.
The severe drop off of Chinese tourism in Thailand (its a worldwide phenomenon, equally obvious in Europe and elsewhere, partially masked by the number of Chinese moving to study or other purposes) may have other reasons, but I suspect it is primarily down to economic uncertainty, and particularly the drop in property values which has severely hit nearly all regular Chinese, most of whom use property assets as their main savings vehicle. And property values in China have a very long way to go down, income/price ratios are still at crazy and unsustainable levels. From my anecdotal experience, the upper layer of quite cosmopolitan Chinese are travelling as much as before (many to look over their various ‘bet hedging’ foreign investments). It is ‘ordinary’ upper middle income Chinese who are consolidating their financial positions and seeing a trip to Chiang Mai or Tokyo as an unnecessary expense (average’ Chinese have never been able to afford much in the way of frivolous foreign travel). When I was in Tokyo last year I was struck my how much mandarin I heard spoken in public areas, but it quickly became apparent that most of these were not casual tourists, but permanent or semi-permanent residents.
So unfortunately, it seems the ‘second China shock’ is on its way, and it will be a double whammy – cheap and very good Chinese implicitly subsidised exports combined with a very weak or non-existent quid quo pro in the form of Chinese tourists or imports. As Keynes pointed out many decades ago, this sort of mismatch in imports and exports is not just a solid indicator that conventional trade theory is wrong (it still is), but is highly destabilizing for the world economy. Its not just Trump or the Europeans who are concerned about this – pretty much all the Asian countries are realising that this is a problem for everyone, particularly countries like Thailand, Indonesia and Vietnam, which are hoping to follow the standard path to developed status.
The reverse wealth effect of lower RE prices and depressed job markets in big first tier cities definitely hits the consumption habits of well-to-do Chinese, but I think the availability of inexpensive and high quality alternatives within China may also play a role.
A friend traveled to Kunming last fall and was quite impressed by the pricing and quality of high end accommodations that he stayed at. He is a SF based foodie with Hong Kong roots, so nitpicked the local food offerings but admitted that they were pretty good and great value for money. Steve Hsu had a podcast where he gave impressions of a recent trip to China where he said that he thought the quality of things like hotel bedding and appliances are now as good as what’s on offer in the West. So how many upper middle class Chinese people, who already probably taken several foreign trips in their lives and likely didn’t enjoy them that much (not knowing the languages, very rushed schedules, a lot of time devoted to frenzied shopping, long travel time), might opt for a cheaper, higher quality in-country vacation by car or HSR? The comment on quality of design of bedding suggests that overall quality of Chinese designed and marketed products have caught up and there’s less rationale for paying a significant premium for high end European design.
While this would not negate the desire for the typical beach vacations or see Rome/Paris/Antarctica, this may well be the end of shopping frenzied mass tourism that used to characterize Chinese travel to SEAsia (on price) and Europe (on quality).
I wonder if 2023 was the aberration after being penned up in China under COVID restrictions, whereas 2024 will represent the norm going forward regardless of how the Chinese economy performed in any given year.
Which makes Hermès even more of an oddity when one looks at the decline in the overall luxury sector. The maker of the Birkin handbag continues to see strong demand and high margins even as industry peers flounder. Ditto the likes of uber luxury brands Loro Piana and Brunello Cuccinelli, who both continue to defy the wider industry slowdown by posting double digit growth figures. So, we clearly have a bifurcation happening with the brands defying the downturn by keeping the profit mill churning leaning heavily into their cultural heritage and market positioning while limiting supply (ie classic, time-tested luxury strategy), while those that are treading water seem to be getting battered from all sides by market dynamics. Maybe the only way forward is to go backwards
“How ‘Dupes’ ”
Google AI
“According to the Oxford Advanced American Dictionary, a dupe is a person who has been tricked or cheated. As a verb, dupe means to deceive or cheat someone.”
Forgive my lack of understanding, but I find no reason to think the Chinese government is deceiving or cheating the Chinese or other peoples in data, and the economic data that are being released for 2024 have been excellent. Also, Chinese economic policy has been designed to increase potential growth from 2025 and on.
As Robert Solow explained in terrific work, increasing potential growth means investment, lots of investment and China is investing at by far the highest rate of any development country. For instance, the UK which is worried about growth has been investing at less than 20% of GDP and a significant amount of this is property investment. China is investing above 40% of GDP, and has purposely limited property investment or speculation.
What I find is a country that has experienced splendid growth since 1977, growth that has meant China is by far the largest country in GDP and growing faster than the next large GDPs, growth that has meant ending severe poverty, growth that is making China as self-sufficient as necessary and able to assist the growth of partner less developed countries.
https://fred.stlouisfed.org/graph/?g=1tLEO
August 4, 2014
Real per capita Gross Domestic Product for China, United States, India, Japan and European Union, 1977-2023
(Indexed to 1977)