Europe’s Luxury Giants Face Challenges Amid China’s Economic Slowdown
Europe’s luxury market, once a powerhouse on par with the U.S. tech giants like the “Magnificent Seven,” is facing significant challenges. After suffering a market value loss of nearly a quarter-trillion dollars, European luxury firms are bracing for further declines as China’s economic downturn deepens. The luxury sector, which thrives on the spending power of affluent consumers, is being hit hard by a spending slump, particularly among China’s wealthy elite. Once eager to splurge on high-end fashion and accessories in Paris, Milan, and Hong Kong, Chinese consumers are now showing a weakened appetite for luxury goods due to the ongoing economic struggles.
The Luxury Boom and Bust: A Post-Pandemic Story
The current volatility in the luxury market contrasts sharply with the post-pandemic boom, when consumers, freed from lockdowns, indulged in lavish spending on travel, fashion, and luxury goods. According to Flavio Cereda, an investment manager at GAM UK Ltd., the current situation is particularly painful for luxury brands, as they are coming off a period of excessive growth.
“This year is more volatile and more painful because it comes after this excessive growth,” said Cereda.
Luxury brands are now experiencing the harsh reality of a cooling market. Burberry Group Plc, one of the UK’s most iconic brands, has seen its market value plummet by 70% over the past year, leading to its removal from London’s FTSE 100 stock index. While Burberry’s downfall is notable, the broader luxury sector is also suffering. Goldman Sachs’ index of luxury shares has shed $240 billion in value since its March peak, with leading brands like Kering SA (Gucci’s parent company) and Hugo Boss AG losing nearly half their market value in the past year.
Luxury Leaders Take a Hit: Kering, Burberry, and LVMH Struggle
Kering, once a top 10 stock in France’s CAC 40 index, now ranks 23rd, illustrating how far the mighty have fallen. The company, along with other luxury brands like LVMH Moët Hennessy Louis Vuitton SE, has been hit hard by the slowdown in consumer spending. LVMH, which was Europe’s largest company by market cap a year ago, has now slid to second place.
The declining post-pandemic spending trend was evident in recent earnings reports. Kering, Burberry, and Hugo Boss all issued profit warnings, and LVMH reported that its leather goods unit, a crucial part of its business, grew by just 1% in organic revenue during the latest quarter — a sharp drop from the 21% growth seen the previous year. Not all brands were equally affected, though. Hermes International SCA and Brunello Cucinelli SpA, which cater to the ultra-wealthy, managed to avoid the full brunt of the downturn.
China’s Economic Slowdown: A Major Threat to Luxury Brands
China’s economic woes are a critical factor behind the luxury market’s troubles. The country’s wealthy consumers, who once flocked to luxury boutiques across Europe and Hong Kong, are cutting back on their spending, driven by concerns over the slowing economy. Luxury malls in Hong Kong, once a hot spot for high-spending Chinese tourists, are now struggling with declining foot traffic. Meanwhile, in mainland China, LVMH’s premium jewelry brand Tiffany & Co. is reportedly planning to halve the size of its flagship store in Shanghai, further signaling the downturn.
Watchmakers in Switzerland, another key luxury market, are also feeling the effects of China’s slowdown, with some seeking state aid as exports dwindle. The slowdown has led several analysts to revise their expectations for the luxury sector’s performance in the coming years.
Outlook: “Slower for Longer”
UBS analyst Zuzanna Pusz has adopted a more cautious outlook for the luxury sector, describing it as “slower for longer.” She has trimmed her estimates for organic sales growth in 2025 and the latter half of 2024, suggesting that the industry is entering a slower cycle after a period of rapid growth and high pricing.
GAM’s Cereda is hopeful that sales will eventually pick up but warns that the current environment is challenging. He expects growth to return to more modest “mid-single-digit” levels, which he views as the sector’s long-term trend.
Challenges and Opportunities for Investors
As luxury brands navigate these difficult times, some analysts are cutting profit and share price estimates. Bank of America Corp.’s Ashley Wallace, for example, believes that consensus expectations for the second half of the year are too high, while Morgan Stanley’s Edouard Aubin sees LVMH and Richemont as particularly vulnerable to China’s slowdown. Aubin has lowered his share price targets for both companies, citing the potential for further declines.
Despite the grim outlook, some analysts see a silver lining. The MSCI Europe Textiles Apparel & Luxury Goods Index, while still trading at a premium, has pulled back from the elevated valuations seen during the 2021 boom. Morningstar analyst Jelena Sokolova believes this downcycle may represent an opportunity for investors to buy into high-quality luxury brands at more reasonable valuations.
“The sector clearly has competitive advantages longer-term, so downcycles are probably the best time to invest,” said Sokolova. She highlights Kering as a brand with strong recognition, which could allow Gucci to rebound when market conditions improve.
GAM’s Cereda, however, advises focusing on the highest-end luxury names, like Hermes, which cater to ultra-wealthy consumers. These brands tend to be more insulated from downturns in aspirational spending, particularly in regions like China, where middle-class consumers are pulling back.
“You don’t want to own brands that don’t have brand heat, and you don’t really want any meaningful exposure to the aspirational consumer,” Cereda explained. “And you certainly don’t want any real exposure to the aspirational consumer in China.”
Conclusion: A New Normal for Luxury?
The recent downturn in Europe’s luxury sector highlights the fragility of the post-pandemic spending bubble, particularly in the face of China’s economic struggles. While some brands may weather the storm better than others, the outlook for the sector remains uncertain. Analysts like UBS’s Pusz expect slower growth for the foreseeable future, while others see potential investment opportunities during this downcycle.
For investors, the key will be to focus on brands with enduring appeal and strong customer bases, especially those catering to the ultra-wealthy. As the luxury sector navigates these challenging times, the highest-end brands like Hermes may emerge as the most resilient, while aspirational brands exposed to China’s middle-class consumer may face more significant challenges.
FAQs
- Why is the luxury sector struggling right now?
The luxury sector is facing a downturn due to reduced consumer spending, particularly in China, where economic conditions have worsened. - Which luxury brands have been hit the hardest?
Kering, Burberry, and Hugo Boss have seen significant declines in market value, while high-end brands like Hermes have been more resilient. - How has China’s economic slowdown impacted luxury brands?
China’s wealthy consumers, once a key driver of luxury sales, are cutting back on spending, leading to reduced revenues for luxury brands that rely on Chinese demand. - Are there any opportunities for investors in the luxury sector?
Some analysts believe that the current downturn offers a buying opportunity, particularly for high-quality brands with strong long-term growth potential. - Will the luxury market recover?
While growth is expected to remain slower in the short term, many analysts believe the luxury market will eventually rebound, especially for brands with strong recognition and appeal to ultra-wealthy consumers.