Luxury goods are cold in China

European luxury brands are struggling due to the downturn in China, their largest market. On February 11, Kering released its financial report for the 2024 fiscal year (ending December 2024), showing that net profit fell 62% year-on-year to 1.133 billion euros. High-end consumption in the United States showed signs of recovery, while demand in the Chinese market remained sluggish and there was no sign of recovery.

“The deterioration of the real estate market and the high unemployment rate among young people have had a negative impact on consumption,” explained François Henri Pinault, CEO of Kering, which owns the Italian luxury brand “GUCCI”, at the financial report conference on February 11.

Sales fell 12% year-on-year to 17.1 billion euros. The biggest reason for the decline in revenue and profit is the struggle in Asia, centered on China. Looking at retail sales in various regions, the Asia-Pacific region fell 24% (excluding the impact of exchange rates), pulling down overall earnings. Kering is busy supporting brands such as Gucci and Saint Laurent and taking cost-cutting measures.

Chinese market “is not expected to improve this year”

After the end of the COVID-19 pandemic, the Chinese market, where luxury consumption is heating up, has played a driving role, and the performance of European luxury brand companies has expanded. However, since 2024, due to the real estate downturn and other factors, the Chinese economy has fallen into a downturn. Except for some brands such as Italy’s Prada, other brands have generally fallen into the dilemma of deteriorating performance.

The financial report for the 2024 fiscal year (ending December 2024) released by the French Moët Hennessy Louis Vuitton Group (LVMH), the world’s largest luxury goods company, in late January showed that net profit fell by 17% to 12.5 billion euros. Like Kering, LVMH’s sales in Asia (excluding Japan) fell by 11%, which had an impact on performance. Sales in Asia fell by 10% from October to December, which was still strongly affected by the downturn in the Chinese market.

“We don’t expect the Chinese market to improve this year, but maybe next year,” said Kering CEO Pinault. At present, it is difficult for luxury companies to portray a vision of improvement in their Chinese business.

Klaus Heine, an associate professor at emlyon business school in France, pointed out that if a tariff war occurs during Trump’s term, leading to an intensification of Sino-US confrontation, “Chinese consumers may emotionally avoid luxury brands from Western countries.”

Expectations for a recovery in high-end consumption in the United States

Despite the sluggish performance of China’s business, there are some positive signs among luxury brand companies. That is the expectation of a recovery in high-end consumption in the US market.

After Trump’s victory in the presidential election in November 2024, the market generally believes that high-end consumption in the United States will expand. “Consumer confidence is rising,” said Luca Solca, head of the luxury goods department of Bernstein Research, a US research company. He believes that Trump’s proposed personal income tax cuts and other policies are stimulating consumer demand for luxury goods.

Although companies have expressed concerns about the slowdown in high-ticket consumption in the Chinese market and the United States, there is a growing expectation that this situation will change. In fact, the number of companies with improved performance is increasing. In the sales of Swiss Richemont Group from October to December, the North and South American markets centered on the United States grew by 22%, driving the overall sales growth of 10%.

The existing store sales of the British Burberry Group from October to December decreased by 4%, recovering from a continuous double-digit decline. The contribution was made by the North and South American markets, which grew by 4%, and this market was the only one to turn to growth among all regions.

The expectation that the US market will lead high-ticket consumption is also very strong in the stock market. Although the sluggish Chinese market is still a problem, the stock prices of various companies are still generally higher than at the beginning of the year. Richemont Group’s stock price rose by more than 30%, and Burberry’s rose by nearly 20%.

On the other hand, there are also risks in the establishment of the Trump administration. Solca of Bernstein Research pointed out that if the imposition of tariffs leads to a resurgence of domestic inflation in the United States, the current consumer enthusiasm may weaken and the willingness to consume high-ticket items will cool down again.