Inside Luxury’s Slowdown

PARIS – Dior’s canvas bowling bags were popular throughout the 1990s and 2000s; you can still find them in vintage shops and resale sites for a few hundred dollars. The brand is currently working to bring back the style, having featured an updated version of the bag — now called “Groove” — on its September runway.

The price? €2,900. Which is considered accessible for handbags at Dior these days, as the French couture brand has hiked up the cost of its flagship styles. A medium Lady Dior bag now retails for €5,900 ($6,500), 76 percent higher than in 2019.

Soaring prices for familiar designs combined with macroeconomic headwinds in key regions have put significant strain on the luxury sector in recent months. Dior-owner LVMH is no exception. The French luxury conglomerate’s third-quarter results, announced after market Tuesday, are expected to be grim.

After gradually cooling off from post-pandemic highs, the global luxury market has slipped into a proper downturn, which could be both longer and more severe than initially forecast. What began as consumer fatigue with heavily logoed products and slowing sales to less-wealthy “aspirational” clients has since spread across price points and aesthetics. Sector leader LVMH saw sales fall 1 percent in the first half; Gucci owner Kering reported a 20 percent drop.

Shares in luxury companies have rallied in recent weeks following positive macroeconomic cues: China announced a round of fiscal stimulus to revive its sluggish economy, while the US announced a round of interest-rate cuts.

But analysts have warned that the rally is built on shaky ground. Retailers continue to order with caution as the collections from last September’s fashion month head to showrooms. In a recent interview, Kering deputy CEO Francesca Bellettini described the industry’s current situation as a “crisis.”

At LVMH, chairman Bernard Arnault has shaken up leadership, announcing designer changes at Celine and Fendi, naming a new deputy CEO for Dior and new CEOs at Givenchy, Hublot and Tag Heuer. But how and when the luxury conglomerate will regain momentum remains an open question.

A recent note by UBS analyst Zuzanna Pusz forecast third-quarter sales down 1 percent at LVMH’s fashion and leather goods division, which houses key brands Louis Vuitton and Dior, saying there was “no recovery in sight” for the group. “The estimated benefit … from the July price increase at Louis Vuitton could be offset by the negative impact of the recent Dior controversy,” Pusz said, citing an Italian investigation into sweatshop labour in the brand’s supply chain.

Economic Headwinds

Analysts point to slower growth, lingering inflation and low consumer confidence in key economies as the biggest drivers of the luxury downturn. Those have damaged both real purchasing power as well as the consumer “feel good” factor that’s critical to sales of discretionary items.

In China, high youth unemployment and depressed markets for real estate and equities have significantly dampened the country’s post-Covid recovery and weighed on consumer confidence. For many, a luxury purchase seems unwise now. “For the past six to nine months, consumers have not had the capacity to project a brighter future,” HSBC analyst Erwan Rambourg said.

Elsewhere in Asia, South Korea’s economy has fared better than China’s, but the market risks saturation. Koreans already spend more on luxury per capita than any other nationality.

Sales in Japan are up sharply this year as a weak yen has made shopping ultra-attractive for international buyers. But the foreign exchange impact means those sales are less profitable for European brands, and price increases to offset currency weakness risk excluding local buyers.

In the US, growth in wages, equities and real estate has outpaced most other mature economies since the pandemic. The job market remains at all-time highs, but many Americans have already spent the savings accumulated during Covid-19 lockdowns, as well as rapidly shifting their priorities back to other categories like travel, restaurants, health and wellness.

Europe continues to be impacted by lingering inflation and the geographic proximity to wars in Ukraine and the Middle East. LVMH’s results will show to what extent the 2024 Olympic Games represented a further blow to sales by deterring luxury shoppers from visiting Paris this summer.

But luxury’s wounds are also self-inflicted.

‘Greedflation’

Steep price hikes since 2019 — both a response to rising costs and an opportunistic bid to pad margins — have worsened the blow for consumers who are already being pinched by inflation, leading many clients to disengage with luxury brands. Others have become more attentive to declining quality: reports of crooked stitching, cheaper hardware, and poor conditions in factories have all gone viral on social media, damaging brand perception.

Today’s luxury prices are on average 54 percent higher than before Covid, according to HSBC, with key styles soaring still higher: the price of Chanel’s 2.55 flap bag has increased by 91 percent; Louis Vuitton’s Speedy is up by 100 percent.

“Consumers are not naive … There’s an element of arrogance, so-called ‘greedflation.’” said Rambourg. And once luxury brands raise prices on iconic products, it’s tricky to backtrack.

Creativity in Crisis

Of course, luxury is meant to be expensive: brands trade on a perception of exclusivity that is bolstered by high prices. But there’s a growing consensus in the industry that prices have gotten too far ahead — not just of quality, but of creativity and desirability. In many cases, the value proposition seems out of whack even for the wealthiest customers.

In recent seasons, safe designs have outperformed as customers leaned more than ever toward items they see as long-term investment pieces with an attractive price-per-wear. That’s partly why brands ranging from Gucci (under new designer Sabato de Sarno) to Chanel (under now-departed Virginie Viard) adopted an ultra-wearable, heritage-driven strategy.

Emphasising iconic carryovers and wearable merch is savvy business as brands seek to defend record sales and profits achieved during the pandemic. But the de-emphasising of bold creative concepts that will keep customers excited about fashion has become the subject of growing concern.

“These are awkward times for our fashion-become-luxury industry. Most everything today seems stripped down to please and target the consumer rather than to better creativity [and] innovation,” art director Ezra Petronio wrote in a recent introduction to his magazine Self-Service.

Heritage-first strategies have the benefit of underscoring a brand’s enduring value for customers. But they have the downside of giving people fewer reasons to feel excited about your brand, to talk about it online or visit stores now rather than next season.

“Luxury customers still remain enthusiastic and motivated to purchase luxury items, but more than ever, they need a compelling reason to invest. Brands that lean too heavily on their traditional staples are feeling the strain,” said Richard Johnson, MyTheresa’s chief commercial officer.

Looking Ahead

Breaking out of the current slump is sure to be a challenge. Marketing budgets are down almost across the board as brands adjust to the new environment, putting pressure on managers and creatives to perform miracles of fashion alchemy — creating greater demand with fewer resources.

The world’s largest consumer economies, China and the US, are in focus. On October 12, China announced a financial stimulus plan aimed at reviving the country’s economic growth. “It is possible that the government will want to support consumer morale ahead of the next Lunar New Year [in late January],” Bernstein analysts wrote. “However, from what we know about the broadly outlined stimulus, there don’t seem to be direct measures in place directed at consumers.”

Chinese consumers “have money in the coffers to spend. The stabilisation of real estate and equity markets could lift sentiment,” said Jelena Sokolova, analyst at Morningstar. But “so far, it’s more hope than anything else.”

Mid-September, the US announced its first interest rate cut in four years, reducing its key lending rate by 0.5 percentage points. The larger-than-expected cut was made to ensure the US stays “in a strong place,” according to Jerome Powell, Chair of the Federal Reserve.

Overall, the outlook for the US economy seems cautiously optimistic. “The American consumer right now is the only one with a bit of signs of life. Of course it depends on the brand, but we expect that the US cluster will do better than other nationalities,” said Rambourg.

While sales to aspirational buyers remain depressed, pandemic-era bets on opening and expanding US boutiques in secondary cities could start to pay off as projects come to fruition. Well-off American consumers, many of whom do not live in big cities, could repatriate spending as plush physical shopping experiences open up closer to home, according to HSBC. Alternately, brands could find their cost base in the US overstretched if demand fails to pick back up.

The Next Big Thing?

This isn’t the first time the luxury industry has found itself in a panic over where things were headed, and in need of a big new idea. Couture gave way to ready-to-wear; ready-to-wear opened the door to diffusion lines and licences. Later came the revolutionary notion that designers could reanimate the “codes” of luxury houses to build global brands, notably put in place by Karl Lagerfeld at Chanel in the 80s. As department stores declined in the 2000s, the industry leaned more heavily on the profitable handbag category (sizeless, seasonless, expensive) in a bit to reduce its exposure to the volatile and less-profitable business of designer apparel.

More recently, following a slowdown in the mid-2010s, luxury opened itself to a new generation through casualisation and streetwear, offering entry-priced merch like hoodies, sneakers and sporty mini-bags. Those products not only reached younger and less well-off customers, they gave brands ways to be present in people’s lives away from galas and boardrooms.

Going forward, analysts believe the most successful brands are likely to be ones who “create new stepping stones” to get entry-level customers excited about spending again. Lowering prices or reinstating end-of-season sales is anathema to luxury players, but they are expected to discreetly offer new products that are smaller, simpler and less expensive while waiting for customers to grow into increased prices for their core offer.

The problem is that T-shirts and keychains won’t feel like a revolution this time. In the meantime, brands are also working to reinforce their cultural clout, engaging more deeply with devotees of sports, art, music and more to keep animating their brands in the absence of a big new aesthetic idea.

Brands are also turning over their creative leadership at a clip: the coming seasons will show whether new designers at Chanel and Fendi (still to be named), Valentino (Alessandro Michele), Givenchy (Sarah Burton) and Tom Ford (Haider Ackermann) can reinvigorate demand.

It’s a cast of familiar characters, for the most part. Will one of them have the next big idea?

Disclosure: LVMH is part of a group of investors who, together, hold a minority interest in The Business of Fashion. All investors have signed shareholders’ documentation guaranteeing BoF’s complete editorial independence.