Feature 1. Luxury

The aspiration of the luxury consumer is ebbing – unprecedented economic challenges, current political dis
putes, and global instability are shaking consumers’ future predictability.

Chandler Mount, CEO of Affluent Consumer Research Company

Overview 2023

In 2023, the global luxury consumption sector began to exhibit signs of sluggishness in the third quarter, with an overall slowdown in growth becoming evident. LVMH Group, the world’s largest luxury conglomerate, unveiled its Q3 financial report in October, revealing a 9% increase in its organic revenue to €19.96 billion, a significant slowdown compared to the first half of the year. The slowdown in growth was primarily attributed to the weaker performance in the two major markets of Asia and Europe, with the Asian market’s growth declining from 23% in the first half of 2023 to 11% in the third quarter, and the European market slowing from 22% to 7%. The industry’s growth prospects raised concerns among investors, prompting a nearly 7% decline in LVMH’s stock price upon the release of the financial report. This downturn also had a ripple effect on various competitors in the market. Following that, Hermès reported a year-on-year increase of 15.6% in its third-quarter sales, calculated at a fixed exchange rate. This growth rate was noticeably lower than the 27.5% growth in the second quarter and 32.5% in the same period last year. Similarly, Prada experienced a significant deceleration in growth, with a growth rate of 10.3% in the third quarter compared to 20.5% in the previous two quarters. Richemont also saw its growth momentum waning. According to its mid-term financial data for the fiscal year 2024 (ending on September 30, 2023), the group reported sales of €10.2 billion and income from continuing operations of €2.7 billion. The Asia- Pacific region emerged as the growth leader, registering a 14% increase yearon- year and contributing 42% of the 2023. 1 - 3 LV X Yayoi Kusama sales. Kering faced an overall setback in its third-quarter performance, characterized by a 9% slump far surpassing that of its luxury peers. Particularly, the group’s core brand, Gucci, suffered its first negative growth rate of the year in the third quarter (calculated at comparable exchange rates), with a 7% decline in revenue. In 2022, Chanel recorded a 17% year-on-year increase in revenue, reaching $17.2 billion. Bruno Pavlovsky, president of fashion at Chanel, mentioned a decline in store visits from both first-time and occasional buyers during 2023. Jean-Jacques Guiony, LVMH’s chief financial officer, said on an earnings call that it was still difficult to make projections for future trends. “Time will tell, depending on the depth and length of the cycle, whether it was a real cycle in consumption or merely a sort of blip after three extraordinary years.” Johann Rupert, Richemont’s group chief executive, stated on an analyst conference call: “We had predicted that China’s recovery would take quite a bit longer than most of the market analysts and even competitors expected. That’s proving to be correct, though we’re starting to see signs when they travel to Hong Kong, Macau, even Japan, that the market is still there; it is just the feelgood factor is not.” While the factors influencing the consumption behavior of luxury goods consumers are complex, and whether luxury items possess countercyclical or anticyclical attributes remains inconclusive, it is undeniable that challenges are looming for the luxury goods market in China.

Challenge

• Global population mobility is reviving, driving robust overseas consumption.

• Brands are navigating uncharted territory in the realm of localization, while the driving force of cultural empathy continues to intensify.

• Gen Z consumers are moving away from the desire to use logos as social currency.

• The effectiveness of coping with inflation by raising prices is diminishing, as frequent price hikes are eroding consumer goodwill.

Recent years have witnessed the Asian market, led by China, becoming a key driver of revenue growth for major luxury conglomerates. However, in 2023, as global population mobility recovers and overseas spending surges, Jean-Jacques Guiony noted that there hasn't been a significant change in Chinese consumers’ demand for fashion and leather goods compared to the previous two years. The decline in growth rate can be attributed to a significant number of consumers shifting their purchases to overseas markets. Additionally, the uncertain global economic outlook, coupled with an inflation-induced decrease in consumer confidence, has led to a more rational approach to making shopping decisions. This has consequently increased customer acquisition costs for brands and extended consumers’ decision-making cycles. In the meantime, the dominant force of Chinese consumers, represented by Gen Z, is gradually moving away from the consumption demand to flaunt their identities through logos. The strategy of frequent price hikes employed by brands like Chanel and Louis Vuitton has also started to yield negative effects on consumer favorability, as revealed in the 2023 Study on Luxury Consumption Concepts and Trends among Gen Z, which found that 26% of respondents expressed a sense of aversion towards price hikes even though they could afford them. At the same time, the continued resonance of Chinese consumers with product innovation, brand creativity, and cultural narratives continues to shake the luxury goods industry.

Action

In uncertain market fluctuations, we have also witnessed several positive action-takers delivering outstanding performances in a downturn. In January 2023, the collaboration between Louis Vuitton and Japanese artist Yayoi Kusama set off a global fever for the Polka Dot Art, fueling a year-on-year increase of 18% to €10.73 billion in the sales of the brand’s fashion and leather goods. Also, the hashtag #LVxYayoiKusama# on Weibo garnered over 650 million views. In June, the newly appointed Creative Director Pharrell Williams orchestrated a dazzling debut of LV24SS, featuring collaborations with luminaries from various domains, achieving a media impact value (MIV) of $42.6 million for the brand. In October, Louis Vuitton launched a limited-time space “Nóng Hó, Shanghai” to explore the city’s cultural spirit, which witnessed an immensely high level of consumer engagement and social buzz, with the hashtag #LVNóngHóShanghai# on Weibo attracting over 620 million views. Likewise, FENDI’s “hand in hand” craftsmanship art exhibition in Beijing joined forces with China’s rising tea brand HEYTEA to introduce limited-edition beverage experiences. This collaboration skyrocketed FENDI’s WeChat search index, resulting in a 30-fold year-on-year increase. Meanwhile, Miu Miu, staging a comeback as the growth engine of Prada Group, has strategically positioned itself with a clear and consistent brand identity, pricing on par with Prada, and proactive adjustments to its product lineup. Notably, the brand’s marketing efforts took a bold approach by enlisting 85-year-old Chinese actress Wu Yanshu for a stunning fashion photoshoot. By unveiling the true beauty and timelessness of a “girl’s youth” beyond superficial characteristics, Miu Miu struck a chord with contemporary young consumers on platforms like Weibo, WeChat, and Xiaohongshu. This campaign gave rise to a powerful resonance, sparking intense interest and discussions under related hashtags such as #miumiuWuYanshu’slook#. Additionally, Miu Miu made a successful foray into the social arena of contemporary young consumers through two seasons of collaborations with New Balance. This allowed the brand’s “rebellious, edgy, and playful image" to resonate with Chinese consumers, establishing itself as one of the luxury brands that set the Chinese market ablaze in 2023. While the Prada Group has not disclosed specific sale figures for its brands, Miu Miu experienced a significant surge in direct sales of 49% in the first nine months of 2023, as calculated at a fixed exchange rate. CEO Andrea Guerra stated that Miu Miu witnessed strong growth across all product categories.

GROWTH in 2024

For luxury brands, the competition in the Chinese market is expected to be fierce. Although the specific performance data for individual brands has not been disclosed by conglomerates, some brands have notably showcased their positive performance in 2023. For instance, LV’s financial reports highlighted their outstanding performance driven by strong creativity, while Miu Miu recorded robust growth across all categories. From these positive outcomes, we can glean several key takeaways:

• Long-term strategic collaborations with leaders in art, design, and creativity can be instrumental in igniting consumers’ desires, aspirations, and cravings.

• The core of culture-driven narratives and value-based marketing lies in connecting with target consumers by telling sincere stories.

• Strong capabilities in resource integration and execution are crucial in sustaining creativity.

And more

The high budgets associated with these standout cases, as well as the high expectations placed upon internal organizational management and decision-makers's boldness, may indeed leave other luxury brands feeling hesitant and pressured. However, it is crucial to contemplate whether collaborations with artists, creative leaders, and celebrities can be universally applicable. As more and more co-branding and collaborations flood into the market, the bar of consumer expectation is continuously sed, while their purchasing power becomes strained. The question then arises: can these collaborations still bring new excitement for consumers and contribute to sales? Will partnering with mass-market brands dilute the luxury feel of a brand and risk losing high-end consumers? Moreover, when cultural themes that have already been discussed by competitors appear again in collaborations in another form, could they be seen as a kind of creative plagiarism or cliché? If we look back at the Chinese market, an insightful example of collaboration can be found in the realm of cultural and artistic endeavors. China has a rich heritage in porcelain culture, featuring a diverse range of categories and techniques. Loewe, for instance, drew inspiration from the colors of monochrome glaze to craft a series of products. They collaborated with Deng Xiping, a state-level inheritor of the Chinese intangible cultural heritage, to host an exhibition on Chinese monochrome glaze and spotlight the process of producing this unique type of porcelain in Jingdezhen. Loewe’s rigorous, sincere, and restrained approach to cultural storytelling has earned them genuine acclaim as an exemplary crossover practice in the Chinese market. Under the concept of "culture", there are countless branches and genres, each harboring extraordinary inheritors, artists, and innovators. They offer their unique interpretations and narratives of the same story, breaking through any doubts about the homogenization of brand cultural narratives. After all, beyond enduring styles, craftsmanship, and a rich history, each luxury brand possesses its own story to tell and a specific audience group to engage with. Perhaps, for a broader consumer base, this is the true manifestation of "luxury" in luxury brands, encompassing distinctiveness and individuality. According to Loewe’s financial data for the fiscal year 2022, the brand witnessed revenue growth of 37% to approximately €626.2 million, with gross profit soaring by 92% year-on-year and net profit rising by 87%. The operating profit doubled, reaching €170 million. Loewe's data reveals that perhaps, for the luxury goods industry, merely focusing on traffic and volume is far from sufficient. What holds greater importance is the creative "value" and the genuine power to captivate consumers’ hearts.