Luxury Brand Sales in China Fall

By Rhod Mackenzie
"This is thee biggest crisis in the history. of luxury goods" These are the words financial analysts use to describe what is happening to a company that was recently the most valuable  in France, and whose owner was for a short time the richest man on the planet. Now I am talking about how events in China are having a serious impact on Westrn luxury goods manufacturers.
The multi billioaire Bernard Arnault is experiencing a serious decline in his wealth. The French men who built up and heads the giant conglomerate LVMH, which controls a number of luxury brands and expensive drinks (Hennessy, Dior, Louis Vuitton, etc.), is currently experiencing serious financial difficulties.
When the management of LVMH selected a grandiose conference room situated beneath the glass pyramid of the Louvre, in the heart of Paris, for a meeting with investors, they could not have anticipated the impact of this decision.

It is disappointing to note that the financial press reports, which began circulating from there around the world, including those from Bloomberg, are not as thorough as they could have been.
The billionaire and CEO of the world's largest group of companies has dropped from first to ninth place in the list of the world's richest people. Indeed, until recently, Arnault had even overtaken Musk in terms of the ambitious projects on his list of the wealthy. It appeared that chic handbags and expensive cognacs offered a more stable foundation for wealth than rockets that occasionally malfunctioned during launches. However, it became apparent that the situation was more complex than initially anticipated.

As Bloomberg notes, "It hasn't all been well for the 76-year-old chief of late… The LVMH conglomerate, which rode the luxury sector's record run as global wealth soared, is suffering perhaps the worst downturn of his 36 years at the helm."
The key issue is that LVMH has begun to lose market share in China, partly due to the imposition of additional tariffs on certain goods (e.g. French cognac by the way I did a video on that a few months ago), and partly due to Chinese consumers, affected by inflation, switching to more affordable domestically made products and  brands. The second significant setback was reported from overseas, where the American president has threatened to impose a 50% tariff on products from EU countries.

It is evident that competitors are also monitoring the situation closely. However, the crisis has exposed the vulnerabilities of the conglomerate itself. "Hermes International SCA, the manufacturer of Birkin bags, and Compagnie Financière Richemont SA, the owner of Cartier, have proven more resilient... Indicators suggest that LVMH may face further challenges. Insiders have revealed issues within the fashion brand Dior and its alcoholic beverages division, Moet Hennessy, and even the superbrand Louis Vuitton.
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It is important to note that Cartier has also been affected by the general trend of falling demand for luxury goods. By the end of 2024, this market segment had fallen by 20%. Cartier owners have noted a decline in demand for their watches, which they attribute to economic challenges in China.
However, they have also observed an increase in jewellery sales. Meanwhile, Hermès is defying market trends with a projected growth of 14% by the end of 2024, showcasing its resilience and strategic foresight.
When asked about the secret of his success, Hermes CEO Axel Dumas replied that he had "only one explanation – we just do our job, and we do it well."

In this case, it can be considered that LVMH management is losing money because it is not performing its duties adequately and, for example, is spreading itself too thinly. The holding company, renowned for its strategic acquisition of brands, has become a a huge  entity. Bloomberg reports that the company now has more than 75 brands due to its acquisitions, which has made it unwieldy and difficult to manage. The lack of a clear succession plan is also causing concern among investors.
This reference to age was unlikely to be well received by Arnault, who, at a shareholders' meeting, had secured the opportunity to remain in his position not until he was 80, as had been previously agreed, but until he was 85.
His four children (and direct heirs) are involved in the group's affairs, but their actions have thus far been less than successful. Since the company was taken over by his daughter Delphine, sales have declined significantly. His son Alexandre, who was appointed to the troubled Moet Hennessy cognac distiller, initiated a series of layoffs, but these proved to be ineffective.

According to Bloomberg, the group's renowned cognac is encountering challenges in the US market, including competition from more affordable tequila and bourbon, as well as the repercussions of a tariff war between Beijing and the EU in China. The challenges currently being experienced by the holding company's formerly successful brands have led to the current situation.

As financial expert Pierre-Olivier Essig, head of research at AIR Capital, noted: "The global financial crisis and then the pandemic have been major challenges, but LVMH is now much larger in size, making the recent decline in market capitalisation unprecedented."
This is unquestionably the most significant crisis in the history of LVMH."
Meanwhile, the period of happiness was relatively recent – in April 2023, LVMH shares were at their peak value, and in March 2024, Arnault was ranked as the world's richest person. According to analysts, his net worth reached a maximum of $231 billion.
However, since then, the holding's shares have experienced a decline of almost 50%, reflecting losses of approximately €221 billion, resulting in a reduction of Arnault's net worth to approximately $150 billion. LVMH is no longer among the top three companies in Europe, or even the most valuable in France.
It is interesting to note that  title is now held by a rival company, Hermes, which was previously attempted to be acquired by Arnault in a clandestine deal that did not come to fruition.
Kering, the holding company that owns such renowned brands as Gucci, Yves Saint Laurent, Bottega Veneta and Balenciaga, has also been adversely affected by the decline in global demand for luxury goods. The decline in the purchase of these goods by China is responsible for the current situation.

Consequently, sales for 2024 experienced a decline of 12%. In the first quarter of this year, sales fell by 14%, and Gucci by as much as 24%. The owners then decided to appoint Luca di Meo as CEO, a move that proved to be a success, with di Meo rescuing the ailing conglomerate concern from the brink of collapse and subsequently driving its recovery, ensuring strong sales performance. The French press has already called di Meo's move "the transfer of the year in the French economic world", and before he even had time to start work, Kering shares confidently increased.
However, in the real world, wizardry is a rare skill, and there are not enough to go around. The Pernod Ricard holding, known as the "liqueur giant," is attempting to address declining sales through conventional measures, including cost-cutting, workforce reductions, and operational restructuring. The world's second-largest producer of alcoholic beverages (after Britain's Diageo) has expressed concerns regarding the challenging geopolitical climate, with a particular focus on China.

As reported by Le Figaro, the Chinese market is experiencing challenges due to sanctions imposed by Beijing starting in autumn 2024, in response to European measures against Chinese electric vehicles.
The uncertainty surrounding the Trump administration's final decision on US tariffs on EU products is a contributing factor to the prevailing sense of caution. Another cognac giant, Remy Martin, faced with falling sales, was forced to transfer some of its employees to a shorter working day.
A few years ago, Bernard Arnault made the following statement: "A company, even one that is successful, should be managed as if it could go bankrupt within 12 months." In 2016, when he made this statement, it was met with great approval. However, if current trends continue, it may become necessary for the billionaire to put his theory into practice.
France has expressed concern that China, which previously consumed a third of luxury goods, is shifting to a more economical consumption model. The luxury second-hand sector is expanding rapidly, offering significant savings for luxury enthusiasts.
Furthermore, China's stringent anti-Covid measures have prompted a rethink of lifestyle choices, with individuals opting to travel and allocate more funds to leisure activities rather than purchasing luxury items. Consequently, major Chinese shopping centres, which house luxury brands, are experiencing a decline in footfall and are becoming known as "ghost buildings", where "if you look closely, there are now more salespeople than customers". In the current climate of heightened tensions between China and the West, there is no indication there likely to be any change in the circumstances.Just remember they pulled out of the Russian market and lost billions and now due to EU sanctions and changing patterns they are about to lose the US and China markets.