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China’s economy is seeing a slowdown, and it’s a big problem for luxury brands.

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🤔What’s going on?

China’s economy is seeing a slowdown, and it’s a big problem for luxury brands.

The nation’s economy grew by 4.7% in the second quarter of this year, which missed expert forecasts of 5.1%. It was also a dip from the 5.3% growth that was reported in the first quarter of 2024 and a big drop from the 2010s, when the country’s GDP consistently grew by between 6-10% every year.

Most recently, corporate earnings reports for luxury companies haven’t been so great when it comes to sales in China, as the nation’s sluggish economy has created a real drag on the appetite for expensive purchases, especially from European brands.

“The biggest challenge facing fashion brands is how to differentiate themselves in what is an ever-developing space. Of course, aesthetics play a part, but ultimately it is the customer experience that will be remembered and aid in developing brand loyalty,” explained Robert Lockyer, the Chief Client Officer for Delta Global, a high-end retail packaging company, to TMS.

👜What are some of the numbers?

LVMH, the largest luxury conglomerate in the world, reported on July 23 that the company only grew by 1% in the second quarter of this year. On its earnings call, it said that the slow growth was driven by tightening wallets in China. Chinese consumers who are searching for discounts are also traveling to Japan to buy luxury items for less because of the weaker yen, hurting the group’s profits.

Richemont, which is owned by Cartier, reported a 27% drop in sales in China, Hong Kong and Macau for its second quarter, and it barely recovered enough in other markets to cover the sales slowdown.

❓What does this mean?

According to consumer insights agency Canvas 8, the economy’s slowdown is changing people’s shopping behaviors.

For example, more young people are looking for deals through secondhand luxury sales. Others are even flaunting “virtual bling,” which is where they photoshop luxury items into their pics so they can flex without having to spend a cent.

With that said, though, brands that have switched up their offerings and strategies have found some success. Prada’s Miu Miu, a sister luxe brand that positions itself as more youthful, affordable and playful, grew by 89% in the first quarter of 2024 in retail sales compared to 58% in 2023. Miu Miu has become super popular in China, rising on Weibo’s Hot Search List. This increased popularity in Asia also boosted Prada Group’s overall net revenue by 16%.

🌏The bigger picture

Back in 2022, China’s luxury market contracted for the first time in five years with a 10% decline. That’s a pretty big deal when you consider it tripled in size from 2017 to 2021, according to Bain. And even though there was a bit of a “revenge shopping” rebound after COVID restrictions were eased, it was short-lived, mainly because of the slumping real estate market and slower-than-expected economic recovery. And now, major luxury brands like LVMH and Kering (the owner of Gucci) have reported sales declines in China this year. Even traditional gift-giving seasons, like the Lunar New Year, haven’t done much to boost luxury spending.

According to consultancy Bain, last year, China made up 16% of the world’s luxury sales, which comes out to a whopping US$63 billion. But this is still a drop compared to before the pandemic, which hit China’s luxury market hard.

Now, some analysts are predicting things won’t get better in China for luxury brands anytime soon because of lingering economic uncertainties and people being more cautious with their spending. But other experts expect some mild growth in the near future and are even more optimistic about the market’s long-term outlook, especially if companies adapt well to the changing landscape.

Ultimately, though, there are a few factors at play here, but three big ones stand out – tightening budgets due to China’s economic slowdown, a crackdown on “wealth-flaunting” and a growing individualism among younger generations.

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Some of the biggest Headlines this week

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📈Tech earnings rundown: A lot of big tech companies reported earnings this week. Some of the major developments include Apple’s return to growth, with it reporting iPhone revenue that beat expectations and helped make up for sales declines in China. Microsoft’s earnings were along the lines of what was expected, although it disappointed in its cloud revenue numbers. Meta reported a profit of US$13.5 billion, beating estimates and sending its shares up almost 7% with the news. Amazon’s report was weaker than expected, and it issued a not-so-rosy guidance, sending its shares down.

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