Luxury goods seemed immune to economic woes, but their shine may be fading. During the pandemic, the luxury market thrived as the wealthy – undeterred by price hikes – splurged on Birkin bags and expensive watches. However, signs now point to a slowdown in the luxury boom of the “roaring 20s.”
In China, for example, the sales boom that occurred in early 2023 did not last long. The country’s slow economic recovery and global uncertainty have contributed to a decline in luxury spending. According to Claudia D’Arpizio of Bain & Co, an expert in the field, despite initial resistance, luxury markets are facing challenges due to geopolitical changes and low consumer confidence.
These turbulences have affected large companies such as LVMH, the conglomerate behind Dior and Louis Vuitton. Its revenue growth in the third quarter has slowed compared to a year earlier, setting a pattern echoed by rivals such as Kering, which owns Gucci, and Burberry.
The complexity of the current luxury market landscape leads to questioning about the true trajectory amid conflicting reports on earnings and spending relaxation. What is really happening in the world of opulence?
The pandemic marked the height of luxury: savings accumulated thanks to stimulus checks and furlough plans bolstered shoppers’ purchasing power, but left them fewer avenues to treat themselves amid travel bans and lockouts. That’s when many turned to luxury goods and bought more champagne and designer handbags than before. The magnitude of the luxury category’s growth during the pandemic is reflected in Deloitte data, which shows that the top 100 luxury companies became larger and more profitable than ever in fiscal 2022.
Then, as interest rates and inflation rose, consumers began to tighten their belts and be more vigilant about where they spent their money. The pandemic-era spending did wonders for luxury companies’ profit margins, but it was never intended to be the new normal. If anything, that was an anomaly, and the moderation in growth we see today reflects a gradual realignment of what used to be the norm before COVID-19.
“Fundamentally, it is not sustainable, nor should it be,” according to Flavio Cereda, investment manager at Zurich-based asset management firm GAM, referring to the high growth rates seen in the luxury segment. “I think what you see this year is this slowdown, which is a process towards normalization. It seems worse than it is because it comes from a very high level.”
Luxury company executives have also pointed out that the apparent slowdown is nothing more than a throwback to how things were before, rather than a totally catastrophic scenario for luxury goods as a whole. Johann Rupert, president of Richemont, noted in last month’s half-year results release that there was a “widespread normalization of market growth expectations across the sector.”
The data also corroborates this: in all luxury categories worldwide, it is estimated that the consumption of the luxury industry in 2023 will be about 1.5 trillion euros (1.62 trillion dollars), according to the report from the Bain & Co. Long Live Luxury sector for November.
The decline in spending in some luxury segments reflects the ebb and flow of shopper preferences and their appetite for discretionary goods in the current economic environment. But in the opinion of Tema ETFs’ Lastra, consumers are splurging on a different type of luxury than in recent years.
“Consumers are spending now on other things,” Lastra said. “It is, therefore, a question of portfolio distribution, rather than job losses or the pressure of interest rates, which is having an influence.”
This could mean a boost in categories such as travel, hospitality and cruises as tourist flow increases. As a result of increased tourism, luxury goods purchases could also benefit, although to less stratospheric degrees, Bain & Co. predicts.
With signs pointing in different directions, it’s clear that next year for luxury will mark a makeover that began in 2023. HSBC warned in a late November note that because luxury is linked to consumer confidence, tourism and equity markets, a more modest pace of growth could remain “challenging” for luxury in 2024.
But on the bright side, the luxury industry is more resilient compared to other consumer sectors of the economy. “One of the reasons why one wants to invest in this sector is the rise of the upper middle class around the world, and that is a fantastic tailwind for all these companies” Lastra said.