Orchard Road buzzes with both locals and tourists on weekends, while weekdays are unexpectedly lively, especially for luxury retailers. On a typical Friday afternoon, shoppers can be seen browsing the first and upper levels of ION Orchard, which features major luxury brands.
These luxury brands with handbags costing thousands and jewellery that can go up to millions are not for the mass market, targeting only the high-net-worth individuals (HNWI) who can easily afford a four-figure bag and a weekday afternoon shopping trip.
Speaking to a staff of one of the luxury brand stores, The Edge Singapore understands that while September is not the busiest period of the year, the brand does see its loyal customers, mainly Singaporeans, coming by the store to make purchases.
In the luxury sector, tourists tend not to be significant spenders, often purchasing just one or two items occasionally. In contrast, locals are frequent buyers seeking to “build a relationship” with the brand and gain access to limited-edition or exclusive items. This trend is common among luxury brands, where customers must spend a certain amount to qualify for the opportunity to buy special-edition products.
For instance, this is common practice for the luxury brand Hermès globally, where customers have to spend several hundred thousand dollars with the brand — and in the same store — to build a “relationship” with the sales assistants. After a certain amount of money is spent, they could be eligible to purchase a Birkin or Kelly bag, one of the most sought-after bags in the market and not available for purchase off the shelves.
A recent report by Canvas8, a global strategic insights practice with expertise in cultural and behavioural trends, found that Southeast Asia is emerging as a transformative force in the worldwide luxury market, with its affluent consumers surpassing traditional high-end shopping hubs. The report, titled “How are Southeast Asian shoppers changing luxury?”, revealed that countries like Thailand and Vietnam are challenging Singapore’s dominance as a luxury shopping hub, demonstrating the region’s significant influence and evolving tastes in luxury consumption.
See also: Bulgari CEO sees China luxury market recovering in next two years
Southeast Asia’s luxury market is booming, driven by an increasing population of ultra-high-net-worth individuals (UHNWI). Countries like Singapore, Malaysia and Indonesia are leading this growth. Revenue from the Southeast Asian luxury market is estimated at US$16.01 billion ($21.13 billion) this year, a significant increase from US$14.38 billion in 2022.
The luxury market has always been touted as resilient, but with the global economic situation today, high interest rates and ongoing geopolitical tensions, will this affect the buying sentiment of the wealthy?
LVMH impacted by China slowdown
See also: LVMH's empty Chinese megastore signals deeper luxury crash
LVMH Moët Hennessy Louis Vuitton’s 3QFY2024 and 9MFY2023 ended September results showed that demand for luxury goods has slowed this year. Once seen as relatively inelastic, luxury has succumbed to the pressures of the marketplace. Much of the blame lies with China, and one way to play the Chinese bazooka story is to invest in European luxury retail.
“LVMH’s results in 3QFY2024 show deteriorating trends, and there was no improvement. The management is cautious about the situation, and the primary driver is the demand in China. In 1HFY2024, Chinese demand showed mid-single-digit growth; in 3QFY2024, Chinese demand fell by mid-single digits y-o-y,” observes Jelena Sokolova, London-based senior equity analyst at Morningstar.
“LVMH’s wide basket of luxury goods and global brands couldn’t cut through deteriorating consumer confidence in China in 3Q2024, even as Western markets gradually improved. Organic sales were flat in the quarter, a 400 bps miss versus consensus. Softness in fashion and leather is the biggest concern to profitability and its peers, and a clue to whether a lower pricing reset is due,” state Deborah Aitken and Andrea Fernando Leggieri, senior industry analyst and senior associate analyst for consumer products at Bloomberg Intelligence, respectively, in a research note.
To take a step back, LVMH is the largest listed luxury company by market capitalisation and is often viewed as a bellwether for the sector. LVMH owns more than 25 luxury brands. Its wines and spirits segment includes Moët & Chandon (champagne), Dom Pérignon (champagne), Veuve Clicquot (champagne), Hennessy (cognac), Belvedere (vodka), Glenmorangie (whisky), Ardbeg (whisky) and Château d’Yquem, Sauternes or dessert wine.
LVMH’s flagship fashion and leather offering is, of course, its namesake, Louis Vuitton. LVMH also owns Christian Dior, a separately listed company with a very low free float. Other well-known brands in the group include Fendi, Céline, Givenchy, Marc Jacobs, Loewe, Kenzo and Rimowa.
Perfumes and cosmetics are ways for the mass affluent market segment to familiarise themselves with high-end brands. Consumers who may not opt for haute couture readily buy Christian Dior perfumes. Other perfume and cosmetic brands owned by LVMH are Guerlain, Acqua di Parma, Benefit Cosmetics, Make Up For Ever and Fresh.
TAG Heuer, Hublot, Zenith and Bulgari are affordable brands in LVMH’s watches and jewellery division, and they sit comfortably with higher-priced jewellery brands Chaumet and Fred.
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On the mass market front, LVMH owns Sephora, Duty-Free Shops (DFS) and Le Bon Marché. Among other activities, LVMH owns Cova Montenapoleone (a café and pastry shop) and Royal Van Lent (a luxury yacht builder).
Fashion and leather goods contribute half of group sales and 75% of operating profit, with Christian Dior, headed by chairwoman and CEO Delphine Arnault, the daughter of LVMH chairman and CEO Bernard Arnault, an important contributor. In 3QFY2024, Christian Dior encountered challenges, which LVMH’s management attributed to costs.
In 9MFY2023, revenues from fashion and leather fell 3.2% y-o-y to CHF29.92 million ($45.4 million); selective retailing, which includes Sephora, rose marginally to CHF12.56 million. “Sephora’s strengths were in Europe and the US, while Duty-Free Shoppers (DFS) benefitted from international travel, even as full recovery is a 2025 prospect. Any pick-up in Asian travel and Chinese trips favours Asia-dependent DFS and Sephora (majority in-store beauty consultation), the two largest of its five houses in selective retailing,” Aitken and Leggieri note in their report. LVMH’s third-largest sector by revenue, watches and jewellery, fell by 5.2% y-o-y to CHF7.53 million in the nine months to Sept 30.
China’s property sector to blame
During a results call, LVMH’s group CFO Jean-Jacques Guiony said Chinese demand will recover when consumer confidence returns. China’s stimulus measures show that authorities are taking the issue seriously.
Data from the Federation of the Swiss Watch Industry shows that slumping Chinese demand continues to impact the Swiss watch sector. Swiss watch exports fell in September as shipments to China dropped by half, putting more pressure on the European country’s struggling luxury sector.
The Federation of the Swiss Watch Industry said on Oct 17 that exports of Swiss timepieces and watch movements declined by 12.4% y-o-y to about CHF1.9 billion in value, with China’s imports down 50%.
Bloomberg reports that the figures reveal the challenging environment for Swiss watchmakers as consumers worldwide cut back on pricey timepieces after a post-pandemic boom. According to Sokolova, the post-pandemic boom was attributed to extra savings from Europe and the US when consumers were stuck at home.
“Demand in the US and Europe has been declining for the last year due to unsustainably high demand from extra savings after the pandemic. This has stabilised at a low single-digit growth stage. The down cycle is likely to last for one to two years. After next year, there should be some potential for the luxury sector,” Sokolova says in an interview with The Edge Singapore.
The main problem with the demand for luxury goods in China is the property market unless the Chinese government creates a floor beneath residential property prices, including in its third-tier cities.
On Oct 17, China’s Ministry of Housing and Urban-Rural Development, the Ministry of Finance and other authorities announced new measures to stabilise the property market.
“We think the most significant directive pertains to upsized credit support to stalled projects, as overall funding will increase to over RMB4 trillion ($738.4 billion) by the end of 2024 with RMB2.2 billion in loans approved as of Oct 17. In our view, we expect an acceleration in loan disbursement with distressed developers receiving more funds, which should prop up homebuyers’ confidence. However, the market may be disappointed by the lack of new incremental stimulus, except reiteration of local governments’ autonomy to relax buying curbs,” says Jeff Zhang, equity analyst at Morningstar.
“We expect new home sale prices to bottom around mid-2025 with a mild rebound. This is supported by easing on borrowing costs, absorption of excess inventory and further fiscal support on property buying,” Zhang adds.
Chinese authorities have pledged to introduce cash subsidies for at least one million apartments for urban village and shantytown redevelopment. They also shared initiatives to allow local governments to purchase idle land from developers through special bond issuances or the central bank’s re-lending. Meanwhile, the ministries encouraged financial institutions to purchase bonds issued by property developers and insurance companies to invest in developers’ stocks.
“We believe these measures will provide renewed support to homebuilders’ credit quality,” Zhang says.
Other luxury stocks
Nearly all luxury companies (see Table 1) suffer from lower Chinese demand. As Sokolova explains, travel restrictions for the Chinese remained in place in 2022, even though other countries had resumed air travel by then.
“Chinese luxury consumption has not recovered to pre-pandemic levels. Americans and Europeans spent a lot after the pandemic because they did not travel during the crisis. However, they had payment cheques in the US from the government, and there was a feel-good factor. Demand in Europe spiked, and much of that was not from the typical luxury consumer,” Sokolova observed.
Since 2022, inflation has surged, and the cost of living crisis consumed both US and Europe. “The luxury sector increased prices as well. Demand in the US and Europe is falling, and there is nothing to offset the weakness in China because now the Chinese, US and Europe comprise 75% of the luxury market,” Sokolova says.
One stock stands out, though. Hermès. In 1HFY2024 ended June 30, revenue rose 12% to EUR7.5 million ($10.7 million); operating income grew 6.8% to EUR3.15 million, and net profit was 6.4% higher at EUR2.37 million. “The demographic for Hermès is the ultra-high net worth. Their supply is controlled and lower than the demand. However, their aspirational categories, such as the lower-priced silks and perfumes, are experiencing weaker demand,” Sokolova says.
Prada outperformed the S&P this year
On the other hand, Hermès’ share price has not been able to outperform the S&P 500 Index year-to-date. The dark horse is Prada, which has gained 26% since the start of the year, compared to the S&P 500’s 24%. However, over a 12-month period, the S&P 500 is up 41%.
“Prada isn’t positioned differently from Kering or LVMH, but the brand is very popular at the moment, and they are gaining market share compared to Kering and Burberry,” Sokolova observes.
Kering’s main brand is Gucci, which was very popular from 2015 to 2020 with distinct designs. People got tired of the designs, according to Sokolova. “They are trying to turn around, but they lost some of their clients who were supporters and generally, luxury brands depend on fashion cycles,” she says.
A stock that has severely underperformed the S&P 500 is Burberry. In September, Burberry was dropped from the FTSE 100 Index after its market capitalisation fell below the level required to keep its place. Famous for its trench coat, the brand was considered fashionable for aspirational consumers rather than the wealthy. Its new CEO, Joshua Schulman, was formerly CEO of Michael Kors, and investors fear that Burberry’s could go down-market. Bloomberg reports that Schulman has reassured the investing community that he will “stay the course on elevating the brand” but with a better price balance.
Waiting for the Chinese consumer
Sokolova reckons that when Chinese property prices recover, Chinese spending could rebound. “The Chinese are cautious about spending. If sentiment approves, if there’s stabilisation in the property sector and asset prices in China, there could be quite a strong rebound.”
Interestingly, The Edge Singapore learnt that half of Louis Vuitton’s customers at its ION Orchard boutique are tourists, particularly the Chinese and Australians. The ION Orchard boutique is popular among tourists because it carries the most stock in the Asia Pacific, and Singapore’s 7% tax return is a big bonus.
Neither does parent LVMH plan to change its offering drastically. “The current situation is more [lack of] demand driven than offer driven. We don’t think we should change strategy. We should continue to innovate, talk to our customers, and address aspirational customers who are less present than they used to be by introducing a new range of affordable products,” says CFO Guiony during the results call. “With the luxury offer, we want to remain true to our brand. We don’t want to change the offer. We keep with the idea that we should stay faithful to our recipes of success over the years.”
Surely, that will reassure regular visitors to LVMH’s many boutiques on ION Orchard’s upper floors, the myriads that throng Sephora in Basement 2 almost daily, and its investors.
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