Luxury has lost 251 billion euros in value amid the China crisis And the situation does not appear ready to improve

The relationship between European luxury and the Chinese market is a love story not unlike Pride and Prejudice: two parties who love each other but keep stumbling over misunderstandings, mix-ups, and changes of plan. It is well known that for economic reasons, as well as matters of culture and policy, Chinese consumers have stopped buying European luxury goods en masse. And the luxury sector is both trying to attract Chinese consumers even more — consumers who are currently under severe economic pressure — and continuing to run into diplomatic incidents and unwanted situations that fuel ill will. As the Financial Times reported in recent days, this ill will comes at a steep price: 251 billion euros wiped from the market capitalisation of Europe's six leading luxury groups this year. It is a serious problem.

Love and Pain

This week alone, Hermès organised a grand exhibition in Hong Kong and Zegna announced an upcoming show in Shanghai, while — between Louis Vuitton's lawsuit against Molly Tea and an ill-timed comment from Dior ambassador Kylian Mbappé — relations between LVMH and China are growing ever more complicated. To give one example, LVMH has seen its market capitalisation shrink by 131.6 billion euros. And for Kering, Hermès (whose market cap has fallen by 93.3 billion euros), and the Prada Group, the Chinese market has begun to look more and more like a puzzle. And yet there are things the luxury sector can do about it, alongside forces beyond its control.

For over a decade, the Chinese market was an inexhaustible source of sales. Inexhaustible until now. According to the Financial Times, monthly retail sales growth in the world's second-largest economy has averaged less than 0.5% over the past six months. And in the latest round of quarterly reports, the deterioration in China sales is directly linked to the commercial stagnation — if not outright contraction — in which so many have found themselves. According to Hermès CFO Eric du Halgouët, the recent decline in Chinese stock markets, combined with a tightening of controls on wealth held abroad, has made the environment more challenging.

This week, a policy came into force in China requiring wealthy individuals to declare their assets held overseas and pay the government a 20% tax on dividends and interest generated by offshore trusts. Meanwhile, the CSI 300 index, which tracks China's three hundred largest listed companies, has lost 19% over the past four months, equivalent to a value contraction of more than 2 trillion dollars, while the prospect of an AI bubble burst is looking increasingly real. That said, this should not lead one to think that growth has stopped altogether. It has stopped for fashion: ultra-exclusive products such as  Birkins, but also fine jewellery and luxury watches, are in fact continuing to grow.

A Broader Problem?

In fact, even in the United States — which had supported the sector at the start of the year — the cooling of stock markets and rising petrol prices are making themselves felt. Looking at the quarterly reports, a clear deceleration between the first and third quarters is evident for Kering (from +9% to +1%) and Moncler (from +7% to +2%), while Puig accelerated in the most recent quarter.

For Prada and LVMH, sales held up but at a more moderate pace. With few signs of recovery in the sector's most important markets, according to Bernstein's Solca, most luxury companies have little choice but to focus on operational efficiency while they wait for consumers to return.