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Luxury feels the pinch as Louis Vuitton boss loses world’s richest spot and Gucci sees sales plunging

As the Chinese economy slows, the luxury goods sector is taking the pain for now but will it continue?

Gucci's parent warned this week first quarter sales would be 20 per cent lower than forecast. Photograph: Justin Shin/Getty Images for Gucci

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Joe Brennan
Fri Mar 22 2024 - 14:50

It’s of cold consolation, but the share slump at French fashion boss Francois-Henri Pinault’s Kering empire this week, after a profit warning, handbagged his arch-rival, Bernard Arnault, off the spot as the world’s richest man.

The animosity between both men goes back to 1999 when each was trying to buy the storied Gucci brand. Pinault’s careful manoeuvring would see him swipe control of the Italian fashion house from under the nose of Arnault’s LVMH Louis Vuitton Moët Hennessy.

Nowhere is the one-upmanship more obvious than in Paris, home to both conglomerates, where each has opened museums for the masses to view their rival art collections – and both have made very public donations to the rebuilding of the Notre Dame cathedral (LVMH and the Arnault family’s €200 million cheque eclipsed the Pinault family’s €100 million).

Shares in Kering, whose stable also includes the likes of Saint Laurent, Alexander McQueen and Balenciaga, plunged as much as 15 per cent on Wednesday after it said Gucci’s sales were set to slump about 20 per cent in the first quarter of the year, amid uncertainty around demand out of China.

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The alert hit the wider European luxury goods sector, with the industry stocks index handing back some of the 17 per cent gain it had made in the first 2½ months of the year. (While the sector had lagged the wider stock market last year, its surge so far in 2024 compares favourably with a 6 per cent advance by the pan-European Stoxx 600 index.)

There had been good reasons behind the advance. Earnings reports from the sector had largely been positive over the last few months, with Hermès, Cartier owner Richemont, and Swatch, whose watch brands span Omega to Longines, bolstering hopes the sector could avoid a slowdown in 2024.

Last year had seen leading analysts cut their earnings expectations for the sector as a result of a muted reopening of the Chinese economy and slowing demand in Europe and the US, as concerns about the wider economy hit more aspirational shoppers, even if high-net-worth individuals kept spending. The top 2 per cent of luxury customers – or what are referred to in the industry as very important clients (VICs) – accounted for an estimated 40 per cent of luxury sales last year, according to management consulting firm Bain.

Few industry doyennes were as upbeat on 2024 as Arnault, who forecast that LVMH sales would grow 8-10 per cent, continuing a trend from last year. While this marked a sharp slowdown from the 23 per cent post-Covid surge in 2022, it was well ahead of the 4 per cent growth that Bain had pencilled in for the industry this year.

LVMH’s surge of as much as 19 per cent so far in 2024 saw Arnault, known as the “wolf in cashmere” for his aggressive takeover moves, strut past Elon Musk and Jeff Bezos to become the world’s richest man, worth about $202 billion (€187 billion) as of last week, according to Forbes. LVMH’s 75 “houses” include Givenchy, Tiffany & Co and Dom Pérignon.

Arnault, whose family owns 48 per cent of the group, has since handed back the crown to Bezos, founder and executive chairman of Amazon.

Four weeks ago, Citigroup analysts declared that the “downgrade cycle might largely be over”. Now they’re less sure.

Does the Kering warning really mean the general boom in the personal luxury market – which reached a record $387 billion last year, with close to a quarter of consumption from Chinese consumers – has come to an end?

For now, analysts reckon much of Kering’s woes are Gucci specific, as it goes through a management and creative shake-up. James Grzinic at Jefferies said the brand’s more classic products, such as leather bags, were failing to resonate with consumers.

Others say it also remains to be seen whether all-important Asia-Pacific buyers would take to the new Gucci creative director Sabato de Sarno’s efforts to shift the brand identity from loud fashion to, as Bernstein’s Luca Solca put it, “quiet luxury”.

The jury is also out on the immediate outlook for the Chinese economy as four decades of almost double-digit annual gross domestic product (GDP) has ground to a halt. The International Monetary Fund estimates growth will slow from 5.2 per cent last year to 4.6 per cent in 2024 and fall further to 3.4 per cent by 2028.

The economic outlook may, if anything, be improving in the key US market, with officials from the Federal Reserve signalling this week they are becoming increasingly optimistic about the possibility of a “soft landing”, rather than a crash.

But this is an election year there. And US consumers tend to be more cautious on spending before they go to polling stations.

After a broad-based advance by stocks across the sector so far this year, analysts from JP Morgan to Bank of America, say it’s now time to parse through the racks for more high-end heritage luxury labels rather than turnaround stories like Kering, Burberry and Salvatore Ferragamo.

JP Morgan said in a note this week on luxury goods – titled Not All Are Created Equal – that Hermès and LVMH are its top European picks in the sector.

At LVMH, Arnault, who turned 75 earlier this month, laid the groundwork for succession planning on Thursday evening by announcing that his 69-year-old deputy Toni Belloni, who had worked alongside him for close to a quarter of a century, is stepping down as second-in-command. He’s been replaced by Stephane Bianchi, who was hired by the group six years ago and is a decade younger.

Arnault is shuffling the deckchairs elsewhere, too. Shareholders will vote at the company’s annual general meeting next month on the proposed appointments of two of his’s sons to the board, where they would join another brother and a sister.

Not that Arnault seems to have any immediate plans to step down – having pushed through a resolution at an agm two years ago to extend the age limit for him to serve as CEO from 75 to 80.

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