LVMH, the world's largest luxury group and the first European company to top $500 billion in market value, is losing its standing. In China, the biggest market for luxury goods, a slowing economy has been compounded by guochao, a consumer preference for domestic brands, while prolonged conflict in the Middle East has weakened spending and tourism. Analysts say repeated price increases since the COVID-19 pandemic have driven away middle-class customers, leaving the group squeezed by both external shocks and the aftereffects of its own pricing strategy.
LVMH shares closed at 412.30 euros on the Paris bourse on the 17th, down 35.76% from 641.80 euros at the start of the year, according to Investing.com data cited on the 19th. The group, which became the first European company to surpass $500 billion in market value in 2023 on the back of post-pandemic revenge spending, has since dropped out of Europe's 10 most valuable companies. The current price is 54.24% below its all-time high of 901.10 euros on April 21, 2023, leaving the stock at less than half its peak in a little over three years.
Behind the slump is a shift in Chinese consumption, long the engine of global luxury growth. A prolonged property downturn and slowing growth have eroded Chinese households' capacity to buy high-end goods, and authorities have recently tightened taxation on overseas assets. Sales at 25 major luxury brands in China fell more than 10% in July from a year earlier, according to Bloomberg's tally of data from three research firms. Louis Vuitton, Dior, Gucci, Bottega Veneta and Balenciaga all posted double-digit declines.
The spread of guochao, a preference among Chinese consumers for homegrown brands, is another burden for Western luxury houses. A trademark dispute between Louis Vuitton, LVMH's flagship brand, and Chinese tea chain Molly Tea recently triggered a consumer backlash. Louis Vuitton won the suit, which it filed over alleged logo infringement, but online sentiment in China rallied behind the local brand. Research firm JL Warren Capital estimates Louis Vuitton's China sales fell about 30% in July and 20% to 25% in August from a year earlier.
In the Middle East, war has been a direct factor. LVMH said the conflict cut its first-quarter revenue growth rate by about 1 percentage point on an organic basis, which strips out currency and portfolio changes. In the second quarter, revenue growth was 4% excluding the effect of the war but 3% including it.
The renewed pressure the Middle East crisis is putting on oil prices and inflation is another drag on the industry. Inflationary pressure from higher crude prices and rising interest rates reduce household disposable income, which can curb discretionary spending on cyclical items such as clothing and handbags. Financial markets are increasingly worried that high oil prices and high interest rates from a drawn-out Middle East conflict could squeeze consumption.
The price barriers that LVMH and its peers built themselves are also weighing on growth. As revenge spending surged after the pandemic, luxury houses leaned on price increases rather than volume growth to lift revenue. More than 80% of the industry's growth since 2019 came from higher prices, according to McKinsey. But analysts say the cumulative increases have pushed price points beyond what first-time and occasional middle-class buyers can afford.
As a result, the so-called aspirational consumers who underpinned the market's scale have begun to leave. McKinsey concluded that price increases have reached their limit in the luxury market and that high prices are squeezing demand from aspirational shoppers. Bain & Company estimates about 60 million middle-class customers have exited the global luxury market in recent years. They are not the wealthy repeat buyers of ultra-high-end goods, but consumers who broadened the market's base by occasionally buying handbags, clothing and small leather goods. Bain said repeated price increases have raised the entry threshold at luxury brands too high for this group.
Brands with a base of top-tier customers whose purchasing power holds up through a downturn, by contrast, are faring relatively well, creating a widening divide within the sector. Hermes and Brunello Cucinelli, which draw heavily on ultra-high-income clients, have held up comparatively firmly. Richemont, the owner of Cartier and Van Cleef & Arpels, has seen its shares rise 28% over the past six months.
Small luxuries such as cosmetics, which offer satisfaction at a lower cost, are also gaining ground. L'Oreal recently displaced LVMH as the most valuable company on the French stock market. As of the 15th of this month, L'Oreal's market capitalization stood at about 203 billion euros, above LVMH's roughly 201 billion euros. L'Oreal shares have gained about 5% this year while LVMH has fallen more than 35%, reversing the two companies' ranking.
Market watchers read the shift as a "lipstick effect," in which consumers in a downturn shift spending from expensive goods to more affordable items such as cosmetics. "As the economic outlook worsens, consumers look for lower-priced items like lipstick instead of expensive handbags or clothing, and that is being reflected in the diverging share prices of the two companies," said Berenberg analyst Nick Anderson.
