What: China is sneezing and luxury brands are catching a cold.

Why it is important: This impacts all retailers involved with luxury brands in the world.

The luxury fashion industry in Europe is facing uncertainty due to subdued demand from China, impacting major brands differently. Kering reported a significant drop in first-half profits, attributing it to low demand in Asia, particularly China, alongside challenges in revitalizing its Gucci label. This announcement led to a six-year low in its share prices. Similarly, Ermenegildo Zegna experienced a decline in revenues in the first quarter due to poor performance of its Thom Browne brand in the Greater China region.

Contrastingly, Prada has seen strong demand for its Miu Miu brand and continued growth in Asia. Moncler and Hermes are expected to report their earnings soon, which could provide further insights into the sector's health. Despite positive reports from LVMH and L'Oréal, concerns remain about the Chinese market's recovery and its impact on luxury brands that have heavily invested in the region. Deloitte's Ira Kalish highlighted several economic challenges in China, including a property crisis and trade disputes, which could slow growth. The luxury market in China, which saw substantial growth from 2017 to 2021, now faces a tougher environment where only the strongest brands may thrive.

Industry leaders are hopeful for Chinese government stimulus to rejuvenate consumer confidence and spending. Meanwhile, brands like Chanel, Hermes, and LVMH’s Louis Vuitton, with a stable clientele of older, wealthier consumers, are well-placed to weather the storm by enhancing marketing efforts and retail experiences.

LVMH remains committed to expanding in mainland China, despite internal debates about the pace of growth. Kering is also adapting by strengthening its local management and resuming in-store activities, though it acknowledges that results from these efforts will take time to materialize.

China’s prolonged recovery shadows luxury sector’s future