US luxury sales are flatlining as the pandemic-era boom wears off
According to luxury’s recent first-quarter earnings, the US is no longer the growth horse as attention turns to China’s rebound.
Published Apr, 27 2023
After a luxury boom in the US, sales are flatlining, casting a pall on the region’s outlook.
Yesterday, Kering reported that North American sales were down 18 per cent, flagging the slip as a weakness across all brands, particularly on the aspirational end. Ferragamo’s North American overall net sales decreased 19.8 per cent. “In terms of the retail landscape, there has been a softening of the environment in the US with reduced traffic compared to last year,” CEO Marco Gobbetti told investors.
Hermès also reported slowed first-quarter revenue growth from the Americas at 19 per cent, down from 40.8 per cent in Q4, though said there was still “good momentum” in the US. In March, according to US government data, American consumers cut their retail spending for the second month in a row, a lull reflected in luxury’s financial results.
LVMH’s US growth stayed steady from the previous quarter, with “good but softer” revenues. “The business is slowing down a bit due to a bigger share of the business taking place outside of the US, but also due to the fact that the local business seems to be slowing down,” LVMH CFO Jean-Jacques Guiony said on the 12 April earnings call. Though nothing to write home about, he said, it’s difficult for the company to draw perspective for the rest of the year.
To Jessica Ramirez, senior analyst at research firm Jane Hali & Associates, the US slowdown is more a matter of normalisation than decline, relative to the exceedingly high sales since the pandemic. “We’re coming down to where retail really stands,” she says. Tapping into Guiony’s sentiment, she says that “year-over-year, Q1 and Q2 are likely to be difficult in terms of comparisons.”
China, meanwhile, is rebounding even faster than expected after lifting its Covid restrictions earlier this year. LVMH’s Guiony attributed its solid financials to a rebound in China. Hermès highlighted a “very good Chinese New Year” when reporting its 23 per cent growth in Asia sales in Q1. “China spend in the luxury segment is coming back after the last two years,” Karla Martin, managing director for the fashion apparel and footwear practice at Deloitte, says. “Probably at a faster rate than spend in the US across all categories we would define as luxury.”
As China’s post-lockdown reopening sets the country up for a rebound, Chinese tourists are travelling again — more than they have in the last two years, Martin says — including to the US. Given this, major metros like New York and Los Angeles are likely to see an increase in growth and spend. This will be driven primarily by the very important client section of Chinese tourists, according to Martin. “This is typically defined as those tourists that not only spend a lot on the travel itself, but use the travel as a shopping vacation.” That said, Europe is likely to see a much larger impact from Chinese tourism than the US, Ramirez of Jane Hali & Associates cautions. Given the strength of the US dollar, US tourists are also likely to spend in Europe over this time.
Tourists may flock to the big cities, but there’s been a shift within the US towards non-major metros. “Over the pandemic, we saw a transfer of folks — particularly millennials and Gen Z — who had money and propensity to buy, moving from places like San Francisco to places like Austin,” Martin says. “The net personal income and disposable income in those cities went up.” For this reason, luxury brands directed more inventory to department stores in those cities, and retailers were more inclined to focus more advertising dollars there.
Martin doesn’t expect the current dip to completely revert this shift, as buyers at the top of the luxury market, while not recession-proof, are less inclined to change their buying habits with increased inflation. It’s newer luxury buyers and those purchasing in the aspirational luxury category that are likely to tighten up amid the current uncertainty. Kering attributed its US slowdown to this factor — and expects that it will pick back up. “It’s a sign that weakness is with the more aspirational cohort,” CFO Jean-Marc Duplaix said during yesterday’s earnings call. “We are convinced that they will come back.”
However, brands are accounting for a pullback. “We’ve seen in the last slate of earnings calls that US brands across the board are tightening up new store openings and changing assortments,” Deloitte’s Martin says. “For stores that were expected to be opened in, say, Tulsa or Atlanta, they may open one instead of two or three.” They’ve not halted completely. Hermès, for instance, opened its 40th US store in Naples, Florida during the first quarter, following its new 20,250-square-foot Madison Avenue store in October 2022.