Inside Luxury's Slowdown

0:07Hello and welcome to The Debrief from the Business of Fashion, where each week we dive into BOF professionals' most impactful stories with the correspondents who wrote them. I'm executive editor Brian Baskin. Today we're tackling a major shift in the luxury sector that surprised even seasoned watchers of the industry. For about a decade, brands such as Louis Vuitton, Gucci, Chanel, and Hermes experienced what seemed like limitless growth. They doubled prices on some of their most popular products and people kept shopping. And then sometime in the last couple years, something changed. A few reports of slowing sales here and there turned into a quarterly firestorm of disappointing revenue and profits.

0:47And it seems like things are only getting worse if the latest results are any indication. Joining to discuss what's behind this downturn and how luxury is finding its way out is BOF's luxury editor, Robert Williams. Robert, welcome to the Debrief podcast. Thanks so much for having me, Brian. Robert, let's start with this last round of earnings, what did we learn? Well, this Q3 print was definitely not stellar. We saw that some groups managed to be relatively resilient in their top line. The biggest groups, namely, well, the biggest, LVMH, was down 5%, which is not an enormous decline, but it's certainly a very different dynamic than what we're used to seeing with them.

1:34They had kept up so consistently double-digit growth since 2015, 2016. And they actually missed expectations, right? Which is very rare for them. Yes, people thought they were going to do a bit better. LVMH, yeah, they were down 5 % for fashion. I think when you take into account some of their other categories like drinks, cosmetics, some things that were a little bit less impacted, and then also account for like currency shifts, it was flat overall. But down 5 % for fashion was pretty surprising to a lot of people in the industry. Because when you're talking about LVMH, the average for the growth is going to be so impacted by whatever Louis Vuitton does.

2:18Because that brand is by far their biggest. And that's a brand that just has such a huge power in terms of marketing, real estate, talent. They are really well positioned to make the numbers every quarter. So to see them in retreat is certainly a surprise. But they're definitely not the worst hit. I mean, there's other brands that have reported recently that make Louis Vuitton look great, right? Oh, yeah, exactly. I mean, Louis Vuitton, LVMH being at minus five pales in comparison to how bad it's gotten at Gucci. Gucci, I think, was down by a little bit less than 20 % in the first half of the year.

2:57And that really deepened to minus 25 % for the third quarter almost. And that's coming on top of a pretty bad quarter the year before. So, I mean, it's a business that's contracted quite rapidly. And, you know, all the discourse and the talking with them is still about how they're planning to relaunch and not really about cuts and restructuring. But if things don't turn around soon, I mean, the brand is going to have to change the way it operates quite radically in terms of headcount, the store footprint. And they even started to tease that they would start closing stores during their last three Q results.

3:35Luxury hasn't gone through a rough stretch like this in quite some time. What are the main causes for these declines? Well, I mean, the biggest cause is going to be the economy. luxury goods are the kind of things that people think about buying for a long time. These brands are omnipresent and people are seeing them everywhere. And then they're thinking about finally splurging on something for a long time. And whether they finally kind of pull the trigger is so much about like their economic confidence, this feel good factor, you know, are things going to be better for me next month or the next month than they are today.

4:12And so this economic optimism has been really lacking. In the US, an election cycle really doesn't help for that. It creates a lot of uncertainty where people tend to be a little bit more conservative. At least that's always been the prevailing narrative in people who study this kind of cyclical business that election years in most places are not great. And then in the US, you have the lingering impacts of the inflation. You have wage growth kind of slowing and job growth slowing a bit. So has the inflation, but maybe not enough for people to start wanting to splurge again the way they were during the pandemic, where that kind of purchase didn't have to compete with as much travel, restaurants, yoga studio memberships.

4:55There were all these other expenses people weren't doing that now have come back in full force. And then the economy isn't really improving at a rate that can allow them to continue to also buy so much stuff. It's a pretty similar situation in Europe with the added impact of the geopolitical issues, the proximity to the Middle East, having Ukraine and the crisis in Ukraine so nearby. And you also have had none of the kind of rapid wage growth and wealth creation that the US has seen over the past few years in Europe. And then the biggest issue and why this quarter was so much worse than the quarters before was China, where people are just really pulling back on this kind of spending.

5:44Let's talk a little more about China. Why is luxury spending falling so much more dramatically there than these other regions that we've discussed? You know, China was the growth engine for luxury for a very long time, but a lot of that business was done abroad. So Chinese travel, these dynamics of people buying when they were abroad at a duty-free price in wherever the prices were the lowest at the time because of exchange rate shifts or just because they're usually cheaper in Europe. People were buying things there and then reselling them in China. So during the pandemic, brands really tried to repatriate a lot of that business and to get Chinese people to go shopping more close to home.

6:26And with the wealthiest Chinese people, that did work to a certain extent, even with this COVID recovery that they had that was really in fits and starts, not going from reopening to moderate lockdowns, more going from reopenings to very strict lockdowns again. Even with that, the highest spending Chinese people continue to buy a lot of luxury goods. But then with the broader base of consumers who buy, sometimes they're really holding out for when they feel better about the economy, when they feel like things are looking up for them again, and they're holding out for when they can maybe feel like they could get a deal again, because prices are higher in China than in most of the world for luxury brands.

7:13There's also just a sense that it's not really the appropriate time to be spending on luxury. You know, a lot of people are still making money and employed or still doing well economically there, even though the economic recovery has not been terrific. There's a lot of people who are doing well enough to be saving quite a lot of money. They don't feel like it's the appropriate time to be kind of splashing out on these nice things that are really ostentatious with logos. It doesn't feel like it's the vibe there. They just don't have this kind of optimism or certainty about the future that makes people want to go out and spend money this way.

7:48And I'm sure brands would love to blame their recent performance entirely on these cyclical issues on the economy and the election and the war in Ukraine. But they made some decisions that if they didn't cause the downturn, at least exacerbated it. And I think that starts with the price hikes that we've seen in recent years. Yeah, that was a big part of the story that we published recently with my colleague Simone Stern about luxury slowdown is that, you know, these historical drivers about the macroeconomic issues, that those were only part of the story. Customers are also just quite fed up with how dramatic the price increases have been, often for like-for-like products.

8:31There's brands who are making sure that they're upscaling in a way, that when they introduce a more expensive product, there's also something visibly better about it. But I think to customers, that feels like it's the exception, not the rule. Often you're paying a lot more money. and with this discourse about the quality declines that you see on TikTok people often feel like they're spending a lot more money for something that's not necessarily as good it's often debated whether or not the quality has really gone down among different brands but it's true now at least in terms of perception because the way social media works and our internet culture works if someone has an issue with the product, they can make that so public in a way and really disenchant a lot of people in their audience and make them question, is this high price worth it?

9:26And there's plenty of products where the price went up, but the product itself remained the same, right? I mean, that story, which was excellent, by the way, it opened with the Lady Dior bag, which you said now retails for 5 ,900 euros up 76 % since 2019. And that's for the exact same product that you could have gotten five years ago, right? Yeah, that's hard for people to digest. I think brands had some drivers for the price hikes that were either necessary or strategic. There are a lot of things going on in the supply chain that are driving up costs. In Italy, you have sort of a generational change with a lot of suppliers reaching retirement age or getting older and wanting to be able to hand over the business, but younger generations not wanting to kind of work under those same conditions.

10:16So people really need to invest in like bigger, better factories with better benefits for workers. They need to really put a lot more money into the supply chain at every level to keep producing things the way they need to be made for a luxury brand compared to what they had to spend in the past. And with the labor issues, the virus issues during COVID and the different shipping and supply chain holdups, there was a real inflation factor that they were adjusting for. then you also had other things like this sense about wanting to avoid too much ubiquity and brands like seeming too banal because of seeing the brand everywhere with the way household wealth and disposable income was really surging in certain places notably the u.s after the pandemic that was creating a situation where maybe the percentage of people you knew who were able to buy a bag with a luxury logo on it was suddenly getting a lot bigger, or at least the percentage of people you knew that had recently done so.

11:22So these things, in order for them to keep feeling special, aspirational, some brands felt like for their flagship most important items, something like the Lady Dior, which has been the bestseller for more than two, maybe three decades at Dior, they felt like that really needed to get pushed up. And then of course, there's just a factor of wanting to take advantage of the situation. If you had lines in front of every luxury to store, a lot of business owners would say, well, it seems like I could sell this for a lot more money. And maybe people want it even more because it's expensive. Because paradoxically, that is sometimes the case with luxury.

11:59And that's fair. Although I guess it puts them in a bit of a bind because it's harder in some ways for a luxury brand to then cut prices or offer discounts. That's something they definitely got away from in these boom years. Yeah, brands don't want to start doing sale again. They really don't want to start having seasonal sales and have people used to the idea that if I hold out for a few more months, I will get the same item for 30 % or 40 % less. So brands really worked hard during this last cycle of growth to clean up their distribution and have like a lot of control and have as much full price sell through as possible.

12:39So sales are a real challenge for them in terms of perception. And then truly like actually cutting prices is a huge no, no. I mean, it sends a message to people like, oh, you're admitting it's not worth the money. And it never was. Instead, I think now the vibe has really changed what people are willing to spend on physical stuff and the same stuff, you know, it's not the same as it was a couple of years ago. And they have to kind of wait for customers and their income and the economy to grow in to the price architecture that they've set. You can't really cut prices. So you kind of have to wait it out to a certain extent.

13:23And so then what's a brand like Dior, let's say, to do in the meantime while they're waiting for customers to get used to the idea of that 5 ,900 euro lady Dior bag? yeah i mean they can take a hit they can have a pretty rough year as a lot of them are having right now they can also introduce new products at a slightly lower price point if it's within the same category is something they have to do quite cautiously and can't do too overtly because there's a sense that a brand should have a coherent price architecture and so if you introduce a new design for the same size or similar handbag, you know, if it's similar in some way, but it's a lot less expensive and there's no obvious reason why it's not great.

14:10So you have to be quite subtle about this. And brands usually try to, you know, they can play with that sort of price change a little bit, but only so much. And then otherwise you can release much simpler products. I mean, in 2015-16 when China was bouncing back from a previous slowdown they really pushed mini bags and you know the idea of little crossbody bags being like the way people wanted to dress and it being such a silhouette that was in part created by the fact that like a cell phone makes one more thing to carry for a lot of guys people want to be out of the street you know that look that utility look was an aesthetic thing that came from the street in some ways, but it was certainly also encouraged from the top because little tiny bags are a great way to have a really high profit item if you're a luxury brand.

15:06That's because it has this appeal to a wide audience. You know, a lot of people can afford it, but it's not challenging the idea that your big flagship bags are worth this really high price. We'll be back with more of The Debrief right after this.

15:28What are you seeing out there right now? What's the 2024 equivalent of that crossbody bag trend? I think one reason the industry is not doing great right now is that they haven't really landed on one. I mean, there isn't an accessible trend right now that is super compelling coming from any of these brands. I don't think people can get but so excited for like, you know, a 300 euro key ring, which you do see things like 250 and 300 euro key rings. You see things like 600 euro iPhone case. These are things you see. And, you know, yes, it is at a price point where in theory more people could afford it, but it's still not like having the value perception to really draw people in.

16:14Of course, another sort of accessible category that brands used a lot in the past few years was streetwear and this fusion of luxury and athletic wear and merch. that sort of fusion aesthetic was really powerful tool for brands to sell on the one hand, some very expensive, ready to wear, creative, complex pieces, demi couture, expensive, large, nice handbags, and then still have something there that's relevant for all of these young people that are finding out about your brand online, coming to stores like the Balenciaga baseball caps and t-shirts. But that is not really hitting right now either.

16:56That's a card they continue to play during these recent boom years. Could beauty potentially fill that role? We've seen so many big luxury brands launch beauty or expand into new beauty categories. That seems to hit that sweet spot of a relatively cheap product that still contributes meaningfully to a brand. I mean, that is the role of perfume and beauty in a lot of brand structure since decades. There's a lot of brands out there that have had periodic real declines. You had luxury brands that had beauty businesses that were much bigger than their fashion business often because the market for couture or for very expensive handbags just wasn't that big compared to the market for a$30 lipstick that trades on that high luxury brand.

17:44image. I think it all depends on if they approach this category in smart and creative ways. Two brands that are getting into it right now more are Bottega Veneta and Loewe. I think they're really well positioned to offer more products in beauty and perfume because they've invested so much in kind of their brand clout in recent years. And I think they have a much bigger audience than is the addressable market for such an expensive leather good. So Loewe had a party last night, Paris for a new perfume they're launching. Bottega Veneta launched a whole new line of perfumes. They're super expensive for perfume, the one Bottega Veneta did, but it's still a stepping stone that could allow a younger or less wealthy person to stay engaged with the brand.

18:30I'm glad you brought up those two brands because they have both reported continued growth throughout this period or for most of it. And Miu Miu is another one that comes to mind. I mean, are they doing right? Why are things working for them right now and seemingly nobody else? You know, those are brands that have a really strong identity right now, that have a strong, clear identity. I think they have people understanding that identity. And then they're quite good at expressing it through both novel and creative initiatives, new designs, new products that can get people really excited. And through something that's a bit more classic, something that seems like it has enduring value, they're kind of often able to play it both ways.

19:18In the case of Loewe, almost all of the design and merchandising is recent. There's no like old designs that are coming from before the Jonathan Anderson era, but that's an increasingly established aesthetic. He's been there for more than 10 years. And those bags, they have a look to them that says that they have design value, craftsmanship. They have a lot of different elements they can trade on in terms of the actual item. But then I think what's more interesting in a lot of ways is the way they contextualize themselves. These are brands that are talking about the world, about art, about culture, about design, cinema, that are really taking points of views that I think feel quite authentic to people when they see the marketing and the engagements, the things these brands do.

20:10In Jonathan Anderson, he did the costumes for challengers. And that's a huge marketing coup for them. I mean, that was such a huge, sexy movie. I mean, it was a movie that was in so many ways that was about tennis and about strategy, about marriage, about a lot of things. But it was also just so much about desire with the way it was filmed and the way it was cast. And then that's what luxury and fashion is about in so many ways. So the crossover was great and it was really authentic. You still have Josh O 'Connor showing up to every Loewe fashion show and event. And he's an ambassador of the house.

20:50He has a contract with them to a certain degree. He's paid to be there, but it doesn't feel fake or phony in the same way a lot of brands kind of activations with something like cinema do. The same could definitely be said with Mewcha Prada. With Mew Mew, they have these literary clubs and all these partnerships with contemporary art. How much that's really reaching a huge audience isn't clear, but you definitely have sort of this aura of cultural authority around Mew Mew and Prada that is something they certainly trade on and allows them to sell much more audacious products than other fashion brands maybe could get away with.

21:31Is this what's driving all of these changes we've been seeing with creative directors and executives at big luxury brands? Are they trying to find the right combination of the creative with that singular vision and then an executive who can actually sell that in the form of products? Yeah, that's the real challenge now is finding the right team to open up kind of a new cycle. You know, this post-pandemic cycle of growth is over. And so now they have to figure out what's the next cycle going to be. And I don't think a lot of people have the right answer to that. Even Prada, which has been so resilient throughout this slowdown last year and this year, you know, it's slowing down quite significantly.

22:15the Prada brand. The group is still pretty hot because of how crazy the numbers have been at MiuMiu. But Prada is a brand which still feels so authoritative in terms of design and marketing and quite relevant. Even they are kind of reaching an end of a cycle economically, it looks like. And so everyone in the industry is thinking, what's the next big thing? And who is the right team to find that or be able to jump on it if someone else finds it. And as we wrap up, do you think that moment is close? You know, whether I'm not going to ask you to predict what that next big thing is. I think if you knew you'd be running one of these brands, but do you see green shoots?

22:57Do you see a sign that maybe some hope is right around the corner? I wish. Honestly, the vibes of the industry are not super optimistic right now. I think most people are forecasting that 2025 will be a pretty stagnant or even negative year. And 2026 could be pretty lackluster as well. I mean, the brands are coming down off of this crazy high of having grown so much, having been able to raise their prices so much. And so now, even if it wasn't just a question of the prices, or even if there weren't these other macroeconomic factors, there could be a sense of having saturated the market a bit. You kind of maybe need to let people be bored with fashion a bit so that then they can rediscover it.

23:47You know, I'm not sure that it's the right time to introduce the next big idea if you were the one who had it. But there is definitely a lot of turnover right now. And then how brands are going to support the ideas and the outcomes and kind of what comes out of all this turnover is what's really unclear Because if you're among the brands whose sales are quite negative this year and whose profits are maybe very negative, not necessarily very negative, like very loss making, but getting close to zero for some of them, then how much can you really invest in telling the world that you're the one who has the next big idea?

24:28I mean, these sort of like shock and awe rebrands that you would see a few years ago where a brand would take a new designer and then overhaul the marketing and then just really plaster it everywhere and make it take off quite quickly, make a huge statement. It doesn't really feel like that's happening right now. Totally. I think what you say does make sense from a creative process level, but for these brands that answer to investors with quarterly results, it's, it's probably pretty hard to say, Hey, just give us, give us a year, maybe two years of, of falling sales and, and losses and, and we'll, we'll get back to you.

25:06Yeah, it's tough. Luckily they have family shareholders, most of them a controlling shareholder. So they're not really at the whims of the market to the same extent with only a few exceptions. but it is an industry where everyone working in the industry, everyone working with the industry and the investors have all gotten used to really consistent profitable growth. And when it's not the case, it's a tough pill to swallow. But I mean, this thing about kind of finding the new aesthetic and the next big thing, they're kind of stuck in a very weird position when it comes to that because the price hikes really play into it or kind of intertwined with creativity.

25:50Because now so many customers are going to be really having a hawk eye on the price per wear when they go into these stores. The prices are so high. And I think they're still really willing to swallow that price in the case of the most wearable, iconic products. The only thing that It seems like it's really getting a lot of traction with Gucci lately. You still see a lot of people with a new pair of Gucci loafers. The price has gone up significantly, but it's still not that tough of a sell because people are like, well, yeah, it's such a classic. You can wear that a lot. The same goes for some of the Louis Vuitton canvas items, the canvas tote bags like the Neverfull.

26:33That's something I think it's more than doubled since 2019 or certainly close. It's a much more expensive bag than it was a few years ago. And people still seem to think that that's worth it because I think they know they can wear it a lot and then they could resell it. If you're a creative trying to introduce an exciting new aesthetic to get people coming to stores again, to get people talking about your brand again, it's hard to then connect that creativity to shoppers and what they're interested in. Robert, thank you so much for joining us today. Thank you so much for having me. Be sure to check out Robert's article, Inside Luxury's Slowdown, written with Simone Stern Carbone, available at businessoffashion.com.

27:18You've been listening to The Debrief, produced by Olivia Davies, edited and mixed by Eric Bria, and I'm Brian Baskin. We'll be back next week with a new episode. Thank you so much for joining us and be sure to follow us wherever you get your podcasts.