Luxury Reshaped: How Kering’s China Bet & LVMH’s Pricing Discipline Are Redrawing the High-Fashion Economy
Strategic Reinvention in China
At the beginning of the month, French luxury group Kering joined Shanghai Fashion Week to launch Kering CRAFT (Creative Residency for Artisanship, Fashion and Technology) at the eighth China International Import Expo in Shanghai. With the help of Chinese designers, this initiative demonstrates Kering’s long-term vision towards a more sustainable future. More than just a cultural investment, the goal to build strong brands with local Chinese houses demonstrates efforts to scale globally. It also reinforces a strategic focus on China and the development of Chinese talent.
LVMH’s Financial Tightrope
Despite LVMH returning to 1% organic growth in Q3, its fashion and leather segment dropped approximately 2%. This reflects a shift in luxury pricing power as macro uncertainty continues. With no efforts to discount goods, these numbers reflect the world’s largest luxury conglomerate’s focus on entry-level luxury and operational efficiency instead of volume.
Macroeconomic Crosswinds
Broader economic headwinds include currency fluctuations, weaker tourist spending in Europe, and slowing demand in Asia. Naturally, exchange rate dynamics impact luxury demand. As the U.S. dollar remains weak against the euro, luxury prices in Europe remain unattractive for American tourists. In Japan, a historically weak yen made luxury shopping very attractive for foreign visitors (especially Chinese tourists), but the yen has strengthened, eroding that competitive advantage. As currencies continue to shift, luxury brands face challenges rooted in pricing and margin pressure. They can either absorb the cost and maintain sales (hurting margins), or raise local prices (risking lower volume). In the past, favorable currency differences enabled price arbitrage (tourists buying in one market, where goods were “cheaper” in their home-currency equivalent) but recent changes appear to result in negative impacts. As currency advantages disappear, major shopping destinations (Paris, Milan, Tokyo, etc.) see a reduced number of sales. Especially in European luxury hubs, tourist spending plays a big role in luxury sales. Despite the drop in tourist spending, brand image remains key. Hence, houses are reluctant to discount goods despite margins under pressure. Flagship stores and resort-city stores are especially threatened by this.
Due to weak macro fundamentals and declining consumer confidence, mainland China shows significant softness relating to luxury sales. Constrained spending from tighter personal income growth affects Chinese consumers as they appear more cautious in spending habits. As a result, timeless pieces are now most attractive. With China as the future-growth engine, changes in consumer behavior reduces both near-term revenue and long-term growth potential.
These issues combined make for the perfect storm. Under some scenarios, luxury value creation is expected to slow substantially, with only 1-3% annual growth projected for 2024-2027. That said, luxury companies may need to rethink their growth playbook from distribution (markets to prioritize) to pricing, to product mix (more timeless, less seasonal), to marketing (targeting high-net-worth instead of tourist shoppers).
Strategic Considerations
Houses should consider financial hedging tools or local pricing hedges to protect margins. They may also want to invest more in local demand and or deepen their presence to domestic ultra-high-net-worth customers. Another way to navigate these headwinds is to adjust the price tiers so luxury goods appear more accessible.
Future of Luxury Growth
The answer is pretty clear. Houses will need to evolve their model for a world where tourist arbitrage is less reliable, currency dynamics are more volatile, and growth in Asia is more complex. The houses that will come out on top will be the ones who prioritize strategic flexibility and increase customer focus.
What do you think?
