Luxury stocks fall as concerns grow about consumer spending

Many retailers are seeing consumers become more cautious with their spending. Luxury retailers had been resilient, but now investors are growing concerned these companies could start seeing a slowdown in spending too. Pauline Brown, Former LVMH Chairman of North America and Author of 'Aesthetic Intelligence’, joins Yahoo Finance Live to discuss the state of luxury retail, the strength of China's luxury retail market, and how these companies are competing on pricing.

Video transcript

SEANA SMITH: Well, investors in the luxury retail market are worried about a slowdown. Shares of European stocks, LVMH, Hermes, and Gucci owner Kering all fell earlier this week on some signs of weakness in the US consumer. And then, of course, there are also some concerns out there about demand in China and whether or not that is going to fade.

Joining us now, we want to bring in Pauline Brown, former LVMH Chairwoman of North America, also author of "Aesthetic Intelligence." Now, it's great to see you here. Lots of questions just about the long run that we've seen in luxury retail, whether or not that's coming to an end, Pauline. What do you think?

PAULINE BROWN: So all good things do come to an end. I think luxury will continue to outpace non luxury. It will not grow nearly at the rate that we've enjoyed for the last couple of years. In fact, in 2023, it's expected to grow 7%-- not a bad growth figure-- but that is less than half of what it grew in 2022. So, clearly, a slowdown or deceleration.

DIANE KING HALL: Pauline, Diane here. I want to ask you-- let's talk a little bit about China. So LVMH Chief Bernard Arnault is reportedly set to visit China later this month. Now, in terms of the numbers and how much China accounts for the luxury market, I mean, we've seen that Chinese customers expected to account for about 60% of luxury growth. What do you think this signals with him planning to make this visit?

PAULINE BROWN: So for the last 20 years or so, China has contributed the most of the growth that we've seen in global luxury. Going forward, it's still, by virtue of its sheer size, going to contribute a lot. And this is coming off of a rather anemic period in luxury sales in China.

So I do think that we'll see some pickup relative to what we've seen recently. I also think Chinese consumption of luxury will compensate to some degree with a bigger slowdown that we see here in the US. But I don't think, once again, that it will merely approximate what we saw in years past.

It is maturing. It is leveling out. Chinese consumers are becoming more discriminating. And they're also changing where and how they buy their luxury.

SEANA SMITH: Pauline, what do you mean by that? What are some of the shifts that you're seeing there?

PAULINE BROWN: One of the biggest is historically, more than 2/3 of luxury sales to Chinese have been outside of mainland China, largely in Europe, but even in other parts of Asia like Japan and Korea. Because of the restrictions, the lockdowns, in China, that has shifted largely to domestic. Now, it is opening up again.

So the good news is the Chinese will start to travel and that will be a nice surge for sales in Europe. The bad news for the luxury players is that products sold in Europe are, on average, about 30% cheaper than in China. So they're not going to see quite as much of the top line gains as when they were selling to Chinese domestically.

DIANE KING HALL: So, Pauline, to that point, so not just tourists coming from China, and heading to Europe, and finding better prices that way-- I mean, you see the same thing with American tourists. We have heard a little bit of buzz about some of these luxury handbag makers and luxury companies changing how they price. What are you expecting to see in terms of pricing to, I guess, combat that pattern or that trend?

PAULINE BROWN: So there's been a lot of inflation. And I think most of the players have taken their price to a level that is not sustainable. I mean, when you look at the appreciation of the price of an average, say, Chanel handbag, Dior handbag just in the last five, six years, it has really extended itself. And it's becoming unaffordable to an aspirational buyer.

So point number one, while some of the growth was fueled by these price increases, going forward, I think it'll have to come from real volume increases. And that's going to be tough. That's going to be tough, especially when the aspirational shopper doesn't have quite the means and the capability that they did a few years ago.

The economic conditions are a lot more challenging now. The uber wealthy, who do account for a healthy share of luxury sales, they'll continue to buy-- selectively. There are brands they favor, there are categories they favor, but they'll continue to spend.

SEANA SMITH: Pauline, who's best positioned, then? Is it that very, very top line, LVMH being one of them-- are they a type of brand that could potentially continue to succeed given all of that uncertainty?

PAULINE BROWN: So I think any one brand, however strong the brand, is going to be challenged. The reason LVMH always outperforms the sector is because it is so well hedged. It's geographically dispersed, with more than 70 brands. It's dispersed across different marketing segments.

It has even a very broad definition of luxury. So what luxury is within the LVMH context at a brand like a Laura Piana or some of their jewelry-- Bulgari-- average price point really, really high. And then on the other end, you have Sephora, or Hennessy, or some of the other wine and spirits brands, which are still expensive for their categories, but they are affordable to the mass market. So that degree of diversification will insulate it in any given market and any given segment challenge.

DIANE KING HALL: So, Pauline, I want to extrapolate your point you made about pricing and that we have seen some of these bags, whether it's Chanel we're talking about or Louis Vuitton bags, et cetera, just head to levels we've never seen before-- and seeing some of that come down and compensate for that with volume. But one of the things I want to talk to you about is, could we see a shift in terms of style?

Because I've seen some talk about how people may be looking for more of a classic look, and not necessarily logos emblazoned on everything. Is that one way some of these luxury brands are seeking to, say, both distinguish themselves, procure more clients, and retain loyal clients?

PAULINE BROWN: Well, the pendulum is always swinging from one end to the other. And we've just come off of an era that was very loud, very focused on streetwear, on big labels, on first time luxury buyers, who were-- whether it was people who had IPO'd in Silicon Valley or who had made their fortune in mainland China-- so a lot of first generation wealth was created.

And that is generally attracted to a different kind of style sentiment than people who are more, let's call it, lifelong luxury buyers. And so, yes, I think that the trend is moving back in the other direction toward quality, toward sustainability. And by that, I mean buying things that you know you'll wear for years on end, not of the season.

And then also, sustainability just in terms of the sort of conscious capitalism-- the idea that these brands are made to last, that they are made by artisans. The artisans are fairly paid, the ingredients or materials that went into it are properly sourced. There's a lot more of that questioning that's going on than a few years ago.

But those stylistic trends do go in cycles. And then within segments, you know, what I'm seeing right now-- because Americans and non-Americans are traveling a lot more, having been sort of pent up in their homes for a few years, they're buying things that are conducive to their travel-- so clothes, for example, that travel well, or shoes that you can walk while you're traveling-- as opposed to what they might have bought 5 or 10 years ago, that would be good for the office or other forms of luxury adornment.

People also are having a lot more events and celebrations. There's a lot of weddings going on that were staved off. So we see more formal wear. What we're seeing-- where we're seeing softness is in the handbag segment, in part because it was on such a growth trajectory for a few years that I think it's kind of saturated.

SEANA SMITH: A big reversal from what we've seen, at least what we saw in 2022. Pauline Brown, former LVMH Chairman of North America, thanks so much.