Why are luxury brands closing stores one after another?

The luxury goods industry is also a cyclical sector.

According to Fashion Business News, Swire Properties' iconic project, Taikoo Li Sanlitun in Beijing, has been undergoing a comprehensive renovation since 2022, with the northern area transitioning towards high-end positioning. Brands under LVMH, including LV, Dior, Loro Piana, Fendi, and Tiffany, have set up barriers here, attracting widespread attention from the industry.

Additionally, sources indicate that the area will introduce Beijing's first Hermès Maison, with Hermès confirming its plan to open a new store in Beijing in 2025 during its earnings meeting this month. According to the Xiaohongshu account Beijing Business Update, the Hermès store in Building 7 of the northern area of Taikoo Li Sanlitun has recently completed registration and will become the fourth Hermès store in the city, excluding the airport store.

However, since the beginning of this year, China's luxury goods market has cooled, presenting significant challenges to luxury brands that had previously been confident in the Chinese market and had ambitious store opening plans.

According to Bloomberg, citing sources, the LV flagship store in the northern area of Taikoo Li Sanlitun was originally scheduled to open in the first half of this year, but it remains covered by barriers. Insiders revealed that the store's opening has been postponed until next year. The official opening dates for other brands under LV have also yet to be determined.

On September 28, LV opened a temporary store in the southern area of Taikoo Li Sanlitun in Beijing, with a design similar to the LV store at Taikoo Li in Shanghai. The brand has not disclosed the duration of this temporary store. While the flagship store in the northern area has not opened, LV will conduct sales through the temporary pop-up store in the southern area.

Analysts believe that this year, luxury goods are facing severe demand weakness in the Chinese market, leading to the postponement and delay of store opening plans. Due to a significant drop in foot traffic at high-end malls this year, brands are finding it difficult to attract new customers, and some brands are already considering closing stores, while high-end malls are struggling to attract tenants.

Last week, Burberry opened a new flagship store in the three-story space in the northern area of Taikoo Li Sanlitun, becoming one of the few newly opened stores recently.

On October 15, LV closed its store at the Shenyang Joy City shopping center, leaving only the store at MixC in Shenyang. Subsequently, the Shenyang Joy City shopping center announced it would close entirely on November 15, with brands including Gucci already withdrawing in advance. In July of this year, Gucci also closed its store at Wangfujing Department Store in Taiyuan, Shanxi.

After opening a store in Haitang Bay, Sanya, last October, LV removed the barriers at its store in Haikou's MixC in March this year. LV's presence was an important leverage for the subsequent leasing of Haikou's MixC, which is positioned as M1 luxury, but due to an underwhelming market environment, the project's development has been slow, and Celine's barriers were also recently removed.

The Italian luxury group OTB, previously seen as an industry dark horse, is also undergoing significant adjustments to its retail network.

The group's Maison Margiela has closed stores in Shanghai IFC and Hong Kong K11 Musea. Notably, after closing its store at Jin Ge Department Store in Kunming, Yunnan, on July 28, this marked OTB Group's closure of all stores in Kunming The group's brand Marni recently closed its stores in Hong Kong's Hysan Place and Causeway Bay Sogo, as well as in Xiamen's MixC. Jil Sander also withdrew from the MixC in Xiamen and Chengdu IFS.

In 2022, brands under the OTB Group collectively made their debut at the Shanghai Jing An Kerry Centre, marking the positive development trend of this emerging luxury group and its strong confidence in the Chinese market. However, the luxury market quickly changed, closing the opportunity window for alternative designer luxury brands.

In July of this year, Maison Margiela opened its first outlet store in Shanghai Bicester and also opened an airport store in the atrium of Terminal 2 at Shanghai Hongqiao Airport, both aimed at seeking cost reduction and efficiency improvement to enhance commercial returns.

The current adjustments of luxury brands in the Chinese retail market have raised concerns about a resurgence of the store closure wave seen a decade ago.

In 2014, influenced by various factors such as the rise of overseas shopping and slowing economic growth, the Chinese luxury market turned sluggish.

According to Bain & Company's research report on the Chinese luxury market, in 2014, the market declined by 1% year-on-year to approximately 115 billion yuan, marking the first decline in the eight years of Bain's research on this market. A year earlier, the data showed a growth of 2%, with the main reasons for the decline being the drop in watch and men's clothing sales, particularly noticeable in high-priced products.

The report pointed out that in 2013, most traditional luxury brands experienced negative same-store sales in China, with only a few brands like Chanel, Hermès, and Tiffany maintaining positive growth. Most brands slowed their new store expansion pace in China, and some brands like Dunhill and Zegna closed some of their stores in China, both of which primarily focus on men's clothing.

This wave of store closures continued for five years, affecting most major luxury brands including LV, Dior, Gucci, Prada, Burberry, Hugo Boss, Giorgio Armani, and D&G.

LV nearly closed 20% of its stores, shutting down seven locations in Guangzhou, Harbin, Urumqi, Shanghai, Taiyuan, Tianjin, and Suzhou in 2015 alone. The group confirmed in its financial report that it was slowing its expansion in mainland China and Hong Kong and closing unprofitable stores.

Prada also reduced its number of stores in China by one-third after 2015. At that time, Prada was experiencing a performance slump, and the Chinese market became a major area of decline. The brand was troubled by quality crises and excessive brand exposure, and its aggressive store opening strategy was seen by analysts as the culprit for declining profits.

Meanwhile, as purchasing agents and overseas travel became increasingly popular, cross-border e-commerce channels developed rapidly, with consumers seeking affordable luxury goods and becoming more concerned about price differences between domestic and international markets.

During the store closure wave, luxury brands had to implement large-scale price reductions in the Chinese market to maintain performance. Chanel simultaneously reduced prices in markets such as China, South Korea, Vietnam, and Russia, with products in the mainland Chinese market seeing price cuts of up to 20%. The brand also raised prices in the European market to coordinate the price differences between domestic and international markets Chanel has taken the lead in initiating this round of price cuts for luxury goods in China. LV subsequently reduced prices by 18% in the mainland Chinese market, while Dior and Prada also implemented varying degrees of price reductions. The high-end watch brand Patek Philippe saw price cuts of up to 22% in Hong Kong, followed closely by LVMH's TAG Heuer announcing price reductions of 8% in China and several other markets.

In many ways, the current luxury goods market in China seems to exhibit characteristics similar to those of a decade ago, with declining store performance and consumers expressing grievances about luxury prices.

Since 2020, luxury brands have relied on the Chinese market to weather the pandemic crisis. Luxury brands represented by Chanel, LV, Hermès, Cartier, Gucci, and Burberry have raised prices multiple times, driving the performance of luxury giants to new heights, with LV's owner Bernard Arnault frequently topping the list of the world's richest individuals.

Between 2020 and the first half of 2023, luxury brands have aggressively expanded their store presence in the Chinese market, stimulating rapid growth in luxury consumption in central and western cities such as Chengdu, Wuhan, and Changsha.

Unlike the standalone stores of luxury brands in Europe and the U.S., luxury stores in the Chinese market are primarily located within high-end shopping centers. In recent years, the relatively aggressive retail network expansion of luxury brands has been closely related to the boom of high-end shopping centers.

After the real estate market came under pressure, large property developers shifted their focus from office leasing and residential development to the development and operation of high-end commercial properties, coinciding with the post-pandemic return of high-end consumption, resulting in a proliferation of high-end malls.

As chain high-end shopping centers represented by Hang Lung, Swire, SKP, and China Resources Vientiane City enter lower-tier markets, luxury brands that have already entered the market face the choice of whether to shift from local developers to chain high-end shopping centers with better operational capabilities.

Taking the Wuhan market as an example, in addition to the well-established local mall Wuhan Commercial Mall, Hang Lung, Vientiane City, and SKP have successively entered the market, sparking intense competition. Some luxury brands have opened stores in multiple projects simultaneously, but the market generally views this move as a transitional measure, as local consumption is unlikely to support multiple stores of the same brand in the same area. Ultimately, luxury brands will complete the transition from "local strongmen" to chain commercial real estate.

If the store closures of luxury brands a decade ago were to correct the mistakes of reckless expansion, the current closures of some luxury brands are about seeking better options. Many new stores opened after closures do not have strict issues, but under the influence of commercial real estate, luxury brands seem to have no choice but to adapt to the market and settle in newly opened malls with greater development potential.

There is a viewpoint that luxury brands can make money by opening stores in the Chinese market not solely due to operational capabilities, but rather due to the favorable rental conditions and renovation subsidies provided by newly built shopping centers over the decades. Shopping centers hope to attract other quality brands and consumers by leveraging the influence of luxury brands.

While this reduces fixed investments for luxury brands, it may consume a significant amount of human resources and time. The process of opening stores for luxury brands often takes several years, and coupled with the store renovations due to changes in creative directors and brand image over the past few years, many brands are actually in a continuous state of store adjustment, failing to establish stable sales conditions Across the country, there are actually very few malls that can create a mature luxury shopping atmosphere. Under the frequent brand combinations and competition from newly added shopping centers within the project, non-top-tier luxury brands find themselves in a passive situation.

It can be seen that unlike the relatively stable luxury retail stores in Europe and the United States, the prosperity of the luxury market in China is closely related to the real estate market. This is not only because about 70% of consumers' wealth is tied up in real estate, affecting the disposable income available for luxury consumption, but also because the expansion of luxury brands' stores is directly linked to the real estate industry.

In terms of store design, the trend of luxury brands opening large stores in China has become increasingly evident over the past five years, thanks to the support and cooperation of shopping centers. Many overseas tourists often find these large luxury brand stores in the Chinese market novel, as they are generally much more impressive than the stores on luxury streets in many European and American markets.

Taking Shanghai Hang Lung Plaza as an example, this project, despite its relatively limited area, still provides luxury brands including Chanel, LV, Dior, Gucci, and Moncler with favorable conditions for cross-floor store expansion, allowing for a more complete product line and category, and increasing more salon space targeted at VIC customers. In the market environment since last year, Hang Lung Plaza has redesigned its traffic flow to boost performance, creating new spaces within the project to accommodate more fresh designer brands.

The large store strategy is actually a double-edged sword; while it provides more brand experiences and enhances the loyalty of VIC consumers, it also brings higher operational costs. A potential downside that has not been fully discussed is that the luxury large stores, which encourage deep shopping, seem to further deter middle-class consumers who are interested in entry-level products.

Since last year, this group of consumers has continued to drift away from luxury brands. They still believe that entering luxury stores brings psychological pressure, and purchasing through channels like duty-free and purchasing agents not only offers lower prices but also avoids the pressure of interacting with luxury brand sales staff.

After the pandemic, most luxury brands have established a fairly complete e-commerce sales network. Therefore, apart from flagship stores located in influential cities that are used for brand image display, luxury brands may indeed have opened too many stores.

A new wave of store closures and price reductions is not impossible, after all, luxury brands have made concessions in the past.

In addition to being overly optimistic about the market, the current situation of luxury brands is also related to the entanglement with commercial real estate. However, the shopping centers' efforts to attract luxury brands are based on the latter's inherent appeal and high sales efficiency. If luxury brands can no longer spark consumer interest in the future, the path dependence of high-end shopping centers will also be broken, and the recent rise of various non-standard commercial formats already hints at brewing changes.

In contrast, Prada and Chanel have become the few luxury brands that maintain their own pace and are relatively cautious about expanding stores in the Chinese market.

After the channel reform in 2015, Prada has not opened a large number of new stores and currently operates about 41 stores in the Chinese market. After the lease of the flagship store at Shanghai Hang Lung Plaza expired in 2021, Prada has not opened any new stores to date Faced with an unoptimistic market situation, the brand removed its two-year-long barriers at Taikoo Li in Qiantan, Shanghai, this March. Sources indicate that the brand may consider entering the second phase of the project.

Even though Miu Miu, under the Prada Group, is currently thriving, the group's management has shown a restrained attitude towards new store openings in public, acknowledging that Miu Miu's retail network somewhat limits brand sales, but only stating that they will expand some stores next year.

Chanel also maintains a cautious approach to its retail network in China, currently having only 18 stores in the country, while luxury brands in the same tier have 45 to 50 stores. Although group executives previously claimed plans to open more stores in China, Chanel can adjust its strategy in response to the rapidly cooling market environment.

If the market does not rise linearly but cycles through periods, then maintaining relative caution and expanding at one's own pace seems wiser. A review of the luxury goods market around 2014 reveals many similarities with the current market.

According to a Bain survey, 70% of respondents claimed they enjoy trying different brands and styles. Consumer preference for luxury brands such as LV, Hermès, Gucci, and Dior is declining, while the preference for some previously-followed brands, such as Versace, Tiffany, and emerging luxury brands like Balenciaga, is on the rise.

In a 2013 survey, consumers were more focused on keywords like overseas shopping, discount stores, and brand logos, while in 2014, style, fashion, and exclusivity ranked higher among the keywords of interest. Nearly half of consumers believe that luxury goods with prominent brand logos are too ostentatious, outdated, and tacky.

The Financial Times observed ten years ago that the new confidence emerging among Chinese consumers made them less willing to blindly follow luxury brands. Previously, this was a way to show off, but now it has shifted to purchasing based on personal interests and lifestyles.

This reflects a cyclical similarity with the current trend of understated luxury, as well as the rise of smaller emerging brands like Miu Miu, Loewe, The Row, and Alaia on the Lyst popularity list. Whether ten years ago or today, Chinese consumers remain consistently concerned about price factors, with an increasing urgent demand for a fair consumption environment.

Of course, the luxury goods industry is not merely replaying history but is on a spiral ascent. Chinese consumers have rapidly matured over the past decade; if ten years ago consumers were merely tired of large logos, ten years later, they may delve deeper into the industry's commercial logic, demystifying the overly commercialized operational models characterized by a lack of creativity, obvious homogenization, and unilateral price increases.

Unfortunately, in the recently concluded third-quarter earnings season, luxury giants generally attributed the market downturn broadly to the macroeconomic situation in China, without publicly reflecting on their own strategies At the end of last month, LVMH veteran Sidney Toledano and other executives from the fashion division visited the Chinese market for inspection again. According to sources, the purpose of the fashion division executives' trip was not only to assess the progress of store opening projects but also to prepare for strategic adjustments for the group's relatively weaker second-tier brands in 2025. The brands under LVMH's fashion division mainly include Celine, Loewe, Kenzo, Givenchy, and Fendi.

In a complex market climate, the heavier the burden, the harder it is to turn around