A difficult-to-summarize luxury goods Q2 report: zero revenue growth, price hikes and promotions together, Hermès "holding up the sky"

The global consumption slowdown trend continues, with luxury goods companies performing below expectations in the second quarter.

According to a research report released by Bank of America Merrill Lynch analysts Ashley Wallace and Daria Nasledysheva on August 27, luxury goods companies saw flat revenue in Q2, with an average profit decline of 12% year-on-year in the first half of the year. Since May, stock prices have lagged behind the market by an average of 5%, and market consensus forecasts have also been revised down by 5%.

These signs all indicate a softening trend and outlook for luxury goods consumption. Specifically, Bank of America also identified several major trends.

Luxury goods revenue stagnation, severe brand polarization

Data from the report shows that in the second quarter, the weighted average revenue growth rate of the luxury goods industry was 0%, a decline from 2% in the first quarter, marking the lowest level in fifteen quarters.

In terms of annual growth rates, revenue growth in the second quarter also showed a slowing trend. The report indicates that based on a 5-year compound annual growth rate calculation, industry revenue growth slowed by 0.9% to 8.8% in the second quarter, and based on a 2-year compound annual growth rate calculation, industry revenue growth slowed by 0.4% to 6.8% in the second quarter.

The report also points out that demand for luxury goods peaked in the first quarter of 2023 and has since normalized. By the second quarter of this year, revenue growth based on a 5-year compound annual growth rate was already 0.2% lower than the long-term average, indicating the end of the "overconsumption" trend post-COVID-19.

In terms of individual brands, revenue performance varies significantly. The report shows that Prada saw a year-on-year revenue growth of 18%, the strongest among the brands, while Burberry had the weakest performance with a same-store sales growth rate of -21%, a 39% difference compared to Prada.

In absolute revenue terms, Hermès almost single-handedly drove industry revenue growth. Compared to the same period last year, Hermès saw a €440 million increase in revenue in the second quarter, while consumer spending on other luxury brands collectively decreased by €140 million. In the first half of the year, Hermès' revenue also increased by €1 billion year-on-year, while total consumer spending on other luxury brands only increased by €400 million.

Hard luxury underperforms soft luxury, brand more important than category

Luxury goods can be divided into two categories: hard luxury and soft luxury, with the former mainly including watches and jewelry, and the latter mainly including fragrances and handbags.

In terms of second-quarter revenue performance, the weighted average revenue for hard luxury was -1%, while the average revenue for soft luxury remained flat. Among hard luxury categories, watches are more cyclical than jewelry, and the best-performing jewelry brand is Pandora; The best-performing brands in the soft luxury brand category are Miu Miu, Hermès, and Cucinelli.

The report points out that the performance of hard luxury is somewhat "counterintuitive" compared to soft luxury, especially in this stage of normalized demand. Bank of America Merrill Lynch (BofA) states that this means product category is not the key factor determining relative income growth, but rather the following three factors are more decisive: 1) brand attractiveness and momentum; 2) fashion content and novelty; 3) brand investment cycle and management execution.

Price increases and promotions are advancing together, but sales may turn negative this year

In fact, starting from 2022, luxury brands led by Chanel, Dior, Louis Vuitton, and Rolex began to raise prices, resulting in an average industry-wide price increase of 7% between 2022 and 2023, in line with the global CPI growth rate.

Today, this trend of price increases continues. The report indicates that most brands have implemented slight price increases this year, with the industry average expected to rise by 4%-5% this year, with the largest price increases in the Japanese and Chinese markets; it is expected that the global industry average price increase over the next two years will be 2-4%, still slightly higher than the long-term trend.

Taking Hermès as an example, the brand has the largest price increases in the U.S. and Japanese markets, and the smallest in Europe. Among various product categories, the smallest price increase is in beauty products, while the highest is in popular products like the Oran sandals, men's ties, and Avalon blankets.

Meanwhile, considering the backdrop of weak luxury consumption demand, brands have also increased their promotional activities.

Data from the report shows that in June, 52% of women's clothing products on luxury e-commerce websites were on sale, higher than the previous year's 48%, with discounts also increasing.

Despite brands implementing multiple measures, industry sales in 2024 may turn negative.

The report states that between 2019 and 2023, price and product mix were the most important drivers of revenue growth during this period, contributing to nearly 60% of industry growth For 2024-2025, Bank of America believes that price and product mix will still be the biggest growth factors, but growth on a global scale will mainly come from optimizing the product mix rather than price increases, and there will be a first-time decline in sales volume, especially in the European and American markets.

Deterioration in U.S. demand, while local demand in Europe remains weak

Looking at different regions, the demand in the U.S. market has worsened compared to the previous period.

The report points out that U.S. consumers are the "canaries in the coal mine," often showing early signs of global consumption trends. However, as the monthly consumption data in the U.S. has not shown substantial improvement, indicating that there is still downside risk in the global luxury industry in the second half of the year.

Aggregate data from Bank of America credit and debit cards shows that the luxury goods consumption rate in the U.S. was -12% in the second quarter, 1 percentage point lower than the -11% in the first quarter.

The revenue growth rate of luxury goods in North America also slowed from 4% in the first quarter to 2% in the second quarter. Although this is better than the trend in Bank of America credit and debit card data, it still marks a continuous deceleration.

The revenue report for the second quarter in Europe slightly exceeded expectations, but Bank of America believes it was mainly driven by the tourism industry, with local demand still remaining weak.

Data shows that tourism spending accounts for about 50% of the European luxury goods market. According to Planet's data, the total amount of international tourist tax refunds in Europe increased by 8% in the second quarter, while the overall luxury goods market in Europe recorded low single-digit growth (4%), indicating slightly negative local consumer spending.