LVMH is waiting for China's consumers to shop at home

• LVMH is continuing to spend big on marketing in China even amid the country's economic gloom.
• Chinese luxury consumers are still spending, but they're going to Japan due to the weak yen.
• LVMH's Asia ex-Japan revenue fell 14% on-year in Q2, but Japan sales surged 57%.

China's once-mighty consumers are holding back on buying as much as they used to at home. But luxury giant LVMH is still spending big on them.

After all, the Chinese are not broke. They would just rather save their money during this time of economic uncertainty. They also prefer spending their on experiences like travel and buying stuff — including luxury items — when they are on vacation in Japan, where they can get great discounts.

So, even though LVMH's business in China is lower than in past years, "it doesn't mean that the global business we do with mainlanders is down," LVMH chief financial officer Jean-Jacques Guiony during the company's second-quarter earnings call on Tuesday.

LVMH does not break out its sales for China separately. The company's revenue for Asia in the first half of the year, including China but excluding Japan, declined 13% from a year ago, to 12.4 billion euros, or $13.4 billion. That made up 30% of LVMH's total revenue.

In contrast, LVMH's Japan revenue surged 27% over the same period, to 3.8 billion euros.

But the Chinese market is still growing, and given that Chinese tourists drive a lot of sales, LVMH is focused on engaging them at home — where they may well return to buying in force one day.

"The response from customers to marketing stimulus is still quite important in China," said Guiony on the earnings call. "So we will certainly allocate a significant amount of our marketing budgets there."

LVMH does not break down its marketing cost by region. For the first half of this year, its spending on marketing and sales totaled nearly $15 billion — about the same as last year.

China's luxury consumers are spending in Japan

Rich Chinese consumers are not spending as much at home because, post-pandemic, they can travel and spend their money elsewhere, with Japan a top destination.

The Japanese yen has been on a losing streak for a few years, hitting a four-decade low against the US dollar and a 34-year low against the euro recently.

"Traffic is down because people are not shopping as much as they used to in Mainland China. They shop in Japan or elsewhere," Guiony said.

He called the trend "extremely violent" for LVMH because it is pressuring margins. Operating profit for the first half of the year came in at 10.7 billion euros, with an operating margin of 25.6% — down from 27.4% a year ago.

"We really have a big shift of business from Asia into Japan," Guiony said "Bear in mind that Fukuoka, for instance, is only two hours by boat from the coast of China."

Japan has become the "most attractive shopping destination for Asian customers," Guiony added.

The fluctuations in the yen make it challenging for LVMH to price its products in Japan. It's unwilling to hike prices in this important market — Japan accounted for 9% of LVMH's revenue — since the yen may go back up at any time.

Since sales in Japan are so driven by currency fluctuations and tourist spending, it looks like LVMH just has to wait for its Chinese customers to get back to shopping at home.

Guiony doesn't seem to know when that will happen.

"Analyzing the Chinese customer is not the easiest thing in the world and we have a little bit of a hard time doing that really from a pure macroeconomic viewpoint," he said.