The luxury outlook in China just keeps getting worse

• Luxury companies' sales are tanking in China due to slowing consumer demand.
• Chinese consumers are putting their money into safe assets rather than spending it.
• Wealthy Chinese tourists are shopping in Japan instead.

Luxury sales are suffering in the world's second-largest economy as Chinese shoppers cut back on luxury spending.

Kering, the latest luxury brand to report earnings, said on Wednesday that it continued to see a "deceleration" in Asia-Pacific. The company warned in April that recurring operating income for the first half of the year would slide up to 45%, compared to the first half of 2023. Two-thirds of Kering's revenue comes from Gucci, which has been especially hard hit in China as customers eschew the brand's older designs and buy at a discount overseas.

LVMH reported a 13% decline in revenue — down to 12.4 billion euros, or $13.4 billion — for Asia in the first half of the year compared with the same period last year. While LVMH did not specifically break out revenue from China, the company has seen sluggish Chinese consumer demand, particularly in the second quarter, said chief financial officer Jean-Jacques Guiony on Tuesday.

Consumer spending in China has been improving "more moderately than before COVID-19," Luca Solca, a luxury goods analyst at Bernstein, told Business Insider.

Chinese shoppers' reluctance to spend more despite higher disposable incomes "produces a 'growth relay' of relatively muted proportion, where even high-quality companies have generated low single-digit growth," Solca said.

LVMH's peers have similarly seen slumps in revenue from China. In its most recent quarter, Burberry's Chinese sales revenue declined 21% from last year. In recent earnings, Kering, Swatch, and Hugo Boss expressed challenges in engaging a Chinese market with softening demand.

Richemont also was barraged by the weakening Chinese consumer demand. Last week, the parent company of brands including Cartier reported a 27% decline in revenue in the combined markets of China, Hong Kong, and Macau, dragging total Asia Pacific sales down by 18%.

Massive discounts and online shopping

To try to boost sales, luxury brands have given massive discounts to Chinese consumers. Brands including Balenciaga and Versace slashed prices by an average of 40% and 50%, respectively, to Chinese customers, Bloomberg reported last month. In early July, Marc Jacobs offered more than 50% discounts on Alibaba's upscale e-commerce platform, Tmall Luxury Pavilion, the FT reported. Burberry, Balenciaga, and Marc Jacobs did not respond to earlier requests for comment.

This step into e-commerce is a change for luxury retailers, which have traditionally abstained from listing products online to avoid associating their brand with quick and convenient shopping, Damien Yeo, an analyst at Fitch Solutions, told BI. They're likely trying to clear stock, which could degrade their brands as some third-party platforms sell their goods at big discounts, Yeo said.

A recent survey by US investment bank TD Cowen suggested that Chinese consumers are spending less on luxury goods while spending more on overseas travel and safe assets such as gold. The government is also campaigning against "money worship," so consumers may be less likely to buy something splashy, part of a broader cultural tilt toward "luxury shaming."

Luxury goods are still popular with wealthy Chinese shoppers — just not in China. Japan has been a popular tourist destination for the Chinese, thanks to the yen's 40-year low against the US dollar. This currency weakness has attracted "a big shift of business from Asia into Japan," said LVMH's Guiony on Tuesday. LVMH sales in Japan were boosted by 57% in the first half of the year, which Guiony attributed to a surge in Chinese tourists.

Not all luxury brands are feeling the heat in China. Hermès saw a 17% spike in sales revenue in the first three months of the year due to its recession-resistant customer base, Bloomberg reported. Hermès is set to publish half-yearly financials on Thursday.