Luxury’s last growth engine has stalled

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Subscribe to enjoy similar stories. Louis Vuitton’s owner seems surprised at how quickly Chinese consumers have closed their wallets and abandoned its brands. It has no obvious place to turn to next for growth.

Shares in LVMH fell 7% on Wednesday morning after the world’s biggest luxury company released third-quarter results that were worse than expected. LVMH’s most important profit driver, its fashion and leather division which includes handbags, saw a 5% drop in sales compared with last year. Demand at its Christian Dior brand has slowed more than Louis Vuitton, a sign that the brand may have been damaged by a recent investigation into its Italian supply chain.

But the main reason for the slowdown is that Chinese shoppers have pulled back. China has been a huge growth story for luxury brands over the past two decades. Back in 2000, Chinese customers generated just 1% of global luxury sales, according to UBS estimates.

Today, they account for a third. LVMH doesn’t think the Chinese have lost their appetite for European luxury goods. But after watching the value of their homes fall, middle-class consumers aren’t in the mood to spend thousands of dollars on designer handbags and watches.

Barclays estimates that the country’s real-estate crisis has wiped the equivalent of $60,000 off the net worth of Chinese households on average. To add to LVMH’s pain, Beijing will slap tariffs on European cognac in response to the EU’s levies on Chinese electric vehicles. The company’s cognac brand Hennessey, which makes around a fifth of its sales in China, will be “collateral damage" in the trade war according to LVMH management.