The luxury industry, once believed to be resilient against market fluctuations, has also felt the impact of consumer segmentation.
Recently, French luxury giant Kering issued a performance warning, citing challenges in the first half of the year. The group expects a year-on-year decline of around 10% in comparable sales for Q1 2024. Kering attributes this decline mainly to a sharp drop in sales of its flagship brand Gucci, particularly in the Asia-Pacific region, where sales are expected to decrease by nearly 20% year-on-year. Following this announcement, Kering’s stock plummeted shortly after the market opened, with the drop reaching as much as 15%, the largest in its history.
In fact, the luxury market is experiencing segmentation, with some brands finding it harder to survive. Although the industry as a whole is still growing, not all brands can maintain the same growth momentum. Gucci, Kering’s core brand, has been popular among young people in recent years. Why has Gucci seemingly lost its appeal?
Gucci’s Poor Resale Value in the Secondhand Market
Kering, one of the world’s top three luxury conglomerates, operates in three main sectors: fashion and leather goods, jewelry, and eyewear. It owns multiple luxury brands, including Gucci, Bottega Veneta, Balenciaga, Alexander McQueen, and Saint Laurent Luxury. Gucci is Kering’s leading brand, generating €9.87 billion of the group’s total revenue of €19.57 billion in 2023, accounting for nearly half of the company’s income.
Under Creative Director Alessandro Michele’s nearly eight-year leadership, Gucci became a hot brand, attracting a millennial audience with its bold and distinct image since its Spring/Summer 2015 collection. However, global economic uncertainty and slower growth have impacted luxury spending, especially in the Asia-Pacific region, where slower growth may reduce consumer purchasing power, affecting Gucci’s sales.
Gucci’s primary customer base, millennials, previously had strong purchasing power as they delayed marriage and family plans. However, as economic growth has slowed post-pandemic, young consumers, with lower risk tolerance, have become more cautious in their spending, affecting Gucci more significantly.
Many young people are now adding secondhand luxury goods to their shopping lists, contributing to rising resale market data, confirming a trend toward “buying old, not new.” In recent years, China’s secondhand luxury market has grown rapidly. According to a report by Bosera Data, the market size increased from just ¥8 billion in 2016 to over ¥100 billion in 2023.
Even three years ago, Kering invested €178 million in the secondhand luxury e-commerce platform Vestiaire Collective, acquiring a 5% stake and a board seat.
In the secondhand luxury market, bags and leather goods are key players due to their high standardization and liquidity. Three sales professionals from various secondhand luxury platforms told Lan Jing Finance that Gucci bags are not seen as good investments in terms of retaining value.
“Although Gucci is a popular entry-level luxury brand, aside from recent hits like the Gucci 1955, Gucci Marmont, Dionysus, and classic tiger head series, other bag series do not hold their value as well as brands like Hermès, Chanel, or LV,” a secondhand luxury buyer told Lan Jing Finance. “Gucci’s classic models are limited, and with fast-paced style updates, old bags tend to depreciate.”
When approached about brand value and future plans, Lan Jing Finance did not receive a response from Kering’s media contacts by the time of publication.
The Accelerating Segmentation of the Luxury Market
Industry-wide, the luxury market continues to grow against the trend. Bain & Company’s China Luxury Report for early 2023 indicated that the global luxury market grew to approximately ¥2.7 trillion in 2023, a 7% year-on-year increase.
Bruno, a senior global partner at Bain, noted that China’s mainland luxury market achieved a double-digit recovery in 2023, though it has not yet reached 2021 levels. In 2023, 65% to 70% of luxury brands posted positive growth, down from 95% in 2022. This indicates that top brands are securing more market share, while other brands are increasingly squeezed out.
For instance, Brunello Cucinelli reported a 15.6% year-on-year increase in fourth-quarter sales to €321 million, with annual sales up by 23.9% to €1.14 billion, exceeding analyst expectations.
Hermès also posted significant gains. In its 2023 financial report, Hermès announced revenue of €13.427 billion, up 21% year-on-year, with a net profit of €4.311 billion, an increase of 28%. In Q4 2023 alone, Hermès’ revenue surged by 18% to €3.364 billion, and the brand expressed confidence in 2024 given its strong Q4 sales.
Lan Jing Finance’s visits to physical stores found that top brands like LV and Hermès are still selling well, while niche brands like Loewe are also popular. A Generation Z shopper told Lan Jing Finance that spending on luxury items has not changed among her peers, as they rely on family finances. She believes the economic downturn may have a greater impact on working-class consumer attitudes.
Additionally, a new salesperson at an LV counter in Chongqing shared on social media that they achieved sales of over a million yuan in just over a month since joining.
Comparatively, while brands like LV and Chanel continue to attract buyers despite price hikes, Gucci has faced challenges in maintaining consumer interest. What’s behind this discrepancy?
Dr. Zhou Ting, president of the Yaoke Research Institute, noted that younger consumers are more affected by economic pressure than older, wealthier buyers. Moving forward, luxury brands will increasingly rely on truly affluent consumers, and the brand identity of luxury will become more defined.
Ultimately, consumption is becoming stratified. While top-tier consumers remain strong, rational and frugal spending has become the main theme for middle-class and average consumers.
A seasoned luxury industry professional with over 20 years of experience remarked, “While the wealthy remain wealthy, some middle-class consumer groups are feeling the pinch. The wealthy buy a fixed amount, but the majority of sales rely on those who don’t have as much. Luxury brands have raised prices to offset reduced sales, but they can’t fully compensate for the decline in volume.”
Kering CFO Jean-Marc Duplaix warned that investors should not expect profit margins to improve in 2024, as the company plans more investments to support key brands’ future growth. Since last year, Kering has spent €1.7 billion and €3.5 billion acquiring a 30% stake in Valentino and majority ownership of high-end fragrance brand Creed.