Key Takeaways
- Gucci’s sales fell 18% in early 2024 amid slowing luxury demand.
- LVMH’s marketing budget swelled to €10 billion, overshadowing smaller brands.
- Burberry struggles with reliance on outlet sales, impacting brand image.
What Happened?
Gucci’s sales plunged 18% in the first quarter of 2024, driven by declining interest in its designs, especially among Chinese shoppers. Kering, Gucci’s parent company, faces similar struggles with Balenciaga, which has not bounced back from a controversial 2022 ad campaign.
Burberry and Ferragamo are also in trouble, with Burberry’s share price halving since a major makeover began in 2017. Smaller luxury brands struggle to keep up as LVMH expands its dominance, increasing its marketing budget from €6.3 billion in 2019 to over €10 billion in 2023.
Why It Matters?
Luxury brand turnarounds have become increasingly challenging. LVMH’s growing clout and financial muscle make it difficult for smaller brands like Gucci and Burberry to stand out.
Kering warned that its operating profit might fall by 45% in the first half of this year due to slow sales at Gucci. High fixed costs, aggressive price hikes, and a growing reliance on outlet stores compound these challenges. Burberry’s heavy dependence on outlet sales, which generate a quarter of its revenue, undermines its brand image.
What’s Next?
Investors should watch for early signs of successful turnarounds, such as social media buzz and increased foot traffic in flagship stores. However, current trends suggest cautious optimism. Brands like Gucci and Burberry must find ways to innovate and attract aspirational shoppers who are tightening their wallets amid economic uncertainty.
The luxury market’s reliance on affluent consumers, who now account for only 60% of global sales, poses a significant risk. Monitoring earnings reports and social media reactions can provide insights into whether these brands are regaining their relevance.
Kering and Burberry stocks are trading below the average for Europe’s top luxury companies, offering potential value if turnaround plans succeed. However, the luxury sector’s high fixed costs and reliance on outlet sales make these investments risky.
