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US spending on luxury brands down 6% on year

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Luxury demand "fragile" after US election

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Moves could erode profit margins

By Mimosa Spencer

PARIS, Dec 20 (Reuters) - Confronting a broad decline in

demand for their usual fare, including $3,000-and-up handbags

and $4,000-and-up cashmere jackets, major marketers of designer

and luxury merchandise are broadening their product lines to

emphasize scarves, belts, wallets and home goods priced at $500

and under.

The companies' renewed focus on more affordable products is

meant to appeal to middle-class aspirational customers who are

more price sensitive, although the strategy may dent companies'

typically fat profit margins.

After more than two years of sharp price hikes -- with

Chanel, Prada and LVMH's Dior raising handbag prices by

over 50% in France in 2023 compared to 2020, according to the

Wall Street analysts at Bernstein -- luxury labels are finding

themselves at risk of alienating the middle class.

U.S. spending on merchandise from top luxury brands fell 6%

year on year in November, according to credit-card data from

Citi, setting a dour tone to the early holiday shopping season

for LVMH, Kering and other global purveyors

of designer goods.

LOGOS FOR UNDER $500

Kering label Gucci's decor and lifestyle gifts this season

include a $440 pet leash and a box of sticky notes covered with

the brand logo, priced at $200.

Louis Vuitton, which belongs to LVMH, offers a $360 card

holder and a $395 canvas and metal Monogram Double Spin bracelet

for $395 on the gifts section of its e-commerce site.

Burberry ( BBRYF ) plans to change its store layout to

emphasise "scarf bars" to drive sales of its cashmere scarves

priced from $450 to $1,050.

And Kering and Cartier's Richemont seek to bring

their perfumes and cosmetics lines back in-house while LVMH has

been developing cafes and entertainment, said Jonathan Siboni,

CEO of Luxurynsight.

DEMAND FRAGILE AFTER US ELECTION

Following the U.S. presidential election on Nov. 5, "luxury

demand appears fragile, particularly with the aspirational

clientele," analysts at Citi said, highlighting weak household

employment in November following tepid U.S. hiring.

The absence of this consumer is reflected in a decline in

global luxury shoppers by 60 million to 355 million, analysts at

RBC said. They cite pressures from inflation and growing

interest in spending on experiences rather than products as key

reasons for the drop-off.

Global sales of luxury personal goods like clothing,

accessories and beauty products, are expected to be flat at

constant exchange rates during the holiday season, according to

consulting firm Bain.

Bain earlier forecast that global sales of personal luxury

goods would drop 2% this year, one of the weakest on record,

with a shrinking client base - especially the so-called

aspirational shoppers, who are more price sensitive.

CHINA DEMAND DAMPENED

Appetite for high-end goods in China, one of the luxury

goods industry's biggest markets and main source of growth in

recent years, has been dampened by a property crisis and low

youth unemployment, with analysts at JPMorgan predicting a

"bumpy" outlook for the sector after a tough 2024, as ongoing

macro challenges in China continue to weigh.

In this context, luxury spenders are particularly selective.

They do not want to buy things perceived as "lower quality or

old styles," said Caroline Reyl, head of premium brands at

Pictet Asset Management.

Instead, brands can gain attention through marketing

campaigns as well as expanded product categories, along with the

shift toward more affordable product categories.

"Still very high quality, but just cheaper in terms of price

points," Reyl added.

Siboni, who combines information pulled from brand websites

as well as the companies themselves, has seen an average

increase of 8% of small leather goods such as wallets in

proportion to full-size handbags compared to a year ago.

In November, the average price of small leather goods at

LVMH's Dior brand was down 21% year on year, according to

Luxurynsight data. Meanwhile its Louis Vuitton label has

increased the ratio of products in its small leather goods

selection priced under 500 euros by 9% compared to the same

period last year.

PROFIT MARGIN EROSION LIKELY

The emphasis on lower-priced products, while necessary to

preserve relevance at a time when middle-class and even wealthy

shoppers are balking at high-priced merchandise, is likely to

erode the profit margins of players such as LVMH and

Balenciaga-parent Kering, which are already facing pressure due

to slowing sales.

"What we are trying to do is to stretch the price range,"

Andrea Guerra, chief executive officer of industry outperformer

Prada, told analysts at the end of October.

Meanwhile, Burberry's ( BBRYF ) new CEO Joshua Schulman, introducing

his turnaround plan for the British luxury label, stressed the

broadening of the assortment of entry-level priced products,

noting that pricing was pushed "too high across the board."

Industry bellwether LVMH, however, cautioned against the

risk of veering too far off brand, which could damage a label's

exclusive aura. Chief Finance Officer Jean-Jacques Guiony said

the group would steer away from introducing a new range of "very

affordable product."

"I think it would be a mistake," he told analysts in

October, stressing the importance of not entirely changing

offerings with a "very short-term view."