Key facts
- China's tax crackdown on wealthy individuals with offshore trusts threatens to curb spending in the luxury market.
- Luxury brands are also contending with signs of slowing consumer spending in the US.
- Shares of LVMH and Hermes are down about 40% this year, while Kering has fallen 29%.
- Chinese consumers account for approximately 20% of global luxury purchases.
- LVMH is scheduled to report third-quarter results on Monday, followed by Kering and Hermes on October 22.
China's recent tax crackdown on wealthy individuals, requiring them to declare and pay years of back taxes on offshore trusts by October 22, presents a new challenge for luxury brands. This comes as the sector, already facing a three-year slowdown, grapples with weakening consumer spending in the United States and the broader economic fallout from the Iran war.
These combined pressures are expected to weigh on third-quarter earnings, due to be released starting next week. Shares of major luxury players reflect this pessimism: LVMH and Hermes have each fallen approximately 40% this year, while Gucci owner Kering is down 29% and trading near multi-year lows.
Chinese consumers, who represent about a fifth of the global luxury market, have long been a key growth driver. However, demand has softened significantly since the COVID-19 pandemic. The new 20% levy on offshore trusts is particularly impacting ultra-high-net-worth individuals, who had previously shown more resilience than middle-class consumers affected by China's property downturn. Alexis Bonhomme, head of Shanghai-based luxury consultancy Trinity Asia, noted that while individuals may not be short of funds, the current mood is not conducive to luxury spending, and some may face liquidity issues before the tax deadline.
Data from mainland China's shopping malls indicated a sharp deceleration in growth over the summer, according to Bernstein analysts. Industry sources familiar with third-quarter mall trading reported continued weakness, though performance varied by brand. Smaller, understated labels like Brunello Cuccinelli and LVMH's Loro Piana reportedly outperformed more ostentatious brands such as Louis Vuitton and Gucci.
In the US, the luxury industry's largest market, demand is also softening. Credit card spending on luxury goods tracked by Citi declined for a third consecutive month in August, coinciding with a broader weakening of consumer confidence and unease about the US economy. Kering has already alerted analysts to an expected contraction in Gucci's performance, leading to a series of brokerages cutting their price targets.
High-end jewelry has been a relative bright spot, with brands like Cartier benefiting from wealthy consumers seeking enduring value in precious materials. However, a Beijing-based exporter, Deng Qi, forecasts a 20% reduction in his luxury spending, citing the tax measures as a signal that could undermine confidence among the broader affluent population.