How Shein and Temu are taking down luxury brands

Here's an interesting trend: people are getting wealthier - not just the rich, but pretty much everyone globally.

Even poorer nations are seeing a rise in personal wealth. That's according to the latest Wealth Report by UBS, which, by the way, shows that Australians rank second internationally (behind Luxembourg) with median wealth per adult of $US261,805 ($395,000).

Despite this uptick in wealth, many luxury brands are under pressure as slowing sales push share values down.

The share price of the French luxury group LVMH, the world's largest luxury brand, which includes Moët Hennessy, Louis Vuitton, Givenchy, Sephora and Tag Heuer, declined more than 13% over the year to mid-August 2024.

Dior shares are down 23.64% over the same period, although Hermès bucked the trend, rising by more than 17%.

Bernard Arnault, chair of LVMH and one of the world's top five wealthiest people, says part of the problem comes down to "an uncertain geopolitical and economic environment".

The shares of UK-based Burberry tumbled about 48% between March and August 2024.

The company warned in July that store sales were down 21% and dividends would be suspended for the year. Gerry Murphy, chair of Burberry, blamed "a luxury market that is proving more challenging than expected".

It's a similar story at German-based Hugo Boss.

Despite inking a deal with former soccer star David Beckham to promote the brand, Daniel Grieder, CEO of Hugo Boss, admits: "The weakening consumer sentiment in most markets led to a rapid slowdown in growth across the entire industry, which we could not completely escape from".

The impact of COVID

The luxury market hasn't always experienced tough conditions.

On the contrary, the COVID pandemic delivered boom times. McKinsey's 2024 State of Fashion report shows that in 2022, the industry notched up more than double the levels of economic profit compared with almost all years between 2010 and 2020.

It wasn't until 2023 that the party fizzled out as consumer spending slowed in Europe, the US and China.

In Australia, the luxury sector is also under pressure. Paul Zahra, CEO of the Australian Retailers Association, says retail is facing an extremely challenging period, and luxury goods are not immune.

"While this category has traditionally been seen as recession-proof, there has been a softening in demand for personal luxury goods both locally and globally."

Nonetheless, he points to strong growth in Australia's luxury goods sector over recent years.

"Louis Vuitton, Richemont and Hermès have achieved significant revenue growth in Australia since 2019, with the luxury clothing and footwear category generating $4.3 billion of total revenue in the past year."

That may be the case, but the homegrown luxury retail platform Cettire has not been immune to investor jitters.

In a profit warning in June, Cettire's founder and CEO, Dean Mintz, highlighted challenging market conditions, softening demand and the impact of clearance sales as "certain players exit parts of the market".

Then, at the end of August, the company announced a 34% drop in net profit for 2024, sending the share price down 20% to $1.10, compared with $4.85 earlier in the year.

Weaker demand hasn't been the only issue to beset Cettire. Earlier this year, Mintz raised eyebrows when he sold 27.5 million personally held Cettire shares. The platform has also had to deal with allegations of selling non-genuine products (which it denies).

The downturn in luxury brands

Even if local demand is holding reasonably firm, Australia's luxury market is a minnow by international standards. For context, the global market for luxury goods was worth €1.5 trillion ($2.5 trillion) in 2023.

Zahra says the downturn in luxury more broadly has in part been caused by "a weak recovery in the Chinese economy".

There's no doubt this is where the sector is really feeling the pinch. While France may be the leading consumer of luxury goods, China - and more particularly, its burgeoning middle class - is now the second largest market for luxury goods, accounting for 22%-24% of worldwide sales.

The catch is that China's economy is no longer the envy of the world.

In August, its National Bureau of Statistics reported a 2.7% rise in annual retail sales. That may sound impressive, but as Shane Oliver, chief economist and head of investment strategy at AMP, points out, this is historically low, and not much stronger than in Australia.

"The problem is that China's consumers are seeing falling wealth as a result of falling property prices, a three-year bear market in shares, poor social security and high education costs for their kids," he says.

"The current government has put a hex on conspicuous consumption with its focus on 'common prosperity'. This has put a big dampener on Chinese demand for luxury brands."

China desperately needs to boost consumer spending, though, as Oliver notes, the government has been resisting any measures for "fear of going the way of the West". The upshot, he believes, is that it's hard to see a big rebound in demand for luxury brands coming from China.

Elsewhere, though, the slowdown may be more temporary.

Oliver says the current woes facing luxury brands are "just cyclical, coming off pandemic spending highs, and reflecting cost-of-living pressures flowing from high rates and inflation impacting consumer spending".

The rise of fast fashion 

Another factor impacting luxury brands is the meteoric rise of fast fashion.

In the past 12 months, 40% of US consumers have shopped at Shein or Temu. Australians have been equally keen to snare the bargains.

Data from Roy Morgan reveals 3.8 million of us have purchased from Temu in the past year, while two million have placed an order with Shein.

"It's been extraordinary to witness the continued rise of these ultra-cheap platforms," says Laura Demasi, Roy Morgan's head of retail research and social and consumer trends.

She adds that over the nine months to August, Shein and Temu have enjoyed the kind of growth that Australian retailers "can only dream of" in the current climate.

Is fast fashion likely to be an enduring threat to the luxury market? Maybe not.

Shane Oliver is confident that as cost-of-living pressures fade, luxury brands will likely be back in fashion based on their reputation for enduring style and quality.

"Fast fashion is a bit of a fad that is unlikely to last given the waste involved," he says. "It's almost certain we will see a shift back to the classic, more durable products offered by luxury brands."

In the meantime, Australian shoppers who can afford it may be well placed to take advantage of savings on luxury items or to pick up shares in internationally renowned brands at heavily discounted prices.

Get stories like this in our newsletters.