Another Major Market Bubble Just Burst.

Does it do anything? It tells the time.

Is the fall of luxury goods finally upon us? At the start of the year, everything seemed promising. A report from Bain & Company estimated the luxury market to reach 1.5 trillion EUR, or $1.63 trillion, globally in 2023, marking a robust 8 to 10% growth over 2022. Luxury good sales hit a new record despite tougher macroeconomic challenges.

But fast forward just 7 months, and the headlines tell a starkly different story: "World's biggest luxury fortunes lose $24 billion as market slows." Luxury fashion is struggling. In the first half of 2024, has the luxury e-commerce bubble burst? Bernard Arnault, LVMH founder and former world's richest person, saw his wealth fall $10.8 billion over the past year and is now third on the rich list behind Elon Musk and Jeff Bezos. LVMH reported markedly slower sales growth for fashion and leather goods in the first quarter, with an overall decline in Asia.

Similarly, L'Oreal's bleak outlook for China has cost Francois Pinault and caught buyers around $10 billion, reducing her net worth to $90 billion. Caring CEO Francois Pinault's wealth shared after warning investors in April about a huge profit plunge due to struggles with Gucci. More recently, the luxury goods market has once again been thrust back into the spotlight as, late last month, LVMH reported much lower than expected revenue, with their Asian sales, ex-Japan, falling 14% year-over-year.

A week earlier, Hugo Boss shares dropped 9% as the firm dropped their 2024 guidance, and prior to that, British luxury fashion house Burberry saw a 16% hit to their share price after reporting a 22% revenue decline for the 13 weeks ended June 29. They also noted that if the recent trading slowdown continues, it expects to report an operating loss for the first half of the year, and they've now decided to suspend their dividend and part ways with their CEO.

But the really concerning thing they noted in their release was that they are facing slowing luxury demand, with all key regions impacted by macroeconomic uncertainty, contributing to the sector slowdown. But the interesting thing is that a popular opinion amongst investors is that the luxury goods market is relatively recession-proof. The primary customers of luxury goods are high net worth individuals and affluent consumers who are typically less affected by economic downturns. Their purchasing power remains relatively stable, allowing them to continue buying luxury items even during recessions.

A rise in interest rates or unemployment simply wouldn't matter to them because they're just so rich. What luxury should I have? Private plane? Larry, I'm on DuckTales. Interestingly, you can see that in the numbers too. During 2008 and 2009, despite the world dealing with one of the worst financial crises in history, the luxury goods market only saw a very modest decline. Following the lockdown-riddled year of 2020, the luxury goods market bounced right back to where it was before in 2019.

So how is it that we're seeing such a downturn in the luxury goods market in 2024? Well, a lot of it has to do with the recent rise in middle-class spending. I was reading a Vox article on this recently, and they noted that, according to global data, Americans with a household income of less than $50,000 make up about 27% of regular luxury consumers, and that's almost as big of a group as luxury consumers with an income of $150,000 or more.

Surprisingly, lower and middle-class consumers account for nearly half of the luxury goods market globally, with this segment expected to be expanding to 450 million people by 2025, up from 390 million in 2019. This is a result of a few things. Firstly, the rising number of consumers now fitting into the middle class in developing economies, but it's also a direct result of the COVID lockdowns and stimulus programs.

While the imagery we saw in the media was one of hardship and suffering, for a great deal of people, this time was actually quite profitable. Again, turning to the numbers, the personal savings rate skyrocketed, which put a lot of money in people's bank accounts. This, coupled with a huge rise of social media exposure to fashion and designer brands thanks to the lockdowns, plus a focus of luxury brands to start offering entry-level and mid-range luxury products, helps spur a really rapid rise in luxury spending from the middle class.

Looking back to data around the pandemic, we can see that luxury purchases by individuals making $40,000 or less were 365% higher at the end of 2021 than they were in January 2020, before the lockdowns began. In the U.S., luxury spending is also trending towards younger age groups now too, with Gen Y and Gen Z accounting for all of the personal luxury goods market's growth back in 2022, and they're expected to account for the lion's share of luxury goods sales by 2030.

So, over the last few years, as strange as it sounds, luxury goods have become more accessible than ever before. But this is also the reason why the sector is no longer as immune to changes in economic conditions because the middle class is much more affected by macroeconomic conditions than the ultra-rich. Most of the buyers of luxury goods are not wealthy; they're upper middle-class people that like to splurge.

And again, when they're not having all that extra cash, like they don't right now, that's going to hurt those discretionary purchases most. For example, two regions that make up a large percentage of the luxury goods market are the U.S. and Europe. It's no secret there are serious cost-of-living pressures on the middle class in both of these regions.

The federal funds rate in America has risen from effectively zero to about 5.5% today, and the ECB similarly has raised from nothing to 4.25% today. Now, these measures were of course put in place to combat the high inflation that, while for slightly different reasons, was seen in both regions. And while these measures have been effective in cooling inflation in both regions, in doing so, of course, they have made the financial lives of businesses and individuals tougher.

Mortgage rates go up, paying back debt becomes harder, unemployment tends to rise in higher rate environments (although not so much this time), and overall, consumers have less to spend. So, inflation naturally cools; that's how it works. Typically, the first things to go are the unnecessary big luxuries, you know—luxury brand cars, high-end bags, jewelry, watches, fragrances—the luxuries that people don't really need to buy. And that's what we're seeing in the results of companies like Burberry.

But now, let's address the big elephant in the room, because while all major regions are contributing to this slowdown in luxury good sales, by far the largest impact is being seen in China. Thanks to the ongoing trend of China's middle class growing in size, from 2017 to 2021, China's luxury market tripled in size. The boom then stumbled in 2022 thanks to the impact of COVID-19 and the CCP's strict policies around that time.

But with the lifting of those restrictions in December 2022, all looked well again. In 2023, the luxury goods market in China experienced a 12% rebound, but that's about where the good times end as 2024 has been quite the different story. Because Chinese consumers are doing it tough. Chinese shoppers are watching what they spend, and that could spell deep trouble for some of the world's luxury brands.

Coming out of the COVID lockdowns, unlike the Western world, the Chinese government opted not to do widescale stimulus, leaving citizens in a world of pain. Considering the value of their wealth was falling rapidly due to wider problems in that real estate sector. Unlike in most Western countries, where the family's wealth might be spread across multiple asset classes like stocks or bonds and real estate, for the Chinese, approximately 70% of household wealth is tied up just in real estate.

As I've spoken about in past videos, in China, the socially accepted pathway to getting wealthy is to buy Chinese real estate. But that obviously causes bigger problems when the real estate market crashes. House prices in China right now have been falling steeply, and it's eroding the wealth of middle-class Chinese families. Now, this has led to consumers tightening the belt, and this has been observed particularly in luxury goods, leading to headlines like this one.

The article notes that just last month, shoppers could secure Balenciaga's iconic hourglass handbag for $1,947, or 35% off on Alibaba's Tmall—the cheapest online price you could find globally. According to the article, Balenciaga averaged a 40% discount on sale items in three of the first four months of 2024 and has more than doubled its number of discounted products on Tmall. Comparatively, over the same period in 2023, Balenciaga only discounted items in January at an average of roughly 30% and had no markdowns at all in the first four months of 2022.

Furthermore, Capri Holdings, LVMH's Zeni and Burberry group have all slashed prices, some by more than half on Tmall and other Chinese platforms. This month, the article notes Fa's average discount jumped from roughly 40% at the start of 2023 to over 50% this year. And this isn't a good look, right? Because, as a luxury goods maker, the more you have to discount your unsold inventory, the more you tarnish your brand.

Our name, Sweet Juan Jack Angelito Perez Tan Jr., CEO of RTG Group Asia, said it best, saying that while discounts might help clear inventory in the short term, frequent price cuts could make brands appear too accessible and drive away coveted VIP clients. And that's the struggle with brand moats like this. While I've said many times that brand moats are often the strongest moats in the world, this also shows that brand moats aren't always necessarily recession-proof.

The top of the top brands generally hold up well— the Rolexes, the Ferraris, the Bugattis—but sometimes, relying on your name just isn't enough. So now, what I really like to see when it comes to these brand moats is actually that their brand has led the business to securing a second or even a third moat. For example, Apple is the number one electronics brand by some margin, but they don't let their business rely solely on the popularity of that brand.

While they've enjoyed the advantages that come with that moat, they've also worked really hard on creating a switching moat or an ecosystem moat where it becomes very hard to escape their products. Same with Visa or Mastercard—big brands, but that comes second to their network effects. Costco has a great brand name, but they're also known for offering the lowest prices.

So, while I typically say that brand moats are some of the most powerful moats in the world, I think I'd actually refine my thoughts a little further. Brand moats can be the strongest moats in the world, but where they become really overpowered is when they're paired with another moat.

Also, just to wrap up, if you'd like to learn more about moats and particularly how to stress test a moat through the company's financial statements, all of that is included as part of the Introduction to Stock Analysis over on New Money Education, which, as I like to remind everyone, is a 6-hour course that goes through reading financial statements, forming your own circle of competence, analyzing moats and management teams, and it also includes three robust valuation methods that you can use to find the intrinsic value of any company that you look at.

So definitely check that out; you can use the code SAVE50 to score $50 off for following the channel. I really appreciate you guys for helping support my business here on YouTube. But with that said, guys, that is the lowdown on the downfall of the luxury goods industry that's taking place across the world right now.

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I have $2 and a Casio.