The global trend of slowing consumer spending continues, and luxury goods companies performed below expectations in the second quarter.

According to a research report released by Bank of America Merrill Lynch analysts Ashley Wallace and Daria Nasledysheva on August 27, luxury goods companies' Q2 revenue remained relatively flat, with average profit dropping by 12% compared to the first half of the year. Since May, stock prices have lagged behind the market by an average of 5%, and market consensus forecasts have also been lowered by 5%.

These signs indicate a weak trend and outlook for luxury goods consumption. Specifically, Bank of America also identified the following major trends.

Zero growth in luxury goods revenue, with severe brand polarization.

According to the report, in the second quarter, the weighted average revenue growth rate of the luxury goods industry was 0%, a decrease from 2% in the first quarter, reaching the lowest level in fifteen quarters.

Looking at the annual growth rate, the revenue growth rate in the second quarter also showed a slowdown. The report shows that based on the 5-year compound annual growth rate, the industry's revenue growth rate in the second quarter slowed by 0.9% to 8.8%, and based on the 2-year compound annual growth rate, the second quarter's revenue growth rate slowed by 0.4% to 6.8%.

The report also pointed out that demand for luxury goods peaked in the first quarter of 2023 and has since normalized. By the second quarter of this year, the revenue growth rate, calculated based on the 5-year compound growth rate, was already 0.2% lower than the long-term average level, indicating that the post-COVID-19 'overspending' trend has come to an end.

In terms of individual brands, there is a significant differentiation in revenue performance. The report shows that Prada's revenue increased by 18% year-on-year, the strongest among all brands, while Burberry's performance was the weakest, with a same-store sales growth rate of -21%, a 39% difference compared to Prada's growth rate.

In terms of absolute revenue, Hermes almost single-handedly drove the industry's revenue growth. Compared to the same period last year, Hermes' second-quarter revenue increased by 0.44 billion euros, while consumer spending on other luxury brands decreased by a total of 0.14 billion euros. In the first half of the year, Hermes' revenue also increased by 1 billion euros year-on-year, while consumer spending on other luxury brands only increased by 0.4 billion euros.

Hard luxury's performance is inferior to soft luxury, where brand is more important than category.

Luxury goods can be divided into two categories: soft luxury and hard luxury. The former mainly includes fragrances and handbags, while the latter mainly includes watches and jewelry.

From the second-quarter revenue performance perspective, the weighted average income of hard luxury is -1%, while the average income of soft luxury remains steady. Among hard luxury categories, watches are more cyclical than jewelry, and the best-performing jewelry brand is Pandora; among soft luxury brands, the best-performing brands are Miu Miu, Hermes, and Cucinelli.

The report points out that the performance of hard luxury is inferior to that of soft luxury, which is somewhat 'counterintuitive,' especially at this stage of normalizing demand. Bank of America Merrill Lynch (BAML) states that this means that product category is not the key factor determining relative income growth, rather the following three factors have more decisive impact: 1) brand attractiveness and momentum; 2) fashion content and its novelty; 3) brand investment cycle and management execution.

Price increases and promotions are 'advancing together,' but sales volume may turn negative this year.

In fact, starting from 2022, luxury brands such as Chanel, Dior, Louis Vuitton, and Rolex began to raise prices, leading to an average industry-wide price increase of 7% between 2022 and 2023, in line with the global CPI growth rate.

Nowadays, this price increase trend is still continuing. The report indicates that most brands have implemented small price increases this year, and it is expected that the average industry price will increase by 4%-5% this year, with Japan and China seeing the largest price increases. It is projected that the average industry price will increase by 2-4% in the next two years, which is still slightly higher than the long-term trend.

Taking Hermès as an example, the brand has seen the largest price increases in the USA and Japan markets, and the smallest in Europe. Among the various categories, the smallest price increase is in beauty products, while the highest increase is in popular products such as the Oran sandals, men's ties, and Avalon blankets.

At the same time, considering the weak demand for luxury goods, brand promotion activities have also increased.

According to the report data, 52% of women's clothing products on luxury goods e-commerce websites were discounted in June, which is higher than the previous year's 48%, and the level of discount has also increased.

Despite the multiple initiatives launched by the brands, industry sales in 2024 may turn negative.

The report states that price and product mix were the most important drivers of revenue growth during the period 2019-2023, contributing to nearly 60% of industry growth.

For 2024-2025, Bank of America believes that price and product mix will still be the biggest growth factors, but growth on a global scale will mainly come from optimizing the product mix rather than increasing average prices, and it will be the first time that sales volume declines, especially in the European and American markets.

There has been a deterioration in demand in the United States, while local demand in Europe remains weak.

In terms of regional analysis, the demand in the USA market has deteriorated compared to the previous period.

The report points out that USA consumers are the "canaries in the coal mine", often showing early signs of global consumption trends. However, due to the lack of substantial improvement in monthly consumption data in the USA, there are still downside risks in the global luxury goods industry in the second half of the year.

The aggregated data from Bank of America's credit and debit cards shows that the luxury goods consumption rate in the USA was -12% in the second quarter, 1 percentage point lower than -11% in the first quarter.

The revenue growth rate of luxury goods in North America also slowed down from 4% in the first quarter to 2% in the second quarter, although it is better than the trend of Bank of America's credit and debit card data, it still recorded continuous deceleration.

The earnings report for the second quarter in the Europe region was slightly better than expected, but Bank of America believes that it is mainly driven by the tourism industry, and local demand is still weak.

Data shows that tourism spending accounts for about 50% of the European luxury goods market. According to data from Planet, the total amount of tax refunds for international tourists in Europe in the second quarter increased by 8%, while the overall luxury goods market in Europe recorded single-digit growth (4%), indicating that local consumer spending has slightly negative values.