From LVMH to Prada, have the days of luxury brands "making money with their eyes closed" come to an end, and the merger battle begun?

The luxury goods industry has long been synonymous with "making money with your eyes closed," but it seems that those days are coming to an end. From the global luxury leader LVMH to Prada in Italy, a series of luxury brands are showing signs of slowing sales growth in key markets.

The demand outlook is filled with uncertainty, and top luxury conglomerates are setting their sights on smaller competitors, sparking a wave of mergers and acquisitions worldwide.

Slowdown in the Two Major Engines of China and the United States

As second-quarter earnings reports are being released, companies such as LVMH, Prada, and Richemont, the parent company of Cartier, have all reported a slowdown in sales growth in the United States. While China's market rebound continues, it is slower than some had expected.

In the first half of the year, LVMH's sales increased by 17%, reaching 42.2 billion euros, with second-quarter revenue of 21.21 billion euros, higher than analysts' expectations. However, sales in the US market for the quarter contracted by 1% compared to the same period last year, an unusual negative growth that has raised concerns and dissatisfaction among investors.

Following the release of the latest earnings report, LVMH's European stock price fell by 5% at one point. LVMH has shown strong performance this year, driving its stock price up by over 21% cumulatively.

Jean-Jacques Guiony, CFO of LVMH, stated that global consumer sentiment this year is not as high as in 2021 and 2022, repeatedly pointing out that the market is normalizing. He also emphasized that the situation in the US market is not as good as before.

Richemont's performance in the US market in the second quarter was poor, leading to a 9% plunge in its stock price last week. Even Cartier and Van Cleef & Arpels, which mainly target ultra-high-net-worth individuals, have reported weak demand.

"The sales in the second quarter of Kering's North American division, the parent company of Gucci, decreased by 23% compared to the same period last year," said Jean-Marc Duplaix, CFO of the group, adding that the Americas remain "a more complex luxury market."

Burberry and Prada also saw declines in sales in the Americas, down 6% and 8% respectively.

However, on the other hand, Hermès saw a 21% growth in the American market in the second quarter, and the performance of Italian luxury brand Brunello Cucinelli in the US market is still growing.

The US market has always been a challenge for European luxury brands.

According to Credit Suisse data, the number of millionaires in the United States exceeds that of any other country, with 40% of millionaires worldwide living in the US. However, luxury goods sales in the US have consistently failed to live up to their potential. According to Watches of Switzerland, a London-listed watch retailer, per capita luxury watch consumption in the US is only one-third of that in the UK. Luxury brands in the US market face a problem where American consumers are more sensitive to prices. The pressure to offer discounts has led brands to withdraw from American department stores and focus on sales in exclusive stores where they have greater control over pricing.

Another issue is the higher cost of marketing in the US. For example, compared to the Chinese market, most advertising in the US is done through traditional channels such as fashion magazines and television, with promotional costs reaching hundreds of thousands of dollars. Therefore, except for super brands, it is difficult for other brands to gain attention.

Wave of Mergers and Acquisitions

With the key market cooling down, luxury companies are changing their strategies and seeking new opportunities for mergers and expanding market share.

Kaiyun Group announced last Thursday that it will acquire a 30% stake in Italian fashion brand Valentino from Qatar investment fund Mayhoola for 1.7 billion euros, with the acquisition expected to be completed by the end of this year.

According to the agreement, Kaiyun Group has the right to purchase all of Valentino's shares before 2028.

In addition, according to insiders cited by the Financial Times last week, Kaiyun Group also acquired French high-end perfume brand Creed in June for 3.5 billion euros.

Lifeng Group announced last Friday that it has acquired a controlling stake in Italian luxury shoe manufacturer Gianvito Rossi. According to insiders, Lifeng has acquired 70% of Gianvito Rossi's shares.