Just a couple of weeks ago, LVMH reported a 9% organic revenue growth in its fashion and leather goods division. Yet the figure fell short of the 11.2% anticipated by analysts. The wines and spirits segment of the group recorded a staggering 14% decline, a far cry from the 17% growth in the preceding quarter, figures that seemed to prove that the post-pandemic luxury boom is losing momentum.
The trend was confirmed by another recent report: French luxury group Kering, owner of Yves Saint Laurent, Gucci, Balenciaga and Bottega Veneta among the others, reported a bigger-than-expected drop in third quarter sales.
On Tuesday, the French luxury group reported revenues of €4.46 billion euros for the third quarter of 2023, a 13% decrease as reported and 9% on a comparable basis. This includes a 6% negative impact from exchange rates and a 2% positive effect from the acquisition of eyewear brand Maui Jim.
In Q3 2023, Gucci recorded revenue of €2.2 billion, reflecting a 14% decrease as reported and a 7% drop on a comparable basis, although it demonstrated resilience in handbags and the Valigeria collection. Wholesale revenue also declined by 17% on a comparable basis. During this period, Gucci introduced its new creative direction with Sabato De Sarno's inaugural collection for the house.
Yves Saint Laurent reported revenue of €768 million, marking a 16% decrease as reported and a 12% decline on a comparable basis. Despite these challenges, positive momentum was achieved in women's ready-to-wear, and the brand continues to pursue its strategy of elevating its product offering. Wholesale revenue, however, fell significantly by 38% on a comparable basis.
Bottega Veneta reported revenue of €381 million in the third quarter, reflecting a 13% decrease as reported and a 7% decline on a comparable basis. Wholesale revenue saw a notable 30% decrease on a comparable basis.
The Group's other houses generated revenue of €805 million in the third quarter, recording a 19% decrease and a 15% decline on a comparable basis. Balenciaga experienced mixed growth, while Alexander McQueen faced a slowdown during the quarter. Trends were more optimistic for jewelry: Boucheron achieved positive results, reflecting the success of its High Jewelry and Jewelry collections; Pomellato witnessed solid growth in its stores, while Qeelin showed excellent momentum.
Kering Eyewear reported revenue of €331 million in the third quarter of 2023, marking a 34% increase as reported, and a 2% rise on a comparable basis. The growth was primarily attributed to optical frames sales, though, following robust sunglasses sales in the first half of the year.
Aside from challenging macroeconomic conditions and the shifting demand within the luxury industry, the performance was attributed to strategic decisions to elevate the brand offerings (Kering went through a number of changes, including management restructuring, and reduction at wholesale distribution level, besides, it acquired Creed, a renowned fragrance house).
Some of us may be luxury consumers; others simply can't afford luxury or just prefer investing their money in other ways, which means that most of us mere mortals do not really care about the losses registered by this sector. That said, exploring the luxury market and comparing it to other industries and sectors can be exciting.
While things may change and these powerful groups may recover, we aren't living in great times for luxury: consumer skepticism about the future is understandable, especially in the context of the ongoing conflict in Ukraine and the current situation in the Middle East, after Hamas’ atrocities and Israel's retaliation.
But what's interesting to consider about luxury is maybe the fact that these groups seem to be constantly expanding, but often in limited directions. There is indeed one sector that they do not seem too keen on keeping an eye on – technology. In this context, we're not referring to the more glamorous areas like smart wearables, NFTs, or Artificial Intelligence, which have piqued the fashion industry's interest. Instead, we're alluding to less glamorous yet immensely valuable technologies, such as advanced microchips.
The electronic components market experienced a surprise turnaround during the initial wave of the Covid-19 pandemic. As many industries and factories shut down during the early weeks of the pandemic, several electronic manufacturers initially reduced their production, anticipating order cancellations due to lockdowns.
However, the semiconductor industry witnessed an unexpected boost, not from its typical markets, but from sectors such as healthcare, medicine, and consumer goods. These industries sought high-end products for medical applications, remote work, distance learning, and home entertainment, creating a surge in demand that caught the industry off guard. Initially, there were concerns about excess component stock, but these were quickly overshadowed by the demand from these emerging markets. Chip manufacturers actually produced more semiconductors during the pandemic and shortages, such as the one that disrupted the car production in the United States throughout 2021 and 2022, were driven by increased demand rather than supply issues.
Semiconductors power all sorts of devices, from electronic goods such as phones and computers to data centers, and area employed in a wide range of industries including aviation, automotive and manufacturing. But the problem is that we all mainly rely on chips from Taiwan, primarily produced by Taiwan Semiconductor Manufacturing Company (TSMC), the world's largest producer of this technology. In turn, TSMC relies on the Taiwan Strait's stability.
Indeed, economists highlight that, if a political crisis ever occurred and China attempted to gain power over Taiwan and control of crucial chip production facilities, there would be severe consequences on a global level. A Taiwan crisis would indeed cost trillions, dwarfing the Covid-19 pandemic's economic impact. Delays in chip production would disrupt various industries, and even upgrading cell phone networks would become challenging.
TSMC's chip production necessitates complex software, the use of potentially dangerous chemicals, ultra-pure silicon, and the deployment of costly machinery to craft tiny transistors on silicon wafers. These are the main reasons why, while the pandemic has taught us that many industries including Big Tech firms can be easily relocated or continue functioning remotely in case of an emergency, rebuilding chip production capacity in other countries would take at least half a decade (that's why in 2021 Taiwanese President Tsai Ing-wen referred to Taiwan's chip industry as a "silicon shield" against disruptions in global supply chains…).
The U.S., Germany, and Japan are accelerating efforts to establish chip manufacturing capabilities: with support from the Biden administration, TSMC also invested $40 billion in two factories in Phoenix, Arizona, but it is facing challenges due to cultural differences and recruiting skilled labor (the knowledge gap between American and Taiwanese technicians meant that hundreds of specialists from Taiwan had to be called over for assistance). This has caused project delays, pushing chip production to 2025 from the initially planned date next year.
What has this got to do with the luxury market? Well, While iconic luxury items like Hermès' Birkin bags have long been regarded as valuable investments, even better than gold and stock market, the semiconductor market offers enticing rewards. This raises the intriguing question of whether luxury groups will one day venture into the world of advanced microchips.
Could we see luxury brands entering the semiconductor market, investing money in this industry or launching their own branded chips? It may sound like a science fiction story with a fashionable twist, but in today's ever-evolving landscape, nothing can be entirely ruled out. Technology and luxury are increasingly intertwined, and luxury will likely need to continually reinvent itself to remain relevant, so, who knows, the idea of branded chips might just be the next unexpected evolution in a luxury market that is losing consumers and support.
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