For luxury brands, there are no replacements as China and the US falter

Mint

16-05-2025

Even though both countries have 1.4-billion strong populations, mainland China has more than 60 Louis Vuitton stores while India has only three.
Designer brands' struggles in India are a reminder of just how difficult it can be to find new growth markets. That search is taking on new urgency, as the two biggest drivers of demand in the luxury goods industry, China and the U.S., are in the doldrums.
Together, Chinese and American shoppers generate around half the sector's sales. But demand from Chinese consumers has been muted for four years. The country's deflating property bubble has wiped 30% off Chinese household wealth, according to Barclays Private Bank, lessening the appetite for luxury goods.
U.S. luxury sales peaked in early 2022 and have tailed off since. A delicate recovery in spending seen late last year was snuffed out by the tariff war. LVMH, the world's biggest luxury-goods company by revenue, said sales in the U.S. fell 3% from a year earlier in the first quarter. Although it doesn't break out China, sales fell more than a 10th in Asia.
And 2025 is shaping up to be a lost year for the luxury industry, with global sales expected to dip 2%.
Brands and their shareholders got used to two decades of reliable 6% annual growth, so they are naturally eager to find the next hot market. But it will be hard for luxury companies to reduce their dependence on Chinese and American consumers, as they need such specific elements to thrive.
If luxury bosses were able to build an ideal market for their products from scratch, the local economy would be growing rapidly. This creates a pool of ultrawealthy spenders. 'The ingredients [for a luxury boom] are the same every time," says Luca Solca, analyst at Bernstein. 'You have a group of top consumers getting a lot richer who are interested in separating themselves from the crowd, so they buy luxury goods."
But there shouldn't be too much wealth inequality. When middle-class consumers are also getting richer, some will try to keep up with the Joneses by spending on designer goods. Top brands have a reputation for catering to the superrich, but more than 50% of global luxury sales come from hundreds of millions of middle-class shoppers who spend less than 2,000 euros a year on luxury goods, equivalent to $2,240 at current exchange rates.
'The two markets coexist in a symbiotic relationship," says Filippo Bianchi, a managing director at Boston Consulting Group. 'Spending by the wealthiest shoppers, that money is always there. But the bottom half is driven by GDP and what is happening to people's salaries."
This is what made China such an amazing market for luxury goods. Between 2009 and 2019, its economy grew 8% a year on average. As China's rich got richer and its middle class swelled, both turned to Western luxury goods to signal they were moving up in the world. Back in 2000, Chinese customers generated 1% of global luxury sales, according to UBS. Today they account for around a quarter.
The country also urbanized rapidly, so luxury brands were able to advertise and retail efficiently to tens of millions of city dwellers. And middle-income consumers were pressed up against the ultrarich, creating status hunger.
Compare that with India, where only a third of the population lives in cities. India is the market that divides opinions the most among luxury industry analysts. It has been one of the fastest-growing economies in the world for several years, so some brands think it is only a matter of time before middle-class Indians want Chanel handbags and Cartier bracelets.
But the Indian market has underperformed expectations so far. Reasons cited include a supposedly less individualistic culture and strong local clothing and jewelry brands. Today, luxury brands sell goods worth $1 billion inside India, compared with $45 billion in mainland China, says Federica Levato, a senior partner at consulting firm Bain & Company.
A country's retail infrastructure can also be a deal breaker for brands. For now, luxury brands sell their goods in the lobbies of five-star hotels in India. But an area equivalent to London's Bond Street or New York's Fifth Avenue where they could open flagship stores hasn't developed yet in major cities.
According to Ashok Som, co-author of 'The Road to Luxury," India's population of 1.4 billion is served by just eight luxury shopping malls. High import taxes, which add around 50% to the price of goods such as designer handbags, mean India's high-net-worth individuals do their luxury shopping abroad.
Unless middle-class Indian consumers start buying luxury goods at home in big numbers, investment in high-end retail won't happen. That in turn further holds back spending.
Luxury brands can try to coax more cash from local Europeans. But the region's shoppers aren't in an indulgent mood. 'The European economy has been stagnant for years versus China and the U.S.," says Bernstein's Solca. 'Consumers only buy luxury goods when they think 'I can spend a lot today because tomorrow I will be richer.'"
Saudi Arabia is another market that luxury brands are watching, even though they aren't all-in yet. Half a million square meters of luxury retail space is being developed over the next decade, in a punchy bet that locals will do more luxury shopping at home rather than in London or Paris, and that there will be an influx of high-spending expats and tourists.
Even if that goes according to plan, luxury sales in the Saudi market will only be the same size as Germany's, says Boston Consulting Group.
With no obvious alternative to China or the U.S., brands might try to lure back middle class consumers in these markets to jump-start growth. A report from Bain shows the luxury industry has lost 50 million customers since 2022, partly because hefty price increases put their goods out of reach for aspirational customers.
Today, the lowest-cost women's sneakers on Gucci's U.S. website were $790. Back in 2020, the most affordably priced pair cost $550, the Wayback Machine shows.
The solution to the luxury industry's growth problem probably doesn't lie in new emerging markets. What the brands really need is a re-emergence of middle-class spending in the U.S. and China.
Write to Carol Ryan at [e-mail]