China’s recent implementation of a 20% tax on affluent individuals is placing significant pressure on luxury brands, just as companies prepare for their third-quarter financial results. From October 22, high earners using offshore trusts to shield assets are required to declare and pay back taxes, a move that could dampen spending in a market responsible for approximately 20% of global luxury sales.
The stock prices of major luxury brands have suffered as a result. LVMH and Hermès have seen their shares decrease by about 40% this year, reaching multi-year lows, while Kering, the parent company of Gucci, has experienced a 29% drop. Recent shopping mall data from mainland China indicates a concerning slowdown in consumer growth, according to analysts at Bernstein.
Tax Deadlines and Retail Liquidity
The new tax is particularly affecting ultra-high-net-worth individuals, a demographic that had previously shown resilience compared to middle-class consumers impacted by a prolonged property downturn in China. Alexis Bonhomme, head of luxury consultancy Trinity Asia based in Shanghai, pointed out that many affluent shoppers may encounter short-term liquidity challenges before the October 22 deadline arrives.
“Until the deadline to pay the tax, some people may face liquidity issues,” Bonhomme said. “This doesn’t mean they won’t start buying again, but right now, the mood just isn’t there,” he added.
Quiet Luxury Pulls Ahead in Mall Aisles
Despite overall weak conditions, some brands are faring better than others. Sources familiar with third-quarter trading insights indicate that smaller “quiet luxury” labels, like cashmere specialist Brunello Cucinelli and LVMH’s Loro Piana, are outperforming more visible brands such as Louis Vuitton and Gucci. In contrast, high-end jewelry continues to thrive, with brands like Cartier seeing increased interest from wealthy consumers who prefer gold and precious materials perceived to offer lasting value.
Global Headwinds Compound Asia Weakness
The slowdown in China is compounded by softening luxury demand in the United States, the industry’s largest market. Citi reports that credit card spending on luxury goods in the U.S. has declined for three consecutive months, as consumer confidence wanes ahead of midterm elections. Luxury brands are also confronting challenges stemming from global events, including the conflict in Iran. Kering has cautioned analysts to expect continued contraction at Gucci, leading brokerages to reduce their stock price targets.
Earlier Strains and Upcoming Earnings
The $350 billion luxury sector is currently facing a three-year slowdown triggered by diminished demand following the pandemic. In downtown Beijing, exporter Deng Qi predicts a 20% reduction in luxury spending this year, stating that the offshore tax measures damage confidence within the affluent community.
Investors will gain insight into the sector’s trajectory when LVMH releases its financial results on Monday, with analysts expecting quarterly sales to reach €18.5 billion ($20.7 billion), representing a 1% increase from the previous year. Kering and Hermès are scheduled to announce their quarterly results on October 22.
