Shifting tastes in China signal new era for luxury: Barclays

Barclays reports a significant shift in China's luxury market, which is no longer a reliable growth driver due to evolving consumer behavior, reduced social pressure to display wealth, and intensified competition from domestic brands. This has led to a polarized sector, with overall negative organic growth in the first half of 2025, and varied performance among brands, prompting revised stock views for Burberry and Moncler upwards, while Hermès was cut. Chinese luxury spending is projected to decline 10% this year amid macroeconomic pressures, with future growth rates significantly lower at 5-6%, indicating the era of easy expansion is over and brands must adapt to a more mature, competitive environment.

Analysis

A Barclays research report indicates a structural shift in the global luxury sector, with China transitioning from a reliable growth engine to a highly competitive 'battleground for market share'. This change is driven by evolving consumer preferences toward experiences over goods, reduced social pressure for overt wealth display, and the rapid ascent of domestic competitors like Laopu Gold, which posted 251% revenue growth in the first half of the year. Compounding this are macroeconomic headwinds, including falling housing prices and subdued consumer confidence, leading Barclays to forecast a 10% decline in Chinese luxury spending for 2025 and a moderated 5-6% growth rate through 2030, a significant deceleration from previous double-digit expansion. The sector's performance is now highly polarized: while the overall organic growth was -2% in the first half of the year, individual brand fortunes diverge sharply. Burberry and Moncler received upward revisions to their price targets and EPS forecasts due to successful strategic initiatives, with Burberry's stock gaining 27% year-to-date. In contrast, Hermès saw its target and EPS forecast lowered on lagging Asia Pacific growth, and Kering is suffering from a nearly 19% sales decline at Gucci. The watch segment is particularly weak, with Swatch's stock down 32%. Despite this slowdown, the sector's forward P/E multiple of approximately 23x remains in line with its 10-year average, suggesting the market has priced in some, but perhaps not all, of these new realities.

Key Decisions for Investors

• Given the sector's polarization, investors should prioritize stock-specific fundamentals over broad sector exposure, focusing on companies like Burberry that are demonstrating successful strategic execution and market share gains.
• Re-evaluate valuations for brands with high dependence on Chinese consumers, as the structural deceleration to mid-single-digit growth, evidenced by Hermès's revised forecast, may not be fully priced into stocks with historical growth premiums.
• Monitor the rising threat from domestic Chinese brands and its impact on the margins of established European houses, as the struggles at Kering's Gucci indicate brand heritage alone is no longer sufficient to defend against competition.
• Assess companies for geographic diversification and strength in the U.S. market, as the report highlights that achieving 6-7% overall sector growth now requires sustained 9-10% growth from American consumers, creating a key dependency and potential risk.