A slower-than-expected rebound in a crucial market would undoubtedly hurt sales for U.S. luxury brands like Michael Kors owner Capri and Estee Lauder. China most certainly made the U.S. need for cooling worse.

After China relaxed stringent import controls to help counteract slowing sales in other regions of the world, global corporations, especially luxury goods producers, had banked on a rise in demand from China.

“Everyone had expected China to come back a little bit more strongly in terms of the rebound post COVID than it has so far. This has clearly led to some need to reset expectations for companies that have a lot of exposure there,” said Raymond James analyst Olivia Tong.

As a post-pandemic rise loses steam, the world’s largest luxury business LVMH this month warned of cooling demand for high-end clothing and accessories in the U.S.

U.S. demand for luxury items has decreased in recent quarters as wealthy consumers hold off on a spending binge due to the country’s persistently high inflation rate.

Companies like Procter & Gamble and L’Oreal have drawn attention to the fragile recovery in China, which is being hampered by a record-high rate of youth unemployment and a lack of effective stimulus measures to increase domestic demand.

The consumer sector of the second-largest economy in the world experienced deflation in July for the first time since February 2021, it was announced on Wednesday.

“For China, the consumer has been somewhat cautious during the reopening compared to what the American consumer has been,” said Rick Patel, analyst at Raymond James.

Travel retail, or sales made at airports or other travel sites, is still struggling to fully recover from the pandemic recession. This is a major growth engine for manufacturers of luxury products.

According to Cowen analyst Oliver Chen, a “lower guidance (is) likely at Estee Lauder” as spending patterns in Hainan, a popular tourism destination in China, are softer than anticipated. Chen also added that he does not anticipate seeing a speedy rebound in the region.

About 30% of Estee’s annual income normally comes from the Asia Pacific region, which is its second-largest market and is known for its MAC lipsticks.

A little bit more than 15% of Capri’s net sales come from Asia, and in May, the firm attributed its full-year prediction to “stronger-than-previously-anticipated trends from the reopening of China”.

However, not all is bad for the industry.

Due to a product lineup that has endured with customers in China and the U.S., businesses including Ralph Lauren and Coach handbag manufacturer Tapestry are anticipated to perform somewhat better.

(Adapted from Reuters.com)

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