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Luxury Goods Sector Takes a Hit in Asia

July will not be remembered as a month where shoppers lavished themselves with luxury goods.

Iconic luxury labels LVMH, Richemont-owned Cartier and Kering, parent company of Gucci, saw their shares dip in July and their investors run for the exit sign. When LVMH shares plunged 7.2% on July 25, it was the company’s biggest one-day sell-off in five years. Meanwhile its second quarter sales growth dwindled down to 0 percent, from 9 percent the previous quarter. Likewise, Gucci’s revenue growth has flatlined from a high of more than 10 percent three years ago to zero percent.

Behind the downturn of these stately luxury brands and the once-booming luxury sector are a number of shakeups in some of its most profitable regions, including Hong Kong, Macao and China, which typically account for more than one third of total revenue for many luxury brands.

Protests in Hong Kong, demanding democratic reforms, scared away visitors and slowed its flow of tourism dollars. A larger-than-expected decline in Japan’s sales surprised analysts, while falling demand for luxury goods in Mainland China–primarily due to government crackdowns on corruption and conspicuous consumption among its government leaders–stunted growth.

What was once considered a beacon of light when LMVH, Gucci, Giorgio Armani, Dolce & Gabbana and other sellers of high-ticket luxury goods opened numerous stores in China starting in 2005, has now generated a significant decline in sales over the past two years, contributing to the plummeting share prices of LVMH and the others. As a result, last year Giorgio Armani, Dolce & Gabbana and others closed their Chinese stores as the economy slumped.

Analysts see LVMH’s dramatic day of sell-offs as evidence that the downtrend is continuing and that the once-robust Chinese market will not soon, if ever, return to its once previous profitability. To improve sales and win back its exclusivity, LVMH and Gucci are bolstering their leather goods selections and are working to add more fashionable designs to lure shoppers back.

Still, analysts are not optimistic about near-term prospects for the companies and have forecast only modest growth for the entire sector over the next few years.