China is dragging the entire luxury brand business into its own recession

French luxury brand Louis Vuitton has got serious problems in China. The slowing economy there plus a government crackdown on corruption - which has reduced the demand for expensive designer goods that can be used as gifts to curry favour - are both hitting Louis Vuitton at once.

It is more evidence that a surprising number of luxury brands were dependent in part for their sales on corruption in China. In addition to Louis Vuitton:

• Last week British firm Burberry posted worse than expected results, blaming poor sales in the country.
• Remy Cointreau disclosed that sales declined by 9%, after taking a hit in China.
• Diageo, which makes Smirnoff and Johnnie Walker, took a £264 million ($411.5 million) sales hit in China, blaming the crackdown for a collapse in its version of Chinese white spirit baijiu.
• Earlier this year Prada blamed the crackdown for its first fall in profits in four years, which dropped by a whopping 28%.
• Luxury group LVMH, which owns Hennessy cognac, revealed a fall in spirit sales in the first quarter because of China.
• The luxury car market has taken a hit.
• And exports of Swiss watches to China have also collapsed.

These disclosures are astonishing. In the West, where these brands are headquartered, we're enjoying a sixth straight year of economic growth, recently coupled with full employment. Even wages are running ahead of inflation - an unusually favourable economic phenomenon. For consumers, these are the best of times. Luxury brands ought to be riding high.

And yet the luxury business looks like it's going through its own Great Recession - because of China.

20% of stores predicted to to close

Louis Vuitton has closed one store in each of the cities of Guangzhou, Harbin, and Urumqi, according to a report in the Financial Times,

These are provincial cities where the economic slowdown has been more pronounced due to a traditional reliance on the manufacturing industry. The closures leave around 50 Louis Vuitton stores across China.

The three closed stores are the first of many, the FT said.

"According to my information, 20% of Louis Vuitton's stores in China will have disappeared by mid-next year: that is a closing rate of about one store per month," Emmanuel Hemmerle, managing partner of a major leadership consultancy in Shanghai, told the FT.

However Louis Vuitton has been quick to say that there will not be widespread store closures. On Tuesday, a spokeswoman for LVMH, Louis Vuitton's parent company told Business Insider that Emmanuel Hemmerle's assertions are "simply not true" and that the company's "retail strategy in China is to optimize the quality of its store network."

The company did, however, admit that there may be temporary store closures, as it seeks to "obtain the best venues possible for LV stores".

Poor performance from luxury brands is largely thanks to the country's economic slowdown which has seen growth forecasts cut to less than 7% after years of double-digit GDP growth.

This, in combination with the huge anti-corruption and anti-extravagance campaign led by president Xi Jinping, has seen luxury goods become less accessible to the growing Chinese middle class, and less acceptable for members of China's elite, where extravagant displays of wealth are now being frowned on.

Another issue particularly affecting Louis Vuitton in China is a growing perception that the brand is not quite good enough for the country's elites, and is now seen as middle class, meaning those who can afford the brand do not buy it. In February, Business Insider spoke to Sara Jane Ho, the founder of an elite Chinese etiquette school, who said "I can't buy Vuitton, I've seen it too much, it's a brand for secretaries."

Organic growth down 6% in China

Despite the closures, Louis Vuitton said on Monday that it has recently opened new stores in both Beijing and the coastal city of Hangzhou, and said that it "will continue investing in China in the current store network in order to enhance the level of experience we wish to offer to our clients."

Louis Vuitton's parent company LVMH released interim results for Q3 in October, and they showed that the Asian market is hugely challenging overall. Year to date organic growth has fallen by 6% in the Asian region across the whole company, which includes luxury drinks brands Moet Champagne, and Hennessy Cognac.

Despite denying more store closures in Tuesday's statement, LVMH CFO Jean-Jacques Guiony, made a tentative announcement of store closures last month when announcing the company's results, saying on a call "We may be closing down a couple of stores in China where we have two stores in second-tier cities".

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