- Brands like Starbucks, LVMH, and L'Oreal struggled in China last quarter as consumer spending dropped.
- Chinese consumers are saving more and spending on experiences over products.
- Starbucks plans to open more stores in suburban areas to counteract declining sales.
Some of the world's biggest brand names are struggling to crack one market this year: China.
Retailers, including luxury giant LVMH, L'Oreal, and Starbucks are all seeing lower sales in the world's second-largest economy, compared with past years. Chinese customers are choosing to save their money and spending on experiences when they do fork out.
Starbucks, which reported earnings on Tuesday, saw an especially harsh reality check.
Sales in the country tumbled 14% year-on-year in the second quarter, a metric important to investors since about 18% of all Starbucks outlets are in China. The company brought in $733 million in revenue in China in the three months ending June 30, down 11%.
"China is one of our most notable international challenges," said CEO Laxman Narasimhan on Tuesday's earnings call. "We've continued to face a more cautious consumer spending and intensified competition in the past year."
Starbucks faces intense competition from local chain Luckin Coffee, which has around twice as many stores as Starbucks in China.
One of Starbucks' strategies for China will be opening more stores in suburban and rural areas, where populations are moving to, chief financial officer Rachel Ruggeri said on the call.
Overall, Starbucks met analysts' quarterly profit expectations, but earnings fell 7.6% compared to the same quarter last year. Shares of the company are down 19% year-to-date.
Chinese customers are not shopping
It's not just dining. French fashion and beauty giants LVMH and L'Oreal have been struggling in the Chinese market, too.
Last week, LVMH, which does not share China-specific results, posted a 13% decline in revenue for the Asia-except-Japan region in the first half of the year. The region made up 30% of the company's total revenue.
Budget-friendly companies like L'Oreal, which owns a series of drugstore brands including L'Oreal Paris and Cera Ve, as well as more upscale brands, have also fared poorly in the Chinese market.
Second-quarter sales declined 2.4% in North Asia including China, the company reported on Tuesday.
"In mainland China, the beauty market was negative in the second quarter on a tough comparison base, exacerbated by lasting low consumer confidence," L'Oreal said in an earnings release on Tuesday.
Some Chinese buyers, including those who shop at LVMH's massive stable of brands, are heading to Japan in search of luxury bargains, thanks to a weak yen.
But not everyone's struggling in China. On Thursday, Hèrmes reported over a 7% uptick in sales revenue for Asia, excluding Japan, to 4.2 billion euros, or $4.5 billion, in the first half of this year. Hérmes did not break out revenue specifically for China.
While the Paris-based company saw a decline in foot traffic in China and more frugal consumers, sales there held relatively steady compared with last year.
"The drop of the share of China is very, very small," said Axel Dumas, executive chairman of Hermès International, on the company's Thursday earnings webcast. His remarks were translated by the company. "We had nearly no more stock and we had to replenish them."
Ultra-high-end brands like Hèrmes can be more immune to the market swings that hit the mass affluent.