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The dismal state of luxury

July 13, 2012: 5:00 AM ET

Combine the European crisis with a slowdown in China and you've got a recipe for a weaker luxury market.

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More window shoppers on Rodeo Drive.

FORTUNE – For the past two years, sales of Louis Vutton bags, Dior perfume and the like have been one of the few bright spots in retailing. But momentum in the world of all that's luxurious has begun to wane some, as evidence builds that even the most resilient consumers might not be able to avoid implications of Europe's ongoing debt crisis combined with a slower growing Chinese economy.

On Wednesday, British luxury fashion house Burberry Group Plc led luxury-goods stocks lower after reporting sales that missed analysts' estimates. Sales for the first quarter rose 11% to $634 million, short of expectations for a 13% gain. Although the results weren't considered anywhere near disastrous, and a Burberry executive said the company continued to see "an enormous amount of opportunity" in China, it didn't exactly ease jittery markets.

Some analysts and investors fear this is just the beginning of slowing high-end sales. Burberry's results came the same day Cartier, the luxury watch and jewelry brand owned by Compagnie Financiere Richemont SA, said it is seeing less appetite for its high-end watches in China, a key driver behind the recent boom in luxury watches.

"After a phenomenal year last year, there's been a bit of a slowdown in mainland China," said Cartier CEO Bernard Fornas, at the company's factory Wednesday as he unveiled its latest innovation, a concept watch, called the ID Two, that uses less energy. Similar to Burberry, Fornas isn't worried about Chinese consumers in the long-run.

"When you talk to the people over there, they are all waiting for a new president to come in," he added. "That will fuel the economy with fresh money and lower interest rates."

But that remains to be seen. In the years following the Great Recession, demand for all things luxury in the U.S. surged in tandem with gains in the stock market. For those who could afford it, posh and extravagance wasn't altogether impractical, as rallies in the equities market made affluent consumers more confident about spending. But that hasn't been enough to sustain appetites for life's finer things, as luxury sales have generally slowed down for the past several months.

In May, MasterCard Advisors SpendingPulse reported that luxury sales, excluding jewelry, climbed 1.8% in April from a year earlier, after gaining 6.7% in the first quarter and 13% in the fourth quarter. Although spending on luxury has bumped up some recently, Michael McNamara, vice president of SpendingPulse, which tracks credit card, cash and check transactions, said robust sales seen in 2011 will be difficult to repeat this year.

High-end jewlers have been particularly vulnerable. In May, Tiffany & Co. (TIF) cut its fiscal year sales and profit forecast after reporting lower-than-expected first quarter earnings. This was driven by several factors, including concerns about Wall Street layoffs and cooling demand from Asia, a big contributor to the global luxury market.

David Schick, managing director at Stifel Financial, said he expects that softer sentiments for luxury will carry over globally as economic growth across Asia and Europe slow. "That's going to damage higher income consumer sentiment," he says.

China's slowing economy has already put pressure on retail sales in Hong Kong, where many Mainland Chinese stand in lines stretched down several city blocks to shop for luxury brands. Sales rose 8.8% in May from a year earlier to $4.6 billion, the smallest gain since September 2009.

A diamond may be forever, but demand for it has a much less certain lifetime.

Correction: An earlier version of this story incorrectly stated that Burberry sales for the first quarter rose 11% to $634 billion. It is $634 million.

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

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