China’s love affair with luxury has cooled

“When people become rich, they feel that they need to use material things to fill themselves up to show that they are rich," said Xie, 45. “But after reaching a certain level, they feel that they no longer need these things to show off."

Luxury’s luster is fading in China. A sluggish economy, the austere political mood and the feeling among some consumers that pricey brands are passé have combined to end the boom that has propelled the industry in recent years.

Last year, China’s luxury market shrank by about a fifth from a year earlier, consulting firm Bain estimates. The industry leader, Louis Vuitton owner LVMH, said its fourth-quarter sales in Asia excluding Japan—a figure that mainly consists of China sales—dropped 11% year-over-year. At Gucci owner Kering, the same China-centered sales figure was down 24%.

“The period of hyper-exponential growth will no longer be here. It’s going to be much more modulated," said Bain partner Weiwei Xing.

Analysts have pressed LVMH and Kering executives on whether the declines are cyclical or reflect a more fundamental change among Chinese consumers. Both Kering’s François-Henri Pinault and LVMH’s Bernard Arnault said they believed China would take a while to improve but the market would eventually recover.

Inside China, some brands are closing stores or taking a while to open new ones. Gucci has closed at least two stores in regional cities. For months, a building in Beijing’s trendy Sanlitun neighborhood has been wrapped with the LV logo without opening. Next to it stands a building wrapped in a Dior logo and on the other side a Tiffany-wrapped building. Neither is open.

Foot traffic has dropped at shops, staff say. Store staff of some top-tier brands who previously brushed off inquiries are now reaching out on chat apps to promote the latest deals, said Xie, the former bag aficionado.

Companies aren’t giving up on China, which even in its diminished state remains one of their largest markets. In November, at an import fair in Shanghai, LVMH set up a big booth showcasing items from 14 brands, including a Louis Vuitton trunk with calligraphy-style work by a Chinese artist.

“Why do we choose to make this effort? It’s very simple. Because we love China," said Marc-Antoine Jamet, LVMH’s general secretary.

Anthony Ledru, the chief executive of Tiffany, an LVMH brand, said in January that in China, “the average price is one of the highest in the world—higher than in the United States, for example, higher than in Japan, and higher than in Korea."

In contrast to China, much of the world’s appetite for luxury remains stable. U.S. sales rose slightly last year at LVMH. In 2020, China accounted for a fifth of the global personal luxury goods market, but that dropped to an estimated 12% last year, Bain said.

Luxury brands are the latest Western businesses to suffer in China, alongside foreign carmakers, coffee chains and tech companies.

Some Chinese luxury fans are making buying trips to Japan, where the cheap yen has made certain items relative bargains. Those excursions are making up for part, but not all, of the setbacks in China, according to Bain.

Shares in Kering have fallen by about a third in the past year. LVMH shares fell by more than a third from peak to trough last year before recovering recently.

Major European luxury brands started to enter China three decades ago. For the emerging middle class and upper classes, bags, belts, shoes and suits were an object of longing and a way to show off newly acquired wealth.

The luxury journey of Xie, the 45-year-old consumer, started in 2008 at Beijing’s Shin Kong Place, a high-end mall. She had just received a year-end bonus of slightly more than $10,000 and, encouraged by a friend, decided to spend about $4,000 of it on a midsize Chanel CF handbag.

Xie called it a gift to herself after working hard for five years. “It was a testimony to my ability to make money," she said.

Over the years, Xie, who works for a labor arbitration company in Beijing, spent tens of thousands of dollars on dozens of handbags. She went on to purchase a Hermès Lindy bag, a Chanel wallet on a chain and a Louis Vuitton NéoNoé bucket bag, among others.

Last year, Xie started focusing on fitness and now discusses lifestyle brands such as Lululemon and Arc’teryx with her friends.

She said luxury items were resonating with her less during China’s economic slowdown. In her eyes, the products offered by European brands increasingly look similar, while some Chinese brands such as handbag maker Songmont offer decent quality and design for less money.

Yang Liu, a 32-year-old working in healthcare, said she has bought bags such as Gucci’s Dionysus and Bulgari’s Serpenti but lost her appetite for luxury during the pandemic and as her income dropped. She now uses canvas tote bags.

“I have become more rational in recent years," she said. “It’s mainly about cost-effectiveness."

Around the globe, industry analysts say price increases have alienated some aspirational buyers. In the three years to 2022, the average price of high-brand luxury handbags in China rose more than 32%, according to data from Yaok Group, a Shanghai-based consulting firm.

Luxury brands are hoping for an influx of customers outside of the richest and most sophisticated Chinese cities, such as Beijing and Shanghai.

Richard Lin, an analyst at SPDB International, said China’s luxury market had been largely fueled by the expansion of the middle class over the past decade.

“If the economy continues to deteriorate, we don’t rule out the possibility that the size of China’s middle class may shrink," he said.

Grace Zhu contributed to this article.

Write to Yoko Kubota at yoko.kubota@wsj.com