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Dazzling: Beyonce wears a Tiffany necklace
Luxury goods companies attract shoppers with their unique allure and cachet. Even more fascinating to investors are the bold strategies, including steep price increases, that this sector is now adopting amid global economic uncertainty.
A Chanel handbag that would have cost £3,940 at the end of 2019 is now £6,740. Louis Vuitton, one of the 75 ‘houses’ that make up the LVMH empire with Christian Dior, Fendi, Givenchy and Tiffany, has also made some bags more expensive.
Watches of Switzerland, retailer of Rolex and other prestigious timepieces, moves into a Bond Street store eight times the size of its current West End store.
These and other moves show confidence – some analysts view these companies as the European equivalent of Apple and other US tech giants. Strong recent results underscore the luxury titans’ confidence in pricing power, a key feature as inflation rises.
But despite this audacity, the stock market’s assessment of the outlook is bleak.
The S&P Global Luxury Index, which includes Hermes, Gucci owner Kering, LVMH and Richemont, the Cartier and Jaeger-LeCoultre group, has fallen 25 percent since early 2022.
Part of this is due to concerns about the lockdowns in China, which accounts for about 80 percent of global spending on bags, jewelry, perfumes and watches. Prepandemic about a third of those purchases were outside of China, but Gen Z shoppers, fond of Burberry and Gucci, are being hit by travel bans and unemployment.
Luxury brands may not be your bag. But you have already bet on it if you have money in many funds and mutual funds.
BlackRock European Dynamic, Brunner, Fundsmith, Law Debenture and Witan have LVMH. Finsbury Growth & Income and Lindsell Train UK Equity have interests in Burberry; while Smithson backs Moncler, known for its £1,200 quilted jackets.
Diageo, the owner of a variety of premium spirits brands, is one of the constituents of the Lindsell Train Global Equity fund. F&C and Monks own Richemont, which recently fended off an attack from activist investors.
As an investor in Fundsmith and Smithson, I am concerned about the ability of luxury goods groups to weather a protracted recession.
But I’m willing to trust their commercial instincts and creative abilities. As with previous delays, there can be a lot of ‘cross-category indulgence’ where luxury lovers stay loyal to a brand but buy cheaper items.
Marcus Morris-Eyton, manager of the Brunner Trust, says: ‘Past has shown that demand for luxury goods is more resilient than other areas of discretionary spending. Simply put, the rich are immune to the cost of living pressure.’
He believes LVMH’s brands give it tremendous pricing power, saying, “In a recessionary environment, LVMH has historically benefited from its loyal customer base and best-in-class brand portfolio.”
And during the 2008 financial crisis, sales and profits soared at LVMH’s fashion and leather division, which today accounts for three-quarters of its profits.
Marcel Stotzel of the Fidelity European Trust says LVMH may be limiting supply, supporting prices. He adds: “In certain categories, such as champagne and cognac, production is limited or cannot be changed quickly, further increasing pricing power.”
The luxury titans will try to make the most of their price power and size. Rebecca Irwin of US fund manager PGIM Jennison says, “Scale benefits in marketing, in getting the best real estate, in hiring the best people, in sharing best practices.”
As a result, the sector grew by 17 percent in the first six months of the year.
Claudia D’Arpizio and Federica Levato of the consulting firm Bain predict the market could be worth €360-380 billion (£315-332 billion) by 2025, up from €288 billion (£252 billion) in 2021. But if the resurgence in China is slow and customers worldwide are cautious, the figure would be €305-320 billion (£267-280 billion).
Levato says companies are “reshaping their future” and improving the online experience.
Irwin notes that American men are more luxury-conscious, with cities like Miami, Austin and Denver being a source of demand. There is an emphasis on planet-friendly items for the younger, more environmentally conscious customers.
Due to the decline in the share of luxury goods, they seem reassuringly cheap. Buying them is a gamble in the belief that the rich will always be different and will not be bothered by economic turmoil.
The markets will take some time to be convinced of this, I suspect.
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