Article

Has the luxury-goods industry overhyped itself?

Sliding sales in one of the world’s most important regions for luxury-goods sales will give executives plenty to talk about at New York Fashion Week.

| 5 min read

New York, Paris, Milan, London…

Over the next month, the world’s fashionistas and champions of haute couture will gather for the premier “Fashion Weeks” in four of the world’s wealthiest cities.

Luxury fashion houses will present what they hope will be headline-grabbing catwalk shows that showcase starry A-list front rows as they crank up their public-relations efforts to full “Edina Monsoon”. All four of the annual industry fixtures will be glamorous and excessive affairs.

However, for us less-beautiful investors, the most interesting discussions will not take place in front of spotlights or the cameras of the world’s press. After a period of what may be excessive investor optimism surrounding the industry, the important whispers are likely to be heard behind closed doors. The business of luxury now faces some challenges – and these threats have already had an impact on the valuations of the world’s biggest listed luxury goods groups.

High-spending consumers free from restrictions

The share-price gains in the sector this year have been spectacular as the industry is bouncing back from one of its greatest-ever shocks – the Covid-19 pandemic.

Once the pandemic took hold, demand for luxury items dropped sharply as consumers changed their purchasing behaviours, stores closed under lockdown regulations, and international travel was dramatically curtailed.

This latter point – the grinding to a halt of the global travel industry – was a major setback for the luxury industry. The fact that China experienced the lengthiest and most stringent response to the pandemic – only relaxing rules in December 2022 – was another major headache hitting business at the world’s most expensive luxury brands.

Before the pandemic, two-thirds of Chinese consumers’ personal spending on luxury goods took place outside of China – and Chinese consumers accounted for about 60% of total industry growth between 2000 and 2019, according to data from Morgan Stanley.

Chinese citizens can now travel abroad following a three-year hiatus. This means they can take advantage of cheaper prices in Europe, where the ticket price is often 30% lower than the cost of the same items in China, depending on the brand.

The China tailwind propelled investors into what Bloomberg described as a “luxury goods frenzy” Investors piled into the sector and, in April, LVMH became the first European company to cross the $500bn valuation level. Controlled by the world’s richest man, Bernard Arnault, the group has built up a business that now manages 75 prestigious, high-profile luxury brands. Today its market capitalisation stands at $392bn, around 22% below that level. This performance is repeated across the luxury goods sector.

The rich are still rich

Of course, the super-wealthy on the front rows of the catwalks in New York, Paris, Milan and London are unlikely to have been impacted by the cost-of-living crisis.

Indeed, the products that the luxury sector produces continue to rise in prominence and desirability.

Last weekend, The Times reported that, because of a rise in the valuation of luxury watches, timepieces worth more than £1bn have been logged as stolen or missing after a “concerning surge” in thefts.

The issue luxury groups are facing is a slowdown in the US, just as China has reopened. This became evident in first-quarter earnings reports at the end of April. This trend was confirmed during the second-quarter reporting.

The standout from LVMH’s interim results was the US slowdown. Revenue in the region fell 3.2% short of expectations. This was primarily the impact of Wines & Spirits, which saw revenue miss expectations by more than 9%. Specifically, cognac and spirits were the areas of weakness. Burberry’s US sales fell 8% in the second quarter, Kering – which owns brands such as Gucci and Balenciaga – saw North American sales plunge 23%, while Prada’s sales were down 6%. Hermès however, saw sales rise 23%.

The downturn in America contrasts with the boom at the height of the Covid-19 pandemic. In 2022, Americans made up about a third of global luxury sales, up from 22% in 2019, according to market researcher Bain & Company. The US luxury market almost doubled in three years, adding up to $128 billion in 2022. But the American consumer has changed their shopping habits. People who had saved up money during the pandemic—which they then spent on luxury goods—may not have as many dollars in the bank, or they may be holding out due to the uncertain economic outlook.

Share-price movements indicate that even the luxury sector is not recession-proof. The long-term future of the industry looks impressive, however, with it being more a question of valuations getting ahead of themselves earlier this year. This is really an issue for investors. However, away from the catwalks of New York Fashion Week there will be talk about what the industry can do to reverse the flatlining of US sales. These will undoubtedly continue in Paris, Milan and London.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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