Has luxury lost its sparkle? High-end brands vulnerable to recession

Dazzling: Beyonce sports a Tiffany necklace

Luxury goods companies draw shoppers with their unique allure and cachet. Even more fascinating for investors are the bold strategies, including steep price rises, now being employed by this industry amid global economic uncertainty. 

A Chanel handbag that would have cost £3,940 in late 2019 is now £6,740. Louis Vuitton, one of the 75 ‘houses’ that with Christian Dior, Fendi, Givenchy and Tiffany form the LVMH empire, has also made some bags more expensive. 

Watches of Switzerland, retailer of Rolex and other high-prestige timepieces, is moving into a Bond Street shop, eight times the size of its current West End store. 

These and other moves show confidence – some analysts regard these businesses as the European equivalent of Apple and other US tech giants. Strong recent results underline the luxury titans’ trust in pricing power, an essential attribute when inflation surges. 

But, despite this audacity, the stock market’s assessment of the outlook is downbeat.

The S&P Global Luxury index, whose members include Hermes, the Gucci owner Kering, LVMH and Richemont, the Cartier and Jaeger-LeCoultre group, has fallen 25 per cent since the start of 2022. 

Part of this is due to apprehension over lockdowns in China, which accounts for about 80 per cent of global expenditure on bags, jewellery, perfumes and watches. Prepandemic about a third of those purchases were outside 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 them if you have money in many funds and investment trusts. 

BlackRock European Dynamic, Brunner, Fundsmith, Law Debenture and Witan hold LVMH. Finsbury Growth & Income and Lindsell Train UK Equity have stakes in Burberry; while Smithson is backing Moncler, known for its £1,200 quilted coats. 

Diageo, the proprietor 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 fought off an activist investor attack. 

As an investor in Fundsmith and Smithson, I am concerned about luxury goods groups’ capacity to weather a lengthy recession. 

But I am minded to rely on their commercial instincts and creative abilities. As in previous slowdowns, there may be much ‘cross-category indulgence’ with lovers of luxury remaining faithful to a brand, but buying cheaper items. 

Marcus Morris-Eyton, manager of the Brunner trust, says: ‘Past downturns have shown demand for luxury goods tends to be more resilient than other areas of discretionary spending. Put simply, the wealthy are more immune to cost of living pressures.’ 

He believes that 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 in the 2008 financial crisis, sales and profits rose at LVMH’s fashion and leather division, which accounts for threequarters of profits today. 

Marcel Stotzel, at the Fidelity European Trust, says LVMH can restrict supply, supporting prices. He adds: ‘In certain categories, such as champagne and cognac, production is restricted or cannot be altered quickly and this further increases pricing power.’ 

The luxury titans will try to make the most of their pricing power, and size. Rebecca Irwin of the US fund manager PGIM Jennison says: ‘Scale brings advantages in marketing, in getting the best real estate, in hiring the best people, in sharing best practices.’ 

As a result, the sector grew 17 per cent in the first six months of the year. 

Claudia D’Arpizio and Federica Levato of the consultancy Bain forecast that the market could be worth €360-380billion (£315-332billion) by 2025, against €288billion (£252billion) in 2021. But if revival in China is slow and customers worldwide are cautious, the figure would be €305- 320billion (£267-280billion). 

Levato says firms are ‘re-routing their futures’, and improving the online experience. 

Irwin notes that American men are more luxury-conscious, with cities like Miami, Austin and Denver a source of demand. There is an emphasis on planet-friendly items for the younger, more eco-conscious clientele. 

The fall in luxury goods shares means that they appear reassuringly inexpensive. Buying them is a gamble on the belief that the rich will always be different and unperturbed by economic turmoil. 

The markets will take some time to be convinced of this, I suspect.

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