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14 February 2023

A Vintage Year for Luxury Retailers?

If you are fortunate enough to own a luxury watch or handbag, or indulged in a bottle of something decent over Christmas, it’s quite possible that your brand of choice is part of the sprawling LVMH empire. LVMH Moët Hennessy Louis Vuitton is Europe’s leading luxury goods manufacturer. Founded in Paris in 1987, today the company owns 75 brands, which it refers to as ‘houses’, across six core sectors. These include well-known brands such as Dom Pérignon, Louis Vuitton, Christian Dior and Bulgari. It has over 175,000 employees and 5,556 stores worldwide.
The company is something of a family affair; co-founder Bernard Arnault remains CEO and four of his five children has a role in one of the brands he controls. Forbes’ real-time billionaire list estimates that Arnault is currently the richest man in the world, having overtaken Tesla and Twitter frontman Elon Musk.
Paris, the city of lights and elegant boulevards, has established itself as the undisputed home of luxury goods. LVMH rivals Hermès, known for its signature silk scarves and Birkin handbags, and Kering SA, owners of Gucci and Yves Saint Laurent, are also listed in the French capital.
In the face of soaring inflation and a looming recession, shares in LVMH have fallen by 16% and Hermès have fallen about 19% last year, while Kering is down 37%. Historically, the luxury goods sector has contracted during a recession and investors have sold down in anticipation of a gloomy outlook. Third-quarter results have defied these pessimistic expectations, however, with Hermès announcing a 24% like-for-like rise in revenue to €3.1bn, compared to analyst expectations of 15%. LVMH also shrugged off these concerns, with core brands Louis Vuitton and Dior continuing to expand.
Chief Finance Officer at Hermès Eric du Halgouet revealed to Reuters that the group has plans to increase prices between 5% and 10% this year. This is due in part to inflation, but also to maintain an air of exclusivity. Hermès is known to intentionally keep supplies of its handbags low and has barely increased the number of storefronts over the previous decade, despite the fact that sales have doubled in that time.
This artificial scarcity may continue to benefit the company, even despite a global downturn. The ultra-wealthy are largely untouched by the economising necessitated by the cost-ofliving crisis. Partner at Stanhope Capital, Pierre Mallevays, observed that “The rich remain rich, even in a recession.” This assertion may be tested, as the S&P global luxury index has fallen by around a third this year.
Having set out its stall as a one-stop shop for all the luxury brands a well-heeled customer could want, 2022 saw a surge in shoppers, especially from the US. The extraordinary strength of the dollar last year was a great benefit to Americans in Europe, with the dollar close to parity with the euro. Bank of America analysts reported late last year that American shoppers in Europe were paying an average discount of 38% on luxury clothes and accessories compared to what they would pay at home. Compared to 2019, American tourist spending in Paris increased more than 40% during the week of Black Friday.
While Paris has benefitted from this spending boom, the phenomenon has been patchy elsewhere. Thierry Andretta, CEO of British designer handbag manufacturer Mulberry, noted that visitor numbers in London plummeted as tourists from the US and Gulf states abandoned the capital for other European cities. Regarding its Bond Street shop, he said “We are losing 45-50 per cent of our potential business due to the end of the tax free”. VAT-free shopping in the UK was scrapped in 2021. Former Chancellor Kwasi Kwarteng had announced its return in his ill-fated mini-budget, whereupon it was promptly reversed again by current Chancellor Jeremy Hunt. Mulberry Group recorded a loss before tax of £3.8m compared with profits of £10.2m the year before.
Luxury retailers are also considering how they will remain culturally relevant, and how to market to the next generation. Brand advisers Équité reported that 15% to 20% of worldwide luxury purchases are now made by the under-25s. Increasingly, they have been looking to the booming global popularity of South Korean pop culture to target this demographic. K-pop and drama have millions of young fans both in Asia and worldwide and correspondingly have enormous social media followings. Several high-end jewellers, including Cartier, Bulgari and Tiffany, have been using these young singers and actors as brand ambassadors, particularly at launch events. Bulgari Chief Executive Jean-Christophe Babin explained their reasoning: “The Asian market differs slightly from those elsewhere as the luxury industry there tends to lean more to a younger crowd. So, it is essential for Bulgari to be inspirational and make them fall in love with the brand through storytelling, which is in line with their values.”
With another turbulent year over, the demand for luxury goods shows no sign of abating. It may be accelerating even further. According to research by consultants Bain & Co, the luxury goods sector is expected to grow between 3% and 8% this year. They reasoned that this is due to an increased portion of sales from the ultra-wealthy, who can shrug off an economic downturn. As China looks increasingly likely to reduce its strict COVID controls and open up travel, this will also give luxury retailers a boost as well-heeled Chinese consumers return to the boutiques of Europe. If 2023 does indeed turn out to be a vintage year for luxury retailers, they have all the champagne they could possibly need to celebrate it.
This article was taken from the December 2022 issue of Market Insight. To subscribe to our investment publications, please visit
Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.
A Vintage Year for Luxury Retailers?
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