Dan AtkinsonAnyone planning to trade or invest in the stock of luxury-goods companies needs to decide where they stand on the industry’s two big debates.
The first is whether or not the business has a future at all, in a world, where technology not only delivers personal products of the highest standards at a reasonable cost, but where that technology will need replacing before too long.
The second, much more critical and occasionally heated, bone of contention is whether it is France or Italy that can truly claim the crown of most stylish nation.
Europe is top dog
Before joining the battle in this (usually genteel) war of words, a luxury-goods industry overview may be useful. The first is that worldwide sales of luxury goods come to $250 billion, with luxury goods example ranging from high fashion through watches and other jewellery to the most expensive wines and spirits.
Whether that indicates improving levels of taste and discernment or rising levels of people with more money than sense is a matter of opinion.
Americans, perhaps because of their democratic heritage and deep-dyed dislike of too much ostentation, have never quite become the force in this industry that they could have been.
The third is that anyone hoping to buy into some of the best names in luxury goods will be disappointed, for the simple reason that they are privately owned. This ought not to come as a surprise, given the grandest fashion houses were traditionally tightly controlled, often by members of the founding family.
Selling shares in the business was on a par with producing a range of ready-to-wear clothing – something else some big names are now reconciled to.
Take Chanel. If you fancy a piece of the action there, then no dice. The shares are not publicly traded. Harrods, probably the most famous department store in the world? Not unless you can get hold of some stock in the Qatar sovereign wealth fund. Armani? Only if your name is “Giorgio Armani”, the sole owner.
Rise in the number of wealthy households
But do not despair if your favourite brand appears to be unavailable for trading or investment. It could be that it is part of a holding company with a market listing.
One example would be Kering, a low-key name for the Paris-based owner of renowned brands including Gucci, Yves Saint Lauren and Alexander McQueen. Another would be Maybelline, a big name in make-up. It’s owned by L’Oreal.
As for Cartier, or Dunhill, or Chloe, or Purdey, or Montblanc, anyone wanting to play them in the market should head for their parent company Richemont.
Rather less homework is required to identify ownership when the owner and the brand have the same name. Into this category would fall LVMH, Hermes, Ted Baker, Ralph Lauren, Christian Dior, Estee Lauder and Tiffany.
The luxury goods industry enjoyed a generally very strong 2018, and some slowdown this year was only to be expected. That said, the continued growth of the numbers in society able to afford luxury products is forecast both in the developed countries and in China, which bodes well for those who design and sell them.
Fitch added: “Our top ten luxury consumer markets shown below are projected to have a combined 91.2 million households with disposable incomes above $75,000 in 2019, an additional 5.6 million households in 2018. By 2023, this figure is forecast to rise to 121.3 million households.”
Those top ten luxury markets are headed, in descending order, by the US, Britain, France, Germany and Japan. China is currently ninth.
In linking the prospects for luxury goods with the rise in disposable income, Fitch concurred with professional investor Zehrid Osmani, writing in Money Week on 6 May: “The rapid expansion of the emerging-market middle class is a key long-term growth theme. In China alone, the middle class is expected to more than double over the next ten years, while the segment defined as affluent is forecast to grow even faster.
Barriers to competition
“As a result, one area of interest over the coming decade and beyond is luxury goods.”
Not everyone is convinced. Writing in The Daily Telegraph on 4 February this year, James Titcomb, one of the paper’s journalists, suggested rapid technological change could make “luxury” a redundant concept. He gave the example of watches, where the smartwatch needs frequent updating, leaving little scope for persuading customers to pay large sums for fancy timepieces.
Third, given the length of time taken to build up the premium nature of a luxury brand, the barriers to competition are very high.
It has something to say also in that other great debate, whether France or Italy is dominant in this industry: “Measured by the number of companies, the leading luxury goods country is Italy.”
However: “On the more important metric of share of total global sales, the undisputed world leader is France.” In fact, LVMH, Kering, L’Oreal and Hermes generate one-quarter of total world luxury goods sales.
Diplomatically, perhaps we should declare honours even.
Finally, it should be remembered that there is really no such thing as a monolithic luxury goods industry. Some companies will offer good investment prospects, others less good. As always, solid research is the key to success.
Image source: Sergio Monti Photography / Shutterstock.com
