Purchase Readiness Across All Commerce Platforms
Sparkling Amid the Storm: The Future of High-End Goods Manufacturers
In the midst of the coronavirus crisis, luxury brands are thriving. For investors, re-entering the high-end market could yield tantalizing returns. By Emmeran Eder, Euro am Sonntag
Cars worthy of a Bond villain are flying off Ferrari's production line. The sports car manufacturer's profits more than tripled in the second quarter. Meanwhile, they sold nearly twice as many speedsters as the previous year, despite the ominous specter of an impending recession.
This resilience isn't confined to Ferrari, either. The world’s largest luxury goods conglomerate, LVMH, recently reported exceptional earnings. This French powerhouse deals in a variety of luxury items, including wine, leather goods, clothing, jewelry, watches, cosmetics, and more.
Following a short dip during the pandemic, the industry bounced back with surprising agility. According to Statista, global sales of luxury products will soar from €206.5 billion in 2014 to a staggering €280 billion this year. Projections suggest that this market will surge to €347 billion by 2027, commanding an annual growth rate of 4.5 percent. The industry derives a significant boost from the escalating wealth of the affluent. Consulting firm Capgemini reported that wealth increased by 8 percent year-on-year to an astounding $82 trillion in 2020.
At the same time, the number of millionaires surged by 7.8 percent to 22.5 million people. "We've been steadily climbing when we look back at the past few years," observes Capgemini expert Klaus-Georg Meyer, commenting on the larger picture.
Naturally, the luxury sector welcomes these wealthy customers. The millionaires of the world control almost half of the globe's private wealth. The growth in the number of affluent individuals is particularly impressive in Asia and China, while growth in Europe and North America remains relatively meager.
A Chinese Affair with Luxury Labels
Almost a third of luxury buyers hail from China, as the burgeoning Chinese middle class embraces extravagant brand labels. With China's economic rise, this middle class continues to expand significantly.
The first lockdown in China in Q1 2020 hit the industry hard. However, the luxury sector has weathered the more recent lockdowns in Shanghai and other Chinese cities. Companies have adapted, significantly bolstering and expanding online sales – an area they previously barely touched. Online sales now account for just over 20 percent of global sales, up from 12 percent in 2017, according to Statista. By 2026, online sales are predicted to reach 26 percent. Additionally, numerous stores have been opened in China, as opposed to the Chinese customers of the past who often traveled to Europe or the Middle East for luxury shopping.
As a result, the luxury industry is now more crisis-resistant than it was before the pandemic. The importance of digital sales advantages big players in the sector, making it more challenging for smaller and medium-sized companies to compete in the manner they historically have. As such, we can expect an increase in mergers and acquisitions, which could send stock prices soaring.
Rarity – A Key selling Point
To maintain their credibility and exclusivity, luxury firms are expanding their product offerings. Hermès and Gucci are broadening their cosmetics offerings, while Fendi, famed for its handbags, is now peddling luxury furniture. "These diversifications serve to attract new consumers and recruit younger customers at lower price points," opines Swetha Ramachandran, manager of the GAM Luxury Brands Fund. However, she cautions that luxury companies must be cognizant to maintain their authenticity and exclusivity, as scarcity remains a pivotal motivator for consumer purchases.
Americans have been major consumers of luxury goods this year, fueling the segment's growth. However, the Chinese could soon surpass them, flooding back into the stores of LVMH and co. following the lockdowns.
Long-term, the sector is poised to benefit from burgeoning feminism. More women are attaining well-paid leadership roles and increasing their earnings. Women are the primary consumers of luxury goods and often manage the household budget. "The luxury industry thrives due to the feminine touch," asserts Armin Zinser, advisor at the French asset management company Prévoir Asset Management. He also sees another advantage: luxury goods serve as a tool to protect against inflation for many customers, as certain luxury items tend to appreciate in value over time.
In the eyes of investors, luxury stocks offer an opportunity to capitalize on growth opportunities in emerging markets while investing in companies rooted in European corporate governance principles, since most of the companies are based in France, Italy, or Switzerland.
However, luxury stocks are already highly valued, with price-to-earnings ratios ranging from 25 to 50 for the year 2023. Hermès boasts a P/E of 49, Ferrari of 43.
Despite the inflated valuation, investors should consider luxury stocks as a long-term investment. This is due to the sector's robust resilience, consistent growth, participation in the upturn of emerging markets, high profit margins and, consequently, robust profits. These profits can be passed on to customers due to inflation.
Investors can gain sector-wide exposure via funds or ETFs, or opt for sector heavyweights for their portfolios. These include the luxury conglomerate and market leader LVMH, another sector titan, Kering (see Investor-Info).
INVESTOR-INFO
Luxury Stocks ETF
Every Luxury Giant under One Roof
The S&P Global Luxury ETF by Amundi wraps up the 80 most significant luxury goods manufacturers worldwide, encompassing production, distribution, and services. The largest holdings are LVMH, Richemont, Hermès, Estée Lauder, Kering, and Tesla. Europe leads the pack with a 53% share, followed by the United States at 40%. Asian countries make up the remainder. The ETF lacks currency hedging, but it has outperformed active funds in this segment over the past three years.**
LVMH
Leading the Pack
The world's foremost luxury conglomerate offers a plethora of premier products. French brands under its umbrella include Louis Vuitton, Dior, and Fendi. The company's first-half operating profit soared 34% to €10.2 billion, outperforming expectations. The growth was chiefly driven by the "Fashion and Leather Goods" division.**
Kering
Undervalued Opportunity
French company Kering's well-known brands include Yves Saint Laurent, Bottega Veneta, and especially Gucci. In the first half, sales increased 23% year-on-year to nearly €10 billion. However, the stock is lagging due to Gucci's recent performance falling short of expectations. With a 2023 P/E of 15, the company is underpriced compared to industry peers. That being said, it may temporarily drop out of the Stoxx 50 index due to the correction.**
Enrichment Data:
- Markets and Trends: The luxury market is witnessing significant trends, including resale platforms, sustainability, digitalization, diversification, and collaboration with artists or influencers.[1][2]
- Luxury's Allure: Despite the economic uncertainties, luxury items still hold allure for consumers, owing to their perceived quality, exclusivity, and status symbolism.[3]
- Resilience: Luxury companies have shown resilience during challenging economic periods, as their products remain desirable to consumers looking to make a statement with their purchases.[3]
- Innovation: Brands are evolving to adapt to digital consumers and incorporate sustainability into their offerings to accommodate a more conscientious consumer base.[2]
- Online Expansion: Online platforms are vital for luxury retailers, facilitating access to a wider audience, particularly in emerging markets, while ensuring a personalized shopping experience.[1][4]
- The S&P Global Luxury ETF by Amundi, which contains 80 of the world's most significant luxury goods manufacturers, provides investors with an opportunity to capitalize on the growth opportunities in the luxury sector while investing in companies rooted in European corporate governance principles.
- Despite lagging due to Gucci's recent performance falling short of expectations, Kering, a French luxury goods conglomerate with brands like Yves Saint Laurent and Bottega Veneta, is underpriced compared to industry peers, with a 2023 P/E of 15.
- LVMH, another luxury sector titan, reported exceptional earnings in the first half of the year, with its "Fashion and Leather Goods" division driving its 34% growth in operating profit to €10.2 billion.
- In the eyes of investors, luxury ETFs like the S&P Global Luxury ETF offer a way to gain sector-wide exposure, with potential long-term benefits due to the sector's robust resilience, consistent growth, participation in the upturn of emerging markets, high profit margins, and consequently, robust profits.
