Luxury goods on the edge?
By Urban B. Eberle and Eduard Werder, Bank Alpinum
Is the boom in the luxury goods sector coming to an end? Investors were stunned by the subdued forecasts for the current year issued by consumer goods groups including LVMH and Richemont. The weakening of momentum in China, in particular, is raising a few concerns. Is it time to beat a retreat from the luxury goods sector?
Let's have a closer look at the luxury goods market. According to surveys conducted by the business consulting firm Bain & Co., in 2012, EUR 212 billion was spent on luxury goods proper. The share of total sales was accounted for as follows in the four key sectors: accessories such as handbags, shoes, etc. (27% share of total sales), fashion/clothing (26%), watches and jewellery (22%) and perfumes and cosmetics (20%). The remaining 5% was attributable to decorative tableware and household items. This core area does not include other significant sectors such as luxury cars, yachts, wine and spirits, and luxury hotels which, combined, added a further EUR 500 billion in sales.
The main attraction of the luxury goods sector for investors is its impressive rate of growth. Since 1995, when the estimated turnover was EUR 77 billion, the sector has grown by more than 6% per year on average, even throughout the various crises. The most striking increases have been achieved in the past three years. Against the backdrop of the debt crisis in the USA, Europe and Japan, luxury goods have broken record after record, reporting double-digit growth rates every year. This growth is not, however, linked to the gap between rich and poor widening in the West, as might be assumed, but is a reflection of the unbridled appetite for luxury goods in the emerging economies of South America and Asia, especially China. Whereas 15 years ago, less than 1% of all luxury goods were purchased by Chinese consumers, today, more than a quarter of all Hermès bags, Prada shoes and Dior perfumes go to the "Middle Kingdom". When it comes to luxury Swiss watches such as Rolex, Cartier, IWC and Omega, the proportion rises to almost half.
This phenomenal boom has been made possible by the breathtaking pace of Chinese economic growth which, according to the Hurun Research Institute in Shanghai, has already turned more than one million Chinese citizens into euro millionaires and created over 200 billionaires. However, it's not just the millionaires who buy luxury goods for themselves and their nearest and dearest. There are also huge numbers of people who make luxury goods an incredibly high priority and will go without a lot of other items in order to be able to afford an accessory with a luxury label. Observers of the local market have found that consumers are now extremely astute and prioritise quality and value retention. On this topic, gifts are very important in China and the majority of luxury goods are purchased as gifts. A not insignificant proportion of gifts are also used to build up friendly business relationships and as a "public relations" strategy with officials. This last factor is one reason why the central government keeps a critical eye on the luxury goods sector and burdens it with advertising bans, new laws and high tax surcharges.
The biggest change to be seen now in the luxury goods sector is not in the products or the people buying them, but in the place of purchase. Chinese consumers are travelling abroad in growing numbers and shopping is a key part of their trip. The Swiss Federal Statistical Office shows that Switzerland received 575,000 Chinese visitors last year, compared with 286,000 in 2010 and only 130,000 in 2008. The Chinese buying pattern is of no great surprise. Even if other reasons are often cited for buying abroad, such as the shopping experience or the pleasure of buying something in its country of origin, the price factor certainly also plays a part. Because of the appreciation of the Chinese yuan, customs duties and consumer taxes, luxury watches cost up to 70% more at home than in Zurich, Lucerne or Vaduz.
Bearing in mind this aspect, it is less troubling to see sales in China levelling off. It does not matter where the Chinese buy, as long as they are still doing so. A welcome side effect of this trend is that a higher proportion of the value creation is accruing to Switzerland and Liechtenstein.
Of course, the traditional markets of Europe and America should not be completely sidelined in any evaluation of the outlook for the global luxury goods industry. However, against the backdrop of the debt crisis, uncertainty persists in these markets.
Clearly the luxury goods industry cannot sustain the breakneck speed of growth that the past three years have shown. Provided that China's economy grows by 5% to 10% each year, as most currently anticipate, the world market for luxury goods will see satisfying growth, which, while not in double figures, will still be a respectable 4% to 6% per annum. So the boom may be over, but there is still potential for growth. In the light of this, equities in this sector still have a lot to offer.
Urban B. Eberle
Bank Alpinum, Vaduz, Liechtenstein
Bank Alpinum, Vaduz, Liechtenstein