Luxury runs faster than gdp

Luxury goods are not just a fashion investment. Because fashion trends may be transient, but the growth trajectory of the high-end sector has been sustained for more than two decades and demand is very stable in the long term. From 1996 to 2019, when it was momentarily held back by the Covid-19 pandemic, luxury’s growth trajectory even surpassed global gdp growth (+4.4%) with a 6% increase. The industry’s 281 billion euros pre-Covid-19 revenue, which dropped to 220 billion in 2020, subsequently put on a +29% run-up to 288 billion euros in 2021. «The industry profile is improving, with margins and free cash flow on the rise. Investing in luxury goods means taking advantage of their strong long-term growth potential», Swetha Ramachandran, investment director, luxury brand equities at Gam, explained.

In the framework of the High conviction equities day held yesterday in Milan, the expert spoke on the role of the luxury sector in the current inflationary environment, new consumer habits, and digitalization trends. On the sidelines of the event, the analyst explained to MFF how some of the critical issues that have emerged during 2022, such as the increase in the cost of energy and living, although significant themselves, will not have a significant impact on the high-end segment. «Inflation will ease slightly during 2023, but the point is that linking inflation to the luxury sector is somewhat misleading, because consumers of high-end products tend to be more resilient to these pressures. Rather, the luxury sector is perceived as a kind of shield against inflation, and this aspect fuels its appeal in terms of investments», Ramachandran pointed out.

The strength of high-end companies lies in their extraordinary pricing power, as well as limited elasticity of demand with respect to an inflationary environment. The starting point for the industry’s strong pricing power is its high gross margins, which are not only stable but for some companies are even growing, despite the rising inflation, as they exercise their power to anticipate prices relative to inflation. «Recent results have widely demonstrated that the trade remains robust and that profit margins are proving particularly resilient. Overall, despite the current difficult market conditions, we believe that the outlook for the luxury sector remains positive precisely because its consumers have a lot of elasticity and are immune to cost increases», Gam's expert continued, citing the example of the Louis Vuitton fashion house, which has increased prices by between 5% and 10% over the past two years without registering any negative reaction from its customers.

Thus, it seems that luxury brands are somewhat sailing against the tide and, unlike the others, are benefiting from inflation due to their pricing power. On the other hand, Ramachandran reminded, just as gold has always been an anti-crisis tool, today in times of pandemic it has been mainly jewelry that has filled the role of a safe haven asset. «Hard luxury will continue to perform well, because in these times of uncertainty jewelry and watches are seen as a kind of store of value. That being said, however, there are some promising categories related to the resurgence of travel», she pointed out. «There is a desire to return to pre-Covid-19 life, and that is why there is a shift from luxury goods to experience. There is huge demand in the hôtellerie segment, but also in the beverage and spirits segment thanks to the return of physical events».

A new normal from which fashion itself is also benefiting, showing unexpected improvements. «People have not changed their wardrobe for two years, and now they have so many occasions such as parties, galas and ceremonies to buy new clothes or heels instead of sneakers. Suffice it to say that this year the US had the most weddings since 1984. And men's suits are also coming back, proving that people want to go back to dressing up in everyday life as well», she concluded. «Another strength of fashion is that many brands have managed to expand beyond their original category to lifestyle. Hermès, which was known for leather goods, now sells more watches than some independent watch brands. Even Prada and Gucci are making major expansions into beauty and cosmetics».

Finally, the appeal of luxury brands in this period of inflation is also growing for younger consumers due to the highly visible resale value of many prestige brands, which leads them to be viewed as long-term investments rather than occasional purchases. It is a view that also ties in with growing concerns in the area of sustainability and shows why the luxury sector as a whole has benefited from the fact that consumers are still, after the pandemic period, continuing to buy less but better. (All rights reserved)