Russia-Ukraine war, three scenarios for luxury goods

Fashion is coming to terms with the war in Ukraine. And if in recent weeks many groups, from Lvmh to Kering, from Prada to Hermès and Moncler, have been active on the solidarity front and have then closed their activities with Russia, now MFF tries to take stock of future scenarios. According to analyst Luca Solca of Bernstein, there are three scenarios that luxury could face. «In the worst one, the looser monetary policy persists because Russia takes control of Ukraine and economic sanctions remain in place indefinitely. In this case, the growth trajectory of luxury demand in 2022 will be more affected and will only grow by 1%». Sanctions on Russia may trigger a further spike in energy costs and inflation, and this in turn may result in a slowdown in global gdp growth or even a recession. Should such a scenario arise, Solca reported, there would be a significant downward adjustment in global equity markets and asset prices. «In this context, the status of high-end consumers would be dented, leading to a sudden halt in high-end discretionary spending».

The sum of all the elements listed above would result in significantly lower fashion revenue and profit performance than expected in 2022. The Russia-Ukraine war could have an impact on luxury of 8 billion euros. That would mean a drop of about 2-3% in global sales, as pointed out by analysts at Bain&Company, who told MFF about their expectations on the sector, together with other experts. Actually, Russia and Ukraine are not particularly important for the fashion luxury market. «Direct exposure to Russian and Ukrainian demand for goods is about 4-5% overall», Solca explained. Both countries, however, have very high incomes and great inequality in wealth distribution. Therefore, companies dealing with high-end, such as Richemont and Lvmh, are likely to be more exposed (all else being equal). «The reason is that demand is driven by a relatively small number of very wealthy individuals, rather than a large group of middle-class consumers», he specified. Analysts at Ubs estimate that major luxury players such as Lvmh, Hermès, Kering and Burberry generate less than 1% of their revenues in Russia, the same percentage as the giant EssilorLuxottica, which sells about 1% of its eyewear in the former Ussr, or Italian brands such as Tod's and Salvatore Ferragamo. As for Richemont, however, Russian buyers represent 2% of its turnover.

This is not the point: the problem is the unintended (but predictable) consequences that the war may have on global demand for luxury. The impact of the conflict will mainly depend on its duration and global economic and financial effects. «Based on the evidence available to date, we first estimate a more likely, immediate and significant impact on Russian personal luxury spending at a local level, due to the devaluation of the local currency and ongoing restrictions», Claudia D'Arpizio, analyst at Bain, explained. Russian spending abroad, mainly towards Western Europe, will also be drastically reduced until the closure of European airspace to Russian civil airlines is in force. The outlook of Swetha Ramachandran, analyst at Gam, is more positive. «In our view, the luxury sector is more defensive than it was at the start of the pandemic. Margins in the sector are rising above previous peaks and are expected to keep increasing due to the impact of increased prices. Moreover, free cash flow is rising, which means the sector is net cash positive, being in a good position in a period of rising rates», the expert concluded. (All rights reserved)