The response of fashion to inflation

Just when the fashion and luxury industry looked ready to begin again after the shock caused by the pandemic, the Russia-Ukraine conflict happened. A conflict that managed to shift market trends, since Russia is one of the main exporters of raw materials and energy in the world. As a direct consequence, prices have increased both in our country and around the world. The inflation in Italy in October registered +11.9% year-on-year, a value that has not been seen since 1984. The real issue is that prices increase but wages do not. As a result, consumers’ purchasing power is decreasing. In this regard, the new European minimum wage directive has received approval from European finance ministers. Member countries such as Italy will have two years to implement it, introducing reforms and legislative initiatives to bring the minimum wage in line with rising inflation and the cost of living. This is too long a timeline for labor unions, which have called for greater speed from the countries. This phenomenon, as mentioned, is inevitably affecting the fashion market as well.

«Fashion and luxury companies confirm that the biggest impact on inflation comes from labor costs», Luca Solca, senior research analyst global luxury goods at Bernstein, told MFF. «It is there for all to see a very tense situation in the labor market, with companies struggling to hire new people. I think this situation is transitory and is another side of the principle that everyone seems to have adopted on the way out of the pandemic: you only live once». This principle translates into much higher-than-normal spending for those who can. For others, the same principle takes the form of a «reappropriation of their time», with less willingness to work and more focus on «living well».

Lvmh’s move is certainly an example in the way it has come out in support of its employees. The French luxury giant has announced the distribution of a bonus to its staff to cope with inflationary pressures. The amount will vary between 1,000 and 1,500 euros and will benefit 27,000 employees of the conglomerate led by Bernard Arnault. «In this sense, Lvmh's move is wise and tends to ensure the loyalty of its workers. I expect it to be imitated by other companies in the industry», Solca explained. Something is moving in Italy, where the government has partially accepted the request of Sistema moda Italia (Smi) and the National chamber of italian fashion (Cnmi) by establishing up to 600 euros of tax and contribution exemption for 2022 for all employees in the textile sector. Last July, precisely to make up for the sharp increase in inflation, the two associations asked the government on an emergency basis to grant companies in the textile and apparel sector the possibility of providing, on a voluntary basis, their employees with up to 100 euros per month in addition to their normal salary and totally exempt from withholding taxes and contributions. It is the first step, but one that should give way to other positions.

However, «for some companies, increases in labor and material costs due to inflation could reduce profits and challenge expansion efforts», Alistair Wittet, portfolio manager Europe at Comgest, explained. If the companies themselves are struggling, how can they help their employees? In any case, Wittet added, inflation will affect quality growth companies much less, which are expected to post double-digit annual earnings per share growth over a five-year investment horizon. The reason lies primarily in competitive advantages, which usually come with pricing power and high gross margins. Pricing power allows companies to pass on cost increases. Thus, players who have the ability to raise prices without risking a collapse in demand can better manage the situation.

And in this case, the example of Lvmh, among the very few to have moved to protect employees, fits, or at least follows a business logic. The company raised the prices of its branded products by about 4% and 5% respectively in 2020. Although a decline in sales was conceivable, the relevant figures remained unchanged. This pricing power can also be observed over a longer period. In 2009, for example, Louis Vuitton launched a women's handbag with a purchase price of 400 euros. Exactly the same bag was among the best-selling bags in 2021, with a purchase price of 1,600 euros. No changes in quality or design have been made over the years. «High gross margins provide companies like Lvmh and Hermès with the necessary foundation to implement innovations and invest in their brands so that they remain desirable in the long run», the Comgest expert continued. Many quality companies create real added value for their customers by introducing new technologies or products, for example, Essilor Luxottica. «In short, we believe that many quality companies in the luxury sector are largely protected from the impact of high inflation. We therefore remain confident in our philosophy and will continue to invest in quality companies with sustainable long-term growth. In difficult economic environments, this approach is more beneficial than ever», he concluded. (All rights reserved)