How to profit from luxury brands
EVER thought about investing in luxury? So, instead of splashing out on a Cartier watch or Gucci shoes, why not buy the shares and reward yourself later?
The star attraction of buying into luxury goods companies is their exposure to the phenomenal wealth creation in the emerging world, where they are gaining hugely aspirational shoppers.
The likes of Richemont, which owns Cartier and Montblanc, and PPR, the owner of luxury brands Yves Saint Laurent, Alexander McQueen and Gucci, are expected to reap the rewards of continued consumption growth in emerging markets, especially China.
Here, cashy takes a closer look...
Rise of eastern consumer
The global luxury market has grown at 5.6% per year over the past 15 years, despite three major crises (the September 11 terrorist attacks, 2003 SARS outbreak and 2008 financial crisis). This performance would not have been possible without the rise of the eastern consumer.
Asian consumers tend spend a disproportionate amount on luxury goods compared to those in developed markets. For example, consumers in Hong Kong spend three times more on luxury goods, on average, than their US counterparts, despite having similar GDP per capita – often considered an indicator of a country's standard of living.
‘Emerging’ consumers accounted for 25% of global luxury sales in 2005 – a figure that has risen to 44% today, according to Lombard Odier. It expects emerging consumers to account for 65% of luxury goods sector sales by 2020.
Non-Japan Asian consumers are the largest group (accounting for 22% of global sales), led by the rapid emergence of the Chinese luxury consumer, now generating 12% of sales versus only 2% in 2004.
“Emerging markets are reshaping the world in a way that investors may still be underestimating,” says Nathalie Longuet, a senior analyst at Lombard Odier.
“It is a fact that the Chinese are set to become the leading luxury consumers within the next five years, surpassing their Japanese neighbours, as positive socio-demographic factors and wealth creation in their country drive massive demand for luxury goods.”
China is poised to be the largest economy in the world by 2050, with figures from Goldman Sachs suggesting that it might overtake the US as soon as 2027, due to the fallout from the western-inspired financial crisis. This will give rise to an even more powerful Asian consumer – great news for the luxury goods sector.
Share in good fortunes
Listed luxury companies now corner 38% of the global market (up from 30% in 2004) and represent 55% of the Chinese market.
The industry’s profit pool is likely to be increasingly concentrated in the hands of these large players to the detriment of smaller, family-held brands, says Longuet.
Large luxury goods businesses listed on global stock markets include LVMH, the world’s largest luxury goods group, which owns Moët et Chandon, Hennessy and Louis Vuitton, US designer brand Ralph Lauren, cosmetics major Estee Lauder and Britain’s Burberry.
The latter recently unveiled a 24% jump in annual revenues, with double-digit growth in all of its markets, led by a 37% jump in the Asia Pacific. Burberry opened 23 new stores during the year, increasing average retail space by 14%.
Jaana Jätyri, chief executive of fashion trend forecaster Trendstop.com, says: “[This is] another bumper set of results for Burberry, which has perfected democratic luxury brand positioning.
“Burberry’s Great British brand continues to make an impact in emerging markets, which complement its traditional geographies and with whom the idea of democratic luxury resonates.”
Don’t bet your shirt
However, investment experts warn against piling into luxury goods: investors should not forget the golden rule of diversification.
Despite the bright outlook, Sheridan Admans, investment research manager at The Share Centre, sounds a note of caution: “For the last financial year, it seems that tough economic conditions have failed to put a significant dent on sales of luxury goods, which was also seen in rival LVMH’s sales and outlook.
“However, we continue to recommend investors ‘hold’ Burberry as we remain vigilant of the problems in Europe, which have taken a turn for the worse in recent weeks, and China continues to moderate. Burberry also took a loss on discontinued operations in Spain.”
If you can’t resist...
Of course, buying a portfolio of shares doesn’t satisfy the temptation to indulge in a spot of retail therapy quite the same as splashing out on a new designer handbag.
Asian consumers aren't alone in their desire to buy luxury brands: many Arab world consumers are also devotees. More than 20 new shopping and dining outlets are set to open at Mall of the Emirates this year, with Italian luxury powerhouse Prada expected to open a store – its third largest worldwide – in June.
The good news is that an investment bag can also return some of the hundreds (or thousands) you put into it when you tap into the high-end resale market.
“Classic, covetable bags can be sold for 30-70% of their retail value on the secondary market,” says Elizabeth Bernstein, Accessories Director at Portero, a luxury goods consignment site.
Her top tips? Buy from an established designer with known staying power, such as Louis Vuitton, Calvin Klein or Michael Kors, and take good care of your purchase.
Do you hold shares in luxury goods companies... or do you prefer buying their physical wares?