Upswing in luxury sector

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01 June 2010

The euro is losing value against the dollar (about 20% drop over the last 6 months), and this is favouring European exporters - particularly in the luxury sector, and for those companies for whom the US and Far Eastern markets are important. The pound has also fallen considerably in recent months, and so boutiques in London have seen an increase in their turnover.

But why do these economic factors favour the luxury sector more than others? Presumably the reason is linked to the fact that high net worth consumers have sufficient liquidity to be able to exploit their increased purchasing power. Results for some luxury brands are a good indication: Burberry saw a 23% increase in profits for 2009, while Richemont, owner of Cartier and Montblanc, saw a 24% increase in sales in April. Hermès reported the largest increase in first-quarter (Q1) 2010 sales of all European luxury goods companies, with a 25% increase in sales in the US, 15% increase in Europe, and 47% increase in Asia (excluding Japan. Japan is in fact one of Hermès largest markets, and Q1 sales there fell 2%). The overall increase in Hermès' sales for Q1 2010 was 18.5% (or 20.2% when corrected for constant currency).

Q1 2010 for LVMH saw a 10% increase, with Gucci Group reporting a 6.1% increase. Tiffany's Q4 2009 results were exceptional, with the quarter ending 31 Jan producing more than half of its profit for the year. Prada have also reported increasing sales.

There is no doubt that the best area for growth continues to be the Asia-Pacific, while Europe and the USA are less encouraging.
This improvement in the luxury sector mirrors events of autumn 2008, when the economic downturn saw luxury purchases dropping even faster than the rest of the sector. Many companies reported massive drops in revenue for Q1 and 2 for 2009. Actually, the turning point seems to have been Q3 2009, with improvements in stock and financial markets fuelling greater sales in the luxury market.

The stage seems to be set for continuing growth of the luxury sector. In the USA, for example, there are now 1.2 million households with a net worth of over $5 million, which can be compared with the figure of 300,000 such households in 1983. In the early 1980s, the top 5% of the population accounted for 16% of national income, whereas today, they account for 27%. In other words, the rich are getting richer. Again, in the USA, annual growth from 1995 to 2005 averaged over 20%, in comparison to a rate of +4.5% for the overall retail sector.

The importance of the Asia-Pacific region can be gauged from the fact that the number of HNW people in that area is forecast to rise by almost 13% annually over the next five years. BMW saw a return to profit in Q1 2010 (€324 million for the quarter, in comparison with a loss of €152 million for Q1 2009), and this was due to increased demand for luxury cars, and a doubling of sales in China. BMW sales rose 4.4% for the quarter in Europe, 7.% in the USA, and 55.7% in Asia. BMW sold 36,607 cars in China, almost exactly double the sales for Q1 2009.

In the photo: Louis Vuitton’s Mon Monogram service