A New Kind of Luxury Is Taking a Share of Rich Consumers’ Money

Luxury goods have seemed immune to economic troubles, but their shine may be dimming. During the pandemic, the luxury goods market boomed as the rich, undeterred by rising prices, enjoyed Birkin bags and expensive watches. However, signs now point to a slowdown in economic growth. boom luxury of the Roaring 20s.

IN ChinaFor example, the sales boom that occurred at the beginning of 2023 did not last long. The country’s slow economic recovery and global uncertainty have contributed to lower spending on luxury goods. In accordance with Claudia D’Arpiziofrom Bane and Co.expert on the subject Despite initial resistance, luxury markets are facing challenges due to geopolitical changes and low consumer confidence.

These turmoil have affected major companies such as LVMH, the conglomerate behind Dior and Louis Vuitton. Revenue growth slowed in the third quarter from a year earlier, setting a pattern replicated by rivals such as Keringowner GucciAnd Burberry.

Richemont’s half-year sales, although up 6%, fell short of expectations, and secondary market prices for Rolex and Patek Philippe suffered.

Although some outliers such as HermesDespite slowing growth thanks to strong sales in the third quarter, the luxury goods sector as a whole is facing uncertainty.

However, specialty segments such as luxury cruises are thriving, with constant currency growth of 116% year over year.

The complexity of the current luxury goods market makes us question the true trajectory amid conflicting reports of declining income and spending. What’s really going on in the world of wealth?

The pandemic marked the peak of luxury, with savings accumulated through stimulus and holiday plans boosting buyers’ purchasing power but leaving them with fewer opportunities to treat themselves amid travel bans and lockdowns. This is when many turned to luxury goods and bought more champagne and designer handbags than before.

“There was a huge excess of savings or purchasing power that was released by people staying at home, especially employees,” he said. Javier Gonzalez Lastraportfolio manager specializing in luxury ETF Topic.

The extent of luxury growth during the pandemic is reflected in the data Deloitteshowing that the 100 largest luxury companies are larger and more profitable than ever in fiscal year 2022.

But then, as interest rates and inflation rose, Lastra says, consumers began tightening their belts and being more vigilant about where they spent their money.

Monstrous expenses of the era pandemic It has done wonders for luxury companies’ profits, but it was never intended to become the new norm. In any case, this was an anomaly, and the slowdown we see today reflects a gradual change from what was the norm before COVID-19.

“As such, it is not sustainable and should not be sustainable,” according to Flavio Seredainvestment manager at an asset management company GAM, based in Zurich, due to the high growth rates observed in the luxury segment. “I think that this year you are seeing a slowdown in growth, that is, a process of normalization. It seems worse than it is because it comes from a very high level.”

Luxury executives also noted that the apparent slowdown is nothing more than a return to the way things were before, rather than a completely catastrophic scenario for luxury goods in general. Johann Rupert, Richemont’s president, said in a half-year report published last month that there had been a “widespread normalization of market growth expectations across the sector.”

Data also supports this: according to a sector report, luxury industry consumption in 2023 is estimated to be around €1.5 trillion ($1.62 trillion) across all luxury categories worldwide. Long live luxury from Bain and Co. November.

The figure is about 70% higher than 2019 levels in constant currency terms, despite an estimated 29% industrywide price increase over the period to keep up with rising production costs, according to the retail data company. EDITED.

The performance of different luxury brands may also depend on the type of consumers they target, he said. Natalya Lekhmanovahead economist Mastercard For Europe.

The “ambitious” entry-level consumer may have been more impacted by macroeconomic factors and their impact on their portfolio than wealthier ones.

“It must be taken into account that luxury consumers fall on a spectrum from wealthy upper-middle class people to billionaires. The former became more price-sensitive: investment bank bonuses declined, the tech sector lost jobs, the cryptocurrency bubble burst, and many wealthy professionals increasingly had to prioritize investments. bags,” Lekhmanova said in an email Luck.

The decline in spending in some luxury segments reflects the ebb and flow of consumer preferences and their appetite for value products in the current economic climate.

But, according to Lastra, ETF TopicConsumers are spending money on different types of luxury than in recent years.

“What we’re seeing in terms of the slowdown is largely due to people spending money on other things now,” Lastra said. “So it’s a matter of portfolio allocation rather than job losses or interest rate pressures that are having an impact.”

In particular, according to data Bane and Co.. D’Arpizioco-author of the November luxury market report, noted that the recovery COVID-19 and the resurgence of travel have encouraged more people to devote themselves experimental luxury throughout 2023, and this trend is expected to continue into next year.

“What we’re seeing in 2023 is a rebalancing of customer appetite toward experiences and experience-based products rather than products, with an unprecedented sense of urgency for social life and travel across geographies,” D’Arpizio said. “Spending on experiences is recovering to record highs, and consumers are once again moving closer to luxury beyond products,” he added.

This could mean growth in categories such as travel, hospitality and cruises as tourism increases. Luxury shopping could also benefit from rising tourism, albeit on a less stratospheric scale, predicts Bane and Co..

Some of these trends are beginning to be reflected in companies’ profits: Europe’s largest hotel group, Accor, raised its annual profit target twice this year as demand soared. British group Rocco Forte Hotelswhich has establishments throughout Europe, has also increased its revenues.

“The cost of experience has more than doubled since 2010,” he says. D’Arpizio. “This ‘new normal’ means that luxury markets are blurring their boundaries and there is an opportunity for brands to expand their influence beyond their core sphere.”

Judging by the signs pointing in different directions, it is clear that the next year in the luxury sector will mark a renewal that began in 2023.

HSBC warned in late November that because luxury is linked to consumer confidence, tourism and stock markets, what happens to it could have wider ripple effects.

The bank forecast more modest growth and said it was “nothing to be ashamed of, but a slowdown is rarely good for shares in this sector.”

With the economies of key regions such as USA, Europe and China He wrote that 2024, still finding its feet, could remain a “challenging” year for luxury. Deutsche Bank last week.

But on the plus side, the luxury industry is more resilient than other consumer sectors of the economy.

“One of the reasons people want to invest in this sector is the rise of the upper middle class around the world, and that’s a fantastic tailwind for all these (luxury) companies,” Lastra said.

(C) 2023, Fortuna