The luxury investment universe includes around 200 companies and is continuing to expand. Luxury companies are not only growing they are also very profitable. Investors appreciate that luxury brands provide exposure to the consump-tion growth seen in emerging markets via well man-aged western companies with high operating margins, strong balance sheets and financials.
Tradition and heritage are part of the DNA of a luxury brand, which is why many consumers prefer Western brands when buying luxury goods. They want watches made in Switzerland, leather bags or shoes made in Italy, perfumes made in France and cars made in Germany. Although new brands are coming to the market, tradi-tional brands continue to dominate the industry and this is unlikely to change in the coming years.
When buying luxury goods, brand, quality and design are more important than the price. As such strong brands have pricing power and the combina-tion of profitability and solidity that typifies the strong fundamentals of the luxury sector. For luxury firms to remain profitable, successful brand management is crucial. Most brands were built over many years, but destroying a brand can be done much faster.
When assessing an investment into luxury brands, careful stock picking is of utmost importance. Inves-tors should consider the strength of the brand, poten-tial margins, distribution channels and product range. Although valuation is a very important factor, caution is recommended when it comes to companies that look very cheap based on numbers alone. Sometimes com-panies are cheap for a good reason, for example when brands lose their appeal with consumers. The brand represents the most important asset for a luxury com-pany and stable management, coupled with long term vision, is a key advantage in the luxury space.
Many luxury companies are sitting on a pile of cash. They continue to invest, mainly in new stores, logistics and e-commerce. However, compared to previous years, big brands like Louis Vuitton and Gucci are slowing down the expansion of retail space to avoid being too ubiquitous and to protect the brand. Other brands like Tod’s and Tiffany’s have entered emerging markets a bit later and still have room to catch up. Burberry has been one of the leaders in the sector when it comes to the internet, yet while the importance of e-commerce is increasing, stores remain important. When consumers decide to spend money on luxury items, most of them still prefer to see and feel what they are buying.
Emerging consumers
Emerging market consumption powered by economic growth, urbanisation and rising wages remains a key driver for the luxury market. Luxury brands continue to benefit from developing market consumers’ desire to own Western brands.
This year should be another solid one for the luxury industry, with a predicted growth of 6-8%. Approxi-mately 90% of that growth will come from emerging market consumers, who account for half of all luxury sales. This number is likely to increase further as wealth in emerging markets is expected to rise strongly in the coming years.
The Chinese represent the most important consumers for the luxury industry, buying nearly 30% of all luxury goods. Chinese consumers are becoming increasingly sophisticated and are more discerning when picking brands. In general, Chinese appetite for Western luxury brands remains very strong and growth rates will stay above average.
With salary and income growing 10-20% per annum, the purchasing power of Chinese consumers will con-tinue to increase. In addition to the Chinese, con-sumers from other developing countries, notably Brazil, Russia and the Middle East, will contribute to growth. Rising disposable incomes and a love for western luxury brands are fuelling strong demand across developing economies.