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Will luxury goods make your investment fund look fabulous as the economy slows?

Tim Richardson

Pengana Capital Group

Luxury goods are the only area in which it is possible to make luxury margins.
– Bernard Arnault, Founder, Chairman, CEO, LVMH

High-end shoppers are ignoring the downturn and increasing spending on luxury goods as they return to the mall. Investors can now take advantage of more attractive company valuations to invest in luxury brands that can grow earnings through the economic cycle.

What are luxury goods?

Luxury goods are those associated with the highest quality materials and workmanship, marketed under brands with strong identities, at superior price points.

While luxury goods are not necessary, they deliver an enhanced feeling of well-being to the owner. They are usually priced at a level well above their functional value, reflecting the perceived brand value and heritage.

The global market for luxury goods is massive, expected to reach US$1.2 trillion1 in sales in 2022.

The luxury goods market is changing

Sales of luxury goods dropped by 14%1 in 2020 as the world entered the pandemic and shoppers stopped visiting the mall. Yet, established luxury brands quickly adapted and enhanced their web presence. Sales fell, but not catastrophically so, as most consumers retained their jobs and incomes.

Focussed, direct-to-consumer online challengers prospered during a lockdown. However, as economies reopened, consumers have switched back to in-store shopping, especially for spontaneous purchases such as most cosmetic sales. Moreover, Apple’s changes to privacy settings and increased digital advertising costs have made developing brands online more challenging. This has shifted market share back to established brands.

Nonetheless, digital remains critical to brand building. Moreover, luxury purchases often follow extensive research and the brand’s own web portal is critical in supporting customers through their buyer journeys.

Despite the return to in-person shopping, e-commerce will account for 20%1 of luxury sales in 2022, up from just 11% in 2019. This shift is most prominent in China, where the pandemic has impacted in-person luxury goods sales for longer.

There is little sign yet that large luxury businesses are being squeezed by customers trading down in the face of rising living costs. French luxury group Hermes reported a 24% jump in its September quarter revenue.

How can luxury goods brands prosper in a slowing economy?

In a slowing economy, it is likely to be the strongest luxury brand that grows sales, while pushing cost inflation through to customers.

An omnichannel strategy is essential for success in this market, with elegant physical stores, attentively staffed, critical to the luxury shopping experience. They should be supported by an astute digital strategy, helping customers transact or simply supporting them through a buying process that may conclude in-store.

Luxury goods purchases are statements of identity, even if made subconsciously. This implies brands should align closely with their customers’ values.

This is especially true when marketing to the more socially and environmentally aware younger demographics. Managing a brand’s reputation by carefully considering its impact on the environment and a wide range of stakeholders such as its workers and suppliers is critical.

Implications for investors

The next stage of the economic cycle will be challenging for luxury groups. Those with the financial resources and capabilities to support their brands, meet customers’ expectations of their shopping journey and align with their values will be best placed.

It is possible to find luxury goods stocks whose strong brands are growing profits, yet are now attractively priced following market weakness earlier this year. These can compound earnings growth, enhancing long-term portfolio returns.

1 Euromonitor International, (2022) Five Trends Shaping the Luxury Goods Market – Fflur Roberts

Tim Richardson
Investment Specialist
Pengana Capital Group
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