The 5 Biggest Threats to the Remarkable Luxury Race
When we talk about pandemic stocks, we usually think of e-commerce retailers or direct-to-consumer brands that have overcome lockdowns to record results and come back to earth as quickly as the world has reopened. Luxury brands have experimented with a softer version of this roller coaster. Their wealthy clientele never stopped shopping, and the post-pandemic consumer boom fueled big increases in sales and profits. But investors think the category is lagging: Shares of most big luxury companies, among the best performers in 2020 and 2021, have underperformed the broader market this year.
Investors can be wrong (and often are wrong). Still, when LVMH, Kering, Hermès, Prada and Moncler release their quarterly results this week, each is likely to make the most of the latest numbers while managing expectations for the future. They will also have to come up with a game plan to get through the tough times ahead.
Below are five potential ways to end the luxury party, in descending order of threat level:
1 – economy
It doesn’t look good there. Inflation continues to rise in most countries and GDP projections continue to be revised downwards (the United States and the Eurozone will release both indicators this week; see the calendar below for details more). Fortunately, the only economic indicator that has remained strong is the one that matters most to the fashion industry: retail sales, which continue to beat expectations in the United States and some other markets. The best luxury customers are also relatively isolated from the broader economic situation. Many won’t even notice a slight recession, or if gas prices are $4 or $5 a gallon. But brands will feel it if middle-class shoppers switch from Louis Vuitton to Coach, or even worse, continue to carry last year’s handbag. And a deeper downturn would squeeze even the most affluent consumer’s budgets.
2 — China
This week’s revenue covers the bulk of China’s ‘Zero Covid’ lockdowns in Shanghai and other major cities. It won’t be pretty. Burberry said its quarterly sales rose just 1% after revenue in China fell 35%. Brands like Gucci and Prada that have relied the most on China for their growth are most at risk. This is especially true if China’s recent slowdown turns into a recession, or if its alliance with Russia turns into a broader move away from the West, including luxury brands. No wonder so many labels that once talked about China as the future are touting their ambitious US store expansion plans.
3 — Overexposure
Speaking of expansion plans, mega labels like Louis Vuitton and Chanel have apparently ended the old idea that luxury brands can only grow so far before they run out of new customers or lose their business. stamp. This bit of conventional wisdom needs another test, as LVMH and Kering promise to increase sales of their biggest brands by billions of dollars over the next few years. Even the biggest brands have new markets to enter, from cosmetics to furniture to hospitality. The plan is to sell a lot more clothes too: Kering announces that it will open dozens of Saint Laurent and Gucci stores, both in luxury hotspots and in relatively untested markets (Kering’s presentation at the Investor Day in June reported that at least three new Gucci locations are planned in Ohio alone).
4 — Currency fluctuations
The euro is at par with the dollar for the first time in 20 years. For now, European luxury brands are mainly reaping the benefits of the hordes of American tourists who are squeezing their new purchasing power in the new Dior megastore in Paris. All those new Gucci stores in Ohio will be all the more lucrative for the brand, which, thanks to currency fluctuations, can charge 20% more for the same bag in Cleveland than in Milan. The downside is that the euro is weak for a reason: it acts as an indicator of the war in Ukraine and the possibility of Russia withholding energy supplies from the continent, triggering a recession.
5 — The Crypto Crash
Crypto millionaires and billionaires are some of the hottest new customers for luxury brands. Or were, anyway. With cryptocurrency and NFT prices plummeting, some of the biggest boosters in the category, who once flaunted their wealth in head-to-toe Louis Vuitton or Gucci, are now fending off creditors. Brands say they are still bullish on crypto, moving forward with NFT releases, and planning to accept cryptocurrency in stores. One of the reasons they can safely ignore the chaos is that none of these brands had invested so much in technology to begin with. If their next NFT project blows up, they can quietly drop plans for the next one. The reason crypto makes this list is because so many industry visionaries see Web3 driving the future of fashion, from how we buy clothes to whether we wear them in virtual worlds. in addition to the physical world. For this transition to happen, crypto needs to make a comeback.
What to watch this week
Bids for Ganni are due to majority owner L Catterton; China-focused investors like Sequoia China would be first
LVMH publishes its second quarter results
US Consumer Confidence in June
US Federal Reserve begins two-day meeting focused on tackling inflation; a rate hike of 0.75 percentage point is expected
Kering, Moncler and Shopify announce their quarterly results
Second Quarter US GDP; Goldman Sachs expects a 0.7% increase
L’Oréal, VF Corp, Prada and Hermès publish their quarterly results
The US PCE index – the Fed’s preferred measure of inflation – is released
Eurozone GDP and Inflation Updates
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