Global Challenges on the World Markets

Global Challenges on the World Markets

by Pininvest Analysis

Luxury at the crossroads on pininvest.com

  • 22 constituents
  • 2.1% 1y performance
  • 34.4% volatility
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With aggregate luxury goods sales of the top 100 companies estimated at $ 212 billion (Deloitte 2017 report), with almost 50% of sales generated by the top 10, strategies have to remain relevant to a global market and involve very large companies

Because distribution and cachet requires powerful marketing investments and local retail presence, conglomerates such as Louis Vuitton LVMH or Richemont are positioned to acquire well established brands, boosting their growth to a degree these companies could not achieve

With a wide ranging catalogue of luxury brands and a global strategy, the luxury conglomerates achieve a degree of stability and hope to weather downturns in the economic cycles more effectively. This is true of the top 5 with sales of approx. $75 billion in total

  • LVMH (Fr)
  • Richemont (Swiss)
  • Kering (Fr)
  • Luxottica (It) asset
  • Swatch Group (Swiss)
  • L’Oreal (Fr)

However, the global approach does not insulate these leaders from recessions as the experience made by Richemont in the 2009 economic crisis, followed by the doubts about the Chinese market in 2016) amply demonstrate. In other words, the size of the conglomerates all but guarantees that no crisis will be lethal but the business cycle leaves the share price exposed to significant volatility

Exposure to the Chinese consumer, which remains a key engine of growth for years to come, is a differentiating factor for fiercely independent family-owned firms and for companies focused on their national market (such as the US)

  • Hermès (Fr)
  • Prada (It)
  • Michael Kors (US) asset
  • Phillips-Van Heusen (US)
  • Tapestry (US)
  • Ralph Lauren (US)
  • Tiffany (US)
  • Chow Tai Fook Jewelry (China)

At the very high end, Hermès is probably a unique example of much sought after brand recognition with a relatively small international footprint, but, along with the US based companies, the exposure to China, below 10% of turnover, is noteworthy. Long waiting lists for iconic products, as nurtured by Hermès, signal true exclusivity and durable appeal in volatile markets. Strongly encouraged shopping by Chinese tourists abroad should not be discounted either… (considering the substantial price differentials with prices in China)

Projecting growth by factoring such diverse aspects may be difficult in general terms but potential individual stories should be tracked

  • Kering – with the January 2018 announcement of the sports division (Puma), signals a renewed focus on the luxury brands (Gucci, Saint-Laurent, Balenciaga)
  • Fossil – on buy-out rumors (Jan ’18)
  • Chow Tai Fook Jewelry (China) – considering its current size ($ 7 billion)
  • Richemont itself, advancing Internet sales with the recent full acquisition of YOOX, an Italian luxury retailer (2018)

Even category domination – such as jewelry for the Richemont conglomerate, eyewear for Luxottica or leather goods for Hermès – does not insulate luxury from the challenges in distribution and market penetration as powerful new groups – such as Chow Tai Fook Jewelry from Hong Kong  arise