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£3,000 bracelets vs £400 sneakers: the diverging fortunes of the luxury market

Luxury’s biggest groups, such as Richemont, LVMH and Hermès, are expected to widen their lead on weaker competitors as the world’s wealthiest splash out on the highest priced handbags and jewellery.

Analysts expect the performance gap between the market’s elite brands and those favoured by aspirational buyers, who helped drive a multiyear luxury boom but are now retreating under pressure from inflation, to further widen as the industry’s growth slows over the coming year.

As the luxury industry’s biggest players — including LVMH, Hermès, Kering and Prada — prepare to present their annual results for 2023 in the coming weeks, analysts expect that divergence to become more acute. 

“We’re going to see the further polarisation of this industry in two ways: first of all with the bigger brands outperforming the smaller ones . . . and the top end of the pyramid outperforming the more aspirational ones,” said Edouard Aubin, luxury analyst at Morgan Stanley. 

“The key thing in 2023 and 2024 is that it’s high net worth individuals driving growth, rather than the middle income,” he added. 

Strong jewellery sales helped Richemont, the owner of Cartier, to increase sales by 4% in the most recent quarter © Stefan Wermuth/Bloomberg

The market’s “roaring ’20s” has hit the brakes: estimates from UBS expect sales growth to slow to an average of 5 per cent in 2024, after delivering an average of 10 per cent organic growth across the luxury market every year since 2016.

Softer sales are also expected to put some pressure on margins even as brands begin to trim their budgets to align with the “new normal” pace of growth. While margins for listed luxury companies averaged about 20 per cent in 2022 and 2023, “for 2024, we estimate there will be about 30 basis points of margin pressure,” said Zuzanna Pusz, analyst at UBS. “Mid-single digit growth is what you need to keep your margins stable.”

The contrasting outlooks for different segments of the luxury industry were on display in early results reported in recent weeks by Swiss luxury group Richemont, owner of jeweller Cartier; high-end Italian fashion house Brunello Cucinelli; and the UK’s Burberry. 

At the top end of the spectrum, Brunello Cucinelli’s sales grew more than 22 per cent last year to hit a €1bn sales target five years ahead of schedule and Richemont’s most recent quarter surprised the market to the upside, with sales growing 4 per cent. Its good news was led by strong sales in jewellery, up 6 per cent, bucking worries they would suffer given the dour economic mood. By contrast, trenchcoat maker Burberry, which is in the midst of a turnaround, issued a profit warning as sales fell. 

“Richemont has the advantage of being largely very high-end . . . A £3,000 Cartier bracelet, even if it’s entry-level for Cartier, is certainly more high-end than a £400 pair of sneakers from Gucci or Burberry,” said Pusz at UBS. 

Those trends are expected to continue as other groups report, with analysts at Morgan Stanley estimating that strong demand for Hermès’s coveted handbags will have helped it to increase sales by around 15 per cent on an organic basis in the last quarter of 2023. Meanwhile, LVMH, which has a more intermediate positioning between its mix of 75 brands, is expected to have grown about 9 per cent, according to consensus estimates.

Kering is forecast to trail behind with sales falling 4 per cent, according to Morgan Stanley, as it struggles to elevate Gucci — its biggest brand and main profit centre — to attract older, wealthier shoppers. 

Hard luxury, which includes jewellery and watches, also appears to be more resilient than expected. This stands in contrast to previous downturns, when investors usually repositioned themselves around the big leather goods brands on the logic that handbags would sell better than more seasonal or very expensive items like diamond jewellery when times were tougher.

A Gucci store in China. Brands are forecast to be even more dependent on Chinese consumers as growth elsewhere weakens © VCG via Getty Images

But as companies have raised prices for bags in the past few years, a classic Chanel flap bag has doubled in price to more than $10,000 since 2016, for example, the relative appeal compared with jewellery may have diminished. 

“The fact that leather goods have been outperforming so much means maybe the consumer is reaching a short-term saturation point — people have enough bags, so they want something else,” said Pusz. Steep price increases on leather goods also mean that “now not only do you have more products offered at the lower end in jewellery, but the same money won’t even buy you one Chanel bag anymore”.

The industry will also have to contend with a slowdown in luxury spending by Chinese consumers, whether they are shopping domestically or abroad, in the fourth quarter at a time when the outlook for the US and Europe is uncertain. While poor economic data out of the world’s second-largest economy spooked investors over the summer, Chinese luxury spending remained relatively stable. 

Now that is expected to shift across the industry. For example, at LVMH’s key fashion and leather goods division, its biggest by revenues, sales to Chinese consumers were up by approximately 40 per cent in each of the first three quarters of 2023 compared with two years previously, a basis of comparison used to show underlying trends before China’s zero-Covid policies shuttered much of the economy at the end of 2022. In the fourth quarter, sales to the Chinese cohort are expected to have grown about 20-25 per cent compared with two years ago, according to Morgan Stanley’s estimates. 

This is going to be “the first time since the beginning of 2023 when, on an underlying basis, we are going to see a slowdown from Chinese national citizens”, said Aubin. 

At the same time brands are also expected to be more dependent on Chinese shoppers as growth elsewhere weakens. Demand from Chinese shoppers is expected to drive some 60 per cent of sector growth in 2024, according to UBS.

“The number one risk for the industry is the Chinese consumer,” said Pusz at UBS. “Growth for the past 10 years has been driven by virtually all consumer nationalities . . . Now it’s a different situation because the consumer globally is slowing because of higher interest rates.”

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