THE RE­NAIS­SANCE OF LUX­URY

The lux­ury mar­ket is back, and an­a­lysts be­lieve two key trends could sus­tain its re­cov­ery in the com­ing years.

The Peak (Hong Kong) - - Portfolio • Investment - STORY NICKY BURRIDGE

The lux­ury goods mar­ket is en­joy­ing an up­swing, thanks to grow­ing wealth among main­land Chi­nese con­sumers, and an­a­lysts be­lieve two trends could just fur­ther its growth -- digi­ti­sa­tion and mil­lenial­i­sa­tion.

Spend­ing on high-end goods has re­bounded as the global lux­ury mar­ket grew by 5 per cent in 2017 to be worth an es­ti­mated EUR1.2 tril­lion (HK$11.64 tril­lion), ac­cord­ing to man­age­ment con­sult­ing firm Bain & Com­pany.

The group says Chi­nese shelled out the most in lux­ury spend­ing, with con­sump­tion bounc­ing back in 2017, fu­elled by re­newed con­sumer con­fi­dence and the rapid emer­gence of what it de­scribed as a new and in­creas­ingly fash­ion savvy mid­dle class.

Sales of per­sonal lux­ury goods, such as clothes, hand­bags and jew­ellery, soared by 15 per cent in main­land China, and when com­bined with pur­chases made abroad, Chi­nese con­sumers ac­counted for 32 per cent of sales world­wide, ac­cord­ing to Bain.

This buoy­ant trend looks set to con­tinue go­ing for­ward.

Bain has fore­cast a com­pound an­nual growth of 4 per cent to 5 per cent for the global lux­ury mar­ket in the next three years.

Carl Ber­ris­ford, eq­uity an­a­lyst of UBS Wealth Man­age­ment CIO, ob­serves that the re­bound in the lux­ury mar­ket has been ev­i­dent in the last six months.

He also at­tributes the rise to the grow­ing wealth of Chi­nese con­sumers, on the back of im­prove­ments in the Chi­nese econ­omy and the wealth-ef­fect peo­ple feel from ris­ing prop­erty prices, most re­cently in tier three and tier four cities.

“There is also a struc­tural dis­cre­tionary in­come story. The num­ber of peo­ple en­ter­ing the ranks of the mid­dle class is swelling ev­ery year and the ac­tual dis­cre­tionary in­come bud­get is in­creas­ing as peo­ple get wealth­ier,” Ber­ris­ford says. “This is an im­por­tant long-term struc­tural driver for the lux­ury mar­ket.”

In­deed, wealth grew five­fold in China since the be­gin­ning of the cen­tury, and in 2015, its mid­dle class has sur­passed the US’ to be­come the world’s largest, says the Credit Suisse Group in a re­port re­leased in Oc­to­ber 2015.

UBS In­vest­ment Bank es­ti­mates that Chi­nese con­sumers now ac­count for 35 per cent of the global lux­ury mar­ket, and it has fore­cast near-term an­nual growth of 10 per cent and long-term an­nual growth of 7 per cent for the sec­tor.

Ber­ris­ford ex­pects growth across all types of high-end prod­ucts, with the lux­ury watch mar­ket cur­rently en­joy­ing a par­tic­u­larly strong re­bound in sales.

But growth is not only con­fined to per­sonal lux­ury goods, with de­mand also strong for lux­ury ex­pe­ri­ences. Spend­ing on high-end food and wine, and lux­ury cruises was up 6 per cent and 14 per cent re­spec­tively in 2017, while lux­ury car sales also rose by 6 per cent, ac­cord­ing to Bain.

The pos­i­tive out­look for the lux­ury sec­tor has caught the at­ten­tion of Chi­nese com­pa­nies, lead­ing to a high-end brand ac­qui­si­tion spree.

Most re­cently, Chi­nese con­glom­er­ate Fo­sun ac­quired a ma­jor­ity stake in Paris-based fash­ion house Lan­vin, while Shan­dong Ruyi bought a con­trol­ling stake in lux­ury shoe maker Bally, adding to its ex­ist­ing brands, which in­clude UK tailors Gieves & Hawkes and Aquas­cu­tum, and French ap­parel firm SMCP.

In Oc­to­ber last year, Hony Cap­i­tal bought a third of Duem­mei, owner of Mr & Mrs Italy.

Ber­ris­ford says the ac­qui­si­tions show Chi­nese cor­po­rates are aware that Chi­nese con­sumers bring more than a third of brand mar­ket sales, and they want a piece of the ac­tion.

“There aren’t re­ally any lux­ury Chi­nese brands that have been able to com­pete or at­tract the same type of sales as the big, global lux­ury brands.”

He adds that he ex­pects to see more M&A in the lux­ury goods sec­tor in the fu­ture.

Zhang Tian­bing, con­sumer busi­ness sec­tor leader, Deloitte China, says that Chi­nese com­pa­nies see the huge po­ten­tial in the Chi­nese mar­ket, thus their ap­petite for ac­quir­ing lux­ury brands.

“This is very much about buy­ing the brand and help­ing them to grow in China to cap­i­talise on the do­mes­tic growth of con­sump­tion, par­tic­u­larly in the lux­ury sec­tor,” he says.

In­vestors also have op­por­tu­ni­ties to cap­i­talise on this growth as many lux­ury brands are owned by listed com­pa­nies.

The S&P Global Lux­ury In­dex, which is com­prised of 80 of the largest pub­li­cal­ly­traded com­pa­nies en­gaged in the pro­duc­tion or dis­tri­bu­tion of lux­ury goods and ser­vices, is up 32 per cent year-on-year, af­ter trad­ing side­ways for much of the pre­vi­ous two years.

A num­ber of big names have also re­cently re­ported strong sales growth, with Ker­ing, whose brands in­clude Gucci and Yves Saint Lau­rent, post­ing a 27 per cent jump in year-on-year sales on a com­pa­ra­ble ba­sis in the fourth quar­ter, to give rev­enues of EUR4.26 bil­lion (Hk$41.31bil­lion). Within the to­tal, sales at Gucci, which has re­cently re­vamped its brand, soared by nearly 43 per cent.

LVHM, home to Louis Vuit­ton, Dior, Givenchy and Ce­line, en­joyed record sales of EUR42.6 bil­lion (HK$413 bil­lion) in 2017, driven by its fash­ion and leather goods arms, while Her­mes posted a 9 per cent rise for the year with rev­enues of Euro5.549 bil­lion (HK$53.81 bil­lion).

The pos­i­tive per­for­mance was not con­fined to high-end fash­ion goods, with cos­met­ics maker Es­tee Lauder also post­ing a near 17 per cent jump in sales for the De­cem­ber quar­ter, beat­ing an­a­lysts’ ex­pec­ta­tions.

But de­spite the re­bound in lux­ury sales, in­vestors will need to pick their stocks care­fully. Ber­ris­ford thinks growth is cur­rently brand-driven, rather than prod­uct driven, with big lux­ury brands likely to out­per­form se­cond-tier mono brands, re­flect­ing Chi­nese con­sumers’ pref­er­ences.

“Out of our uni­verse of 11 lux­ury stocks, five are buys,” he says.

He adds that there is a proxy play be­tween lux­ury spend­ing and Ma­cau gam­ing stocks.

“There is a quite a cor­re­la­tion be­tween lux­ury spend­ing and spend­ing in Ma­cau. For watches, there is an 81 per cent cor­re­la­tion be­tween lux­ury watch sales in Hong Kong and Ma­cau gam­ing growth,” Ber­ris­ford says.

Moody’s In­vestors Ser­vice ex­pects the credit qual­ity of the ma­jor­ity of the 11 lux­ury stocks it tracks to strengthen over the com­ing year. But it feels most pos­i­tive about com­pa­nies that have started to fo­cus on on­line sales and im­prov­ing store pro­duc­tiv­ity.

It is also cau­tious about US com­pa­nies, such as Ralph Lau­ren, which rely heav­ily on sales through de­part­ment stores, where foot­fall is fall­ing, while they also face head­winds from the strong US dol­lar. The in­ter­net presents both chal­lenges and op­por­tu­ni­ties for high-end brands.

Zhang sees a big shift tak­ing place in the lux­ury mar­ket, and thinks the brands that will en­joy the strong­est growth go­ing for­ward will be those that fo­cus on cus­tomised bou­tiques and in­ter­act­ing with their cus­tomers, both on­line and off­line.

“For lux­ury brands, trans­form­ing them­selves to make sure they are rel­e­vant in the dig­i­tal age will be crit­i­cal to the suc­cess and even sur­vival of th­ese brands.

"THOSE WHO ADAPT THEM­SELVES FASTER TO THE NEW DIG­I­TAL WORLD WILL BE THE WIN­NERS AND THOSE WHO ADAPT SLOWER WILL BE THE LOSERS." – Zhang Tian­bing, Deloitte China

“Those who adapt them­selves faster to the new dig­i­tal world will be the win­ners and those who adapt slower will be the losers.”

But most brands have not been quick to de­velop dig­i­tal chan­nels, and while global on­line sales of per­sonal lux­ury goods jumped by 24 per cent in 2017, they still only ac­counted for 9 per cent in to­tal global lux­ury sales, ac­cord­ing to Bain.

Even so, the group es­ti­mates this chan­nel will ex­pand to reach 25 per cent of the mar­ket by 2025.

On­line sales are most preva­lent in the Amer­i­cas, with the re­gion ac­count­ing for 47 per cent of the global to­tal, but Asia is catch­ing up fast, largely driven by China.

Bruno Lannes, part­ner at Bain & Com­pany China, says on­line lux­ury sales grew by 43 per­cent in main­land in 2017, com­pared with a rise of 19 per cent for off­line ones. It is also seen as a pi­o­neer for in­no­va­tive dig­i­tal ser­vices and mod­els for con­sumer en­gage­ment, with the 40 lead­ing lux­ury brands all hav­ing of­fi­cial Wechat ac­counts in China.

But while most brands have al­ready launched their own web­site or in­tend to do so in the com­ing year, very few are ex­plor­ing other on­line op­tions, such as sell­ing through ag­gre­ga­tors.

Zhang points out that digi­ti­sa­tion gen­er­ally is still at a very early stage among most lux­ury brands.

“They are start­ing to cre­ate con­sumer data vis­i­bil­ity and in­sights with the pur­pose of im­prov­ing store con­ver­sion. “There are also at­tempts to up­grade store for­mats to make them dig­i­tally-en­abled,” he says.

But he stresses the im­por­tance of digi­ti­sa­tion in or­der to ap­peal to mil­len­ni­als.

“Mil­len­ni­als are be­com­ing the ma­jor cus­tomer base and they are dig­i­tal na­tives, spend­ing 50 per cent more time, at six hours per week, on­line shop­ping than the older gen­er­a­tions. They also live on­line and are a lot eas­ier to be ac­cessed and in­flu­enced via dig­i­tal touch points.”

It is not only on­line that high-end brands are hav­ing to adapt to the de­mands of younger peo­ple, with the lux­ury in­dus­try un­der­go­ing a so-called “mil­len­ni­al­i­sa­tion”.

This in­volves rein­ter­pret­ing streetwear to ap­peal to younger con­sumers, with T-shirts, down jack­ets and sneak­ers see­ing sales growth of 25 per cent, 15 per cent and 10 per cent re­spec­tively in 2017, ac­cord­ing to Bain’s data.

Ap­peal­ing to mil­len­ni­als, par­tic­u­larly those in China, is likely to be key to the suc­cess of brands go­ing for­ward.

Lannes ex­plains: “New con­sumers, mostly mil­len­ni­als, have been ma­jor con­trib­u­tors to the mar­ket growth.

“Mil­len­ni­als are dig­i­tally savvy and very knowl­edge­able about lux­ury.”

He adds that they pre­fer fash­ion and ca­sual clothes, but favour de­signer brands. They also start buy­ing lux­ury goods at a young age and with rel­a­tively high fre­quency.

De­spite the op­por­tu­ni­ties the rise in lux­ury con­sump­tion of­fers com­pa­nies, sig­nif­i­cant hur­dles and risks re­main.

In the pe­riod from 2014 to 2017, among the 65 per cent of brands that man­aged to grew rev­enue, only one-third were also able to grow their prof­its, ac­cord­ing to Bain.

An­other vul­ner­a­bil­ity is the fact that the mar­ket is so Chi­nadriven, and a re­vival of Bei­jing’s anti-cor­rup­tion crack­down could put a damp­ener on growth in the lux­ury mar­ket.

“The fate of the Chi­nese econ­omy is a key is­sue. You re­ally want growth to be more di­ver­si­fied. If the Chi­nese prop­erty mar­ket turns down, you will see it in the lux­ury mar­ket be­cause it would end the wealth ef­fect,” Ber­ris­ford says.

But Zhang thinks de­mand is now com­ing out of gen­eral con­sump­tion, which should lead to more sta­ble growth.

De­spite th­ese hur­dles, for brands that are able to con­nect with their cus­tomers, par­tic­u­larly those in China, and ex­e­cute suc­cess­ful dig­i­tal strate­gies, the re­wards are po­ten­tially huge.

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