Luxury brands feel bite of austerity

IN the past 10 years, luxury retailer Compagnie Financière Richemont SA has outperformed the JSE All Share index due to its rand-hedge qualities.

But with a slump in emerging markets, producers of luxury consumer goods are finding it difficult to maintain momentum as demand slows.

Atiyyah Vawda, an analyst at Avior Capital Markets who rated Richemont as underperforming, said that relative to the performance of the JSE, Richemont’s price-earnings ratio averaged 18 in 2010 after the financial crisis, while the JSE’s was 9.50.

“Now the JSE is trading at 15, whereas Richemont is trading at a similar level . . . so if you calculate, it’s at least a 40% reduction,” she said.

The group, which owns exclusive brands such as Cartier, Van Cleef & Arpels, Piaget and Montblanc, did rally this week, with its share price rising almost 5% following trade data from China that indicated the resilience of that economy.

But slower demand in China was reflected in the group’s interim results for the six months to September.

Sales decreased 6% in constant currency terms October 2015. The stock has shed more than 14% since April last year.

Deborah Aitken, a Londonbased analyst on global luxury goods at Bloomberg Intelligence, said the Chinese government’s austerity measures to curb extravagant spending had had a major impact on sales of luxury items, especially watches.

“The Chinese consumer is the most important, as they make up 31% of global luxury spending,” she said.

Competitor Prada’s organic sales have shrunk over six consecutive quarters, while Burberry’s dropped by 1% in the second quarter to March 2016.

Standard & Poor’s Global Luxury index, which measures 80 of the largest listed companies that make or distribute luxury goods, has shed about 11% of its value since April last year.

Typically, luxury retail maintains momentum despite economic headwinds, but as the TIGHT FIT: Luxury goods are vulnerable in emerging markets world’s biggest market for luxury goods maintained flatline growth, other emerging markets have been left vulnerable.

Africa has 50 directly operated global luxury single-brand stores, with French multinational LVMH and Richemont owning 60% of the luxury retail space on the continent.

South Africa and Morocco account for 80% of the luxury mono-brand stores.

Luxury goods sales in Africa are rising by 5.6% a year and it is estimated that they will reach $5.2-billion (about R75.45-billion) by 2019.

François Conradie, head of research at NKC African Economics, said luxury retailers tended to do badly in Africa. “The markets are very small, and the people who can afford those goods can also afford to shop in London or Paris.”

Conradie said luxury items were “positional goods”, meaning that the fewer the people who had them, the more value the people who did have them felt they got from them.

Demand for luxury goods in other emerging markets is also likely to come under pressure. Market research firm Euromonitor said Brazil was likely to see only moderate luxury sales growth due to high taxes on imports. India’s luxury goods sector was fragmented, with traditional jewellery and dresses dominating.

Vawda said European listed producers of luxury goods, such as Louis Vuitton, all had a high exposure to emerging markets. In the US some recovery had been evident, “but there has still been mixed signals in recovery there”.

US luxury jeweller Tiffany & Co’s sales rose 33% to $4.1-billion in 2015, from a 3.5% decline a year earlier.

But despite the downturn in economic conditions, Conradie said: “The rich have got better at protecting their wealth.”