Europe’s Luxury Sector Is Poised to Keep Growing
Analysts shared a blue- sky view on the sector, especially for the biggest players.
Luxury's spectacular rebound from the pandemic is expected to continue — perhaps moderated slightly — into 2022, fueled by a vibrant U.S. market and China, and driven by local consumers instead of tourists.
"The prospects for European luxury goods companies are still very promising despite the recent powerful rebound in sales," said Erwan Rambourg, managing director and global co-head of consumer and retail at HSBC in New York. "The irony of the past 18 months is that the uncertainty generated by COVID-19-related restrictions has forced management teams to be more nimble, less risk-averse, more daring and has helped them make tough decisions they may have postponed prior to the crisis on staff, rents, digital transformation and more."
Meanwhile, luxury goods "offer some meaning and relief to consumers" in troubled times, according to Rambourg, and "the awareness of brands has been soaring on social media and traditional advertising" thanks to heavy investments during the pandemic.
"We've seen very strong results in the luxury industry given the wealth effect, and given that consumers still have healthy amounts of savings, as well as low unemployment and consumer confidence," said Oliver Chen, managing director and senior equity research analyst at Cowen & Co. "We're looking for low double-digit sales growth in 2022. Comparisons are tougher in the first half, so it could be a little bit weaker than the second half, based on the algebra."
China and the U.S. should continue to drive growth, whereas Europe will gradually recover as local spending picks up, according to Barclays' 2022 outlook for luxury goods. The bank touted steady growth in the middle class in China, which Bain expects to account for 45 percent of luxury spending by 2025.
"The rollout of a property tax in pilot cities will be a focus in 2022," Barclays cautioned. "More broadly, we expect regulatory updates on China to be highly monitored in the space next year as this can have a big impact on consumer sentiment."
Luca Solca, senior research analyst in luxury goods at Bernstein, stressed that "Chinese demand doesn't seem to be going for a 'step-down' reset similar to the anticorruption drive of 2021, as feared by the market in mid-August."
Few clouds disrupt a blue-sky view of the American market.
"The next two years could see a lot of impressive growth stories unfolding in the U.S.," said Rambourg, who earlier this year penned a report explaining why America is an emerging market for luxury.
No one expects international, longhaul travel to resume with gusto anytime soon, however.
"In a closed world, the focus has been on local clienteles and those have reacted very well to finally getting a bit of attention," Rambourg said. "Europe seems to be shutting down again somewhat, but that is unlikely to hurt sales significantly.
"Many investors have been fearful about a 'stay-cationing reversal,' this idea that while you were stuck at home and saved on flights, fancy restaurants, nightclubs and hotels, you spend a lot on things and that would reverse as soon as the world would reopen," he continued.
But "spending on experiences versus spending on goods: it's actually not an either/or. As LVMH mentioned on a call, when you start going out again, you'll also want to look good. And at least since the U.S. has reopened, there has been no evidence of luxury sales taking a hit despite it being virtually impossible to book a restaurant or even a bar," HSBC's Rambourg said.
Cowen's Chen also predicted a "restocking of the closet" as social occasions resume, "so I expect strength in apparel and accessories. There's been a sequential deceleration in home because home was just growing so, so much, but it's still pretty attractive growth."
Another standout category to watch is beauty, health and wellness. "Investing in your face and skin care and wellness is in many ways like the new luxury, like health is the new wealth," Chen said.
Rambourg forecast a lot of noise around the jewelry category as Tiffany & Co., now controlled by a "management dream team" under LVMH Moët Hennessy Louis Vuitton, unfurls its new strategy. Meanwhile, segment leader Cartier "continues to impress."
"Observers are often thinking that if one succeeds, it will be at the expense of the other: We disagree and believe both will thrive," Rambourg said. "Retail and media spend will help the entire branded jewelry space."
The analyst also sees bright days ahead for outerwear as consumers continue to crave outdoor pursuits, which may be further propelled in the short term by the upcoming winter Olympics in Beijing despite threatened boycotts of the Games by government officials of many Western countries, but not the athletes.
"Finally, I believe footwear will see much attention as it is the best way to generate repeat purchases. And so whether it is specialists like Christian Louboutin or generalists like Dior, the category will be supported by many initiatives," Rambourg said.
Barclays, however, considers shoe specialists Tod's and Salvatore Ferragamo "as particularly challenged at the moment due to competition from leather goods brands, limited exposure to sportswear/sneakers, which is seeing better trends than formalwear, and higher exposure to wholesale."
According to Solca, "leather goods, jewelry and beauty are still probably going to be on the front foot, relative to other product categories."
Scale, a key factor in 2021 performance, is likely to remain an important factor next year.
"The big companies are likely to outperform," Rambourg said. "In handbags and accessories, Dior, Louis Vuitton, Chanel, Hermès and now Gucci and
Prada as well are showing strong signs of a recovery. In watches, Rolex. In jewelry, Cartier and Tiffany."
Analysts suggest physical stores may take on more importance as the pandemic wanes, and traffic returns.
Cowen said several themes are emerging. Brands seem to prefer fewer, but better stores; ones that are experiential and with digital engagement within the walls.
"This redefinition of experiential cuts across all retail and involves food, art and culture," Cowen said. "In many ways, some of the finest stores are like churches to the brands."
Among major openings in early 2022 is Dior's expanded Avenue Montaigne flagship, which is said to house a museum, restaurant, garden courtyards and at least one hotel suite.
"The point is to create environments so special that the consumer forgets about price," Cowen said. "Everyone's looking for fantasy. So it's a good time for brands to be investing and giving consumers that exceptional experience."
According to Bernstein's Solca, "further channel integration — combining customer service, remote selling, in-store and digital distribution — will be prominent" next year.
"Digital distribution is reaching far beyond e-commerce and 'colonizing' many alternative and parallel worlds in the metaverse," he said. "The industry needs more ways to excite consumers, on top of pop-up stores and collaborations. The race is on for new 'format innovation.'"
As for risks and challenges that could upset the luxury juggernaut, there are several.
"I believe the biggest challenges are mostly with macro elements that are out of the brands' control and notably economic growth and any big shift in terms of wealth factors — equity markets, property markets," said Rambourg. "The biggest challenge that is really down to the industry itself is how to move from reputational risk to reputational opportunity on environmental, social and governance issues: ensure you do the right thing in terms of sustainability, ensure you pay and train your staff appropriately, ensure you communicate with more transparency."
He noted ESG issues are not specific to the first half of the year, but rather a "long-term challenge that the industry needs to address."
"We think Millennials and Gen Z consumers will continue to demand companies step up their ESG efforts in 2022," Barclays concurred in its report.
"We think Burberry and Kering are the clear leaders in terms of reducing carbonemission intensity."
While global supply-chain disruptions have not greatly affected the luxury sector so far, Barclays said "many companies reported higher shipping and logistics cost, which may persist in 2022. In addition, brands have returned to capital investment (e.g., selective store openings) and marketing and other spending, which could weigh on earnings."
Ho-hum products or those that are too much the same are always a hazard.
"Selling to consumers who already have a lot demands being ahead of the curve on innovation," according to Solca. "Creative talent is becoming more and more important, as well as matching the right creative director with the specific brand DNA. This is easy to understand in theory, very difficult to do in practice."
Analysts also expect consolidation to continue, despite a dearth of big targets in key luxury categories.
"Consolidation has every reason to go on in 2022 after the past 18 months of intensive deal-making," Rambourg said. "The issue, of course, is that sellers decide, not buyers, so timing and nature of deals is impossible to forecast."
In his view, LVMH, "the key aggregator for the industry, will likely continue to redefine what luxury actually means and this implies categories added might be unexpected, a bit like hospitality (Belmond) or travel (Rimowa) were when they announced those. I would advise to expect the unexpected as deals in the existing categories won't change the narrative or move the needle as much."