Transcription
Cost of living crisis? What cost of living crisis?
ROB: Wars and a pandemic may have plunged many people into poverty… But the world’s luxury brands have never had it so good. Sales have soared for everything from fancy footwear to Ferraris. We saw the largest demand ever actually in cars now in the first quarter of this year. You look at LVMH, they just became a 500 billion euro company. The first time in Europe a company ever became that big. With the help of industry experts and insiders - let’s investigate what’s driving the luxury boom: the people and the places. In 2021, the affluent Chinese families were about 100 million, and in 2025 there will be 200 million. Why do so many people in the world seem to be treating themselves? Luxury puts a smile on your face. Luxury changes your perspective. And just how long can it all last? Find out in this edition of Business Beyond.
If you’re in the luxury business, you’ve had a good couple of years pretty much no matter what you sell. But the reasons why are not always the same. During the course of this video, let’s look at four key luxury sectors, each of which has a different story to tell. Let’s start with what are called personal luxury goods. That term covers everything from premium clothing, though cosmetics, handbags and jewellery. The things we might buy ourselves to make us feel and look good. And right now, they’re flying off the shelves. The sector has actually seen decades of sustained growth - interrupted only by the global financial crisis of 2008 and 2009, and the coronavirus pandemic. But since the depths of the pandemic, spending on personal luxury goods hasn’t just recovered… it’s surged.
"I think it's a period of time probably when consumers need a bit of escapism. When you've been stuck at home for so long, I think you aspire to travel, you aspire to forgetting what we've just all been through. Luxury enables you to move to a more positive psychological place, I guess." That’s Erwan Rambourg, who is HSBC’s expert on personal luxury, having worked deep within the industry himself. We spoke to him just as the biggest name in the sector made history. LVMH became the first European company to surpass 500 billion dollars in market value today. The shares up 34% this year, up 70% just in the last 7 months. LVMH, the owner of brands including Louis Vuitton, Dior, Tiffany, Hennessey and a whole load of others, is riding a wave of enormous demand for a taste of European luxury. A wave that has taken the sector by surprise.
"I think fundamentally, we had underestimated the impacts of the reopening in Europe, even more so in the US. And now you have Chinese consumers coming back, and they're moving the needle quite significantly."
ROB: Since the depths of the pandemic, luxury retailers have seen sales rise basically everywhere. Including in markets that they never fully exploited before the pandemic.
"I think you have a lot of local clientels who were ignored literally for decades. If you think about the local French, Italian, Spanish consumers, if you think about in Asia, the local Thai or Singaporean consumers, they were left out because you didn't really need them. You needed in Italy to speak Japanese, Korean, Mandarin, Russian and English to go about. And then suddenly the world shut and you started to pay attention to the local consumers in those local markets."
The biggest market for luxury goods remains the United States. But with things looking a bit wobbly with the US economy - more on that later - the sector’s future may not depend on America, but on Asia. And above all: China. The GDP growth fueled by an increasing middle class, and that middle class getting increasingly affluent has been the driving motor behind luxury business. And if you just think numbers, in 2021, the affluent Chinese families were about 100 million, and in 2025 there will be 200 million. Just think about the doubling of a relevant population that's interested in buying luxury goods. And those are just the wealthiest Chinese. But as much as a quarter of the country’s population is now thought to be middle class - around 350 million people. That’s more than the entire population of the United States. That’s an enormous, aspirational target market for luxury retailers the world over. Particularly with Chinese consumers still appearing to prefer to buy their premium products from overseas. If you look at other categories in China, you see compared to ten years ago, local brands gaining increasing popularity, but in the luxury brands, that's still not fully the case. In the luxury segment, you see some early startups and some of the big Europeans have invested in the view. But if you look at the scale of that, compared to the big Europeans, it's still relatively small.
And Asia has two other major markets for luxury goods. Japan has long been the region’s high street, with wealthy shoppers heading there to shop in up-market stores. And South Korea… South Koreans are actually the world’s biggest buyers of premium brands. A fact that hasn’t escaped the likes of Louis Vuitton, who just held their first ever major event there. According to Morgan Stanley, the average South Korean spent $325 dollars on personal luxury goods last year: 50 dollars more than the average American, and SIX TIMES the average spend in China. Only 20% of Koreans has a quote-unquote “shame factor” or feeling of “you should not display your wealth and your status”, which is very, very different from other countries. And so the willingness to demonstrate wealth and to demonstrate luxury in an extreme way is much, much higher, even for younger generations and especially for young and affluent generations who are buying more and more.
The post-pandemic return of these markets has lifted luxury retailers to new heights. But the question is: how long can it go on?
"It's a much more balanced industry than it used to be, and it's partly derisked from that point of view because you're relying on, again, global wealth and not one single nationality moving the needle for your business. Probably China will remain the biggest motor just by sheer volumes. Korea will still grow, driven by the affluence of the younger population. Japan will actually still grow again by the Chinese tourists spending there. And then Southeast Asia is on the rise as well. So the luxury goods boom still has some time to run yet…"
Let’s have a look at another premium sector now: Luxury cars. While sales of ordinary cars have barely moved recently, and show little sign of getting out of first gear… High-end vehicle sales are cruising - with the sector expected to continue growing into the next decade. Sales of cars costing over half a million dollars are expected to increase 14% each year, through to 2031. What’s going on? Many people of course, look at these cars as an asset. Eric Finnås Dalhström is CEO of global luxury marketplace James Edition. Demand for luxury cars on the site hit a record high this year.
"Our average price there in the cars category then is a little bit more than $400,000. So it's really in the higher luxury segments and a combination of both, either brand new luxury unique cars or secondhand cars in the luxury segment. Two things we see there is that if we compare to two years ago, we see that demand is very strong and we see that the prices are increasing."
So what happened two years ago? Well we’re back there again: the pandemic. But unlike luxury goods - which soared in the wake of the pandemic - luxury car sales surged in the midst of it. One reason was that as people avoided public transport, they upgraded their own set of wheels. But a further driver was the behaviour of the car manufacturers. A global shortage of microchips caused by pandemic supply chain problems meant carmakers could produce fewer cars. So to make up for it, they went for quality over quantity - shifting their efforts onto their premium products. Couple that with the growing numbers of wealthy individuals around the world - like we’ve talked about in Asia in particular - and you have the engine for a luxury car sales boom. And what’s more, carmakers have been able to keep prices rising by limiting the availability of their products in places like Asia.
"It's more constrained by the amount of cars they're willing to put in the market than the demand. So the Ferraris of this world could sell more cars if they wanted to, but they're also very deliberate in how much they allow to go to the market in terms of fulfilling growth and making sure that they keep the experience really exclusive."
This strategy means that, unlike mass market cars, luxury vehicles don’t begin losing their value the moment you drive them off the forecourt. You might double the value when you take it out of the factory instead of losing.
Let’s keep things moving and look at another luxury sector with a tale to tell. While the pandemic saw some of the world’s rich take to the roads in fancy cars, it saw others take to the skies. When COVID first happened, the airlines, the commercial airlines probably cut somewhere between 60 and 70% of their schedules. So if you wanted to go from point A to B, you just couldn't get there. The solution for those who could afford it? A private jet. Although it took them a bit of time to realise it.
"The industry did take a big dip. Big dip, right when the first lockdown occurred, in beginning of 2020, I'd say the market probably dropped 20 or 30% as far as prices. And most of the activity stopped dead because everybody thought it was the end of the world and nobody was going to fly anymore anywhere in the world, and everybody was going to die. So it didn't take long. After that, people realized, okay, the world's not coming to an end, and they start seeing there is potential for light at the end of the tunnel. And things started coming back alive, and it slowly, slowly started picking up speed, almost like a locomotive coming out of a station."
So private jets enabled businesses to send their people to parts of the world that commercial airlines weren’t willing to take them. They also had the added bonus of sidestepping certain health concerns. People didn't want to travel with a lot of other people in a big airplane and a lot of the commercial aircraft also recirculate the air inside the cabin where on a corporate aircraft you're actually taking fresh air in from outside. As a result of all this, demand surged. And so did prices.
"A lot of the charter operators saw a huge increase in demand. I mean really like a 50 60% increase in people who wanted to charter a corporate jet and 50% of those people never flew on a corporate jet before."
And for some, the habit stuck. 2022 was a massive year for the private jet industry. The market grew to over 34 billion dollars - with a record 5.3 million private flights worldwide last year. You can’t talk about private jets without mentioning the environmental question. Private flights are thought to emit ten times more pollutants per passenger than commercial flights. But it’s a question Steve Varsano is used to answering.
"Nowadays, this is the second comment you get after hello, how are you? Yes, for sure, flying on a corporate jet is not as environmentally friendly as flying on a commercial airplane. There's no question about that. Flying on Ryanair is not as environmentally friendly as taking a horse. Whether people want to believe it or not, corporations who have bases all around the world, they need this kind of flexibility to be able to travel around the place. This is 2023."
Environmentalists would prefer to see a reversal of the trend towards private flight. So is that going to happen?
"It started slowing down a little bit when interest rates started going up around the world and the threat of a European and a US recession coming. [...] A lot of the world is just taking a breather and it's nothing different that's happened in the past. Everybody thinks, oh the end is here, but it's just a cycle. [...] What I hear from people that are pretty smart in the world economics is the beginning of 24, interest rates start dropping down and the world starts recovering and all of a sudden you go right back up again."
Let’s look at our final luxury sector: real estate. Again, this story starts with the coronavirus pandemic. Lockdowns and the rise in working from home meant people were spending a lot more time between their own four walls - and realising that they needed something more. Something that also played out on the James Edition website.
"People have maybe to some extent reevaluated where they live and how they live. Which means that people are looking for more space and maybe moving us to places which offers a slightly different lifestyle on a day-to-day basis that still enables them to work on a distance to their regular jobs."
The impulse among the world’s wealthiest to seek out more space peaked in 2021, when the number of luxury home sales was a whole 35% above the pre-pandemic levels of 2017, according to Forbes. And at the very top end, 2022 saw price records smashed in many of the world’s most expensive housing markets - particularly in the US. Properties in Hong Kong and in Europe were also among the most lucrative.
"We see also a lot of demand from the US coming to Europe. Now we have a strong dollar. Even though the stock market has gone down a bit lately, we still have a lot of people that still benefited a lot from the stock market gains in the previous years. And if we look, even though interest rates are going up, a lot of these buyers in what we call them hotspots in Europe are cash buyers to a large extent. So they are not as affected."
ROB: And that is a key difference between luxury real estate and the average sale. While many would-be homeowners need a mortgage to push the sale through, the world’s wealthy do not. And that means they’re more or less immune to the high interest rates that are blighting buyers in Europe and the US. So that means luxury real estate sales have been resilient where more modest home sales haven’t. However, the question is, once again, can it last?
"I think that the trends that we have seen in terms of real estate people relocating, I guess that will taper off a bit as we go forward. People have now done those relocations. And that’s what’s playing out."
Luxury real estate levels in 2022 were only a few percent (5%) above pre-pandemic levels. Well below the 2021 boom times. So, four luxury sectors - four different stories. But in the long term, what does the future hold for those who make their money off people having lots of it?
"What's interesting about the luxury market is that you see more younger populations still quite happily spending lots and lots. So it's not a oh, this is an old generation thing, which also makes the sustainability of the growth better. With a huge wealth transfer going to happen in the next ten to 15 years of then large inheritances moving down to kids and then later grandkids, then that will drive to some extent some luxury consumption. I am bullish for the long term in terms of the compounding nature of growth, because you still have so many people you can recruit within the pyramid of luxury."
Thanks for watching this edition of Business Beyond. If you liked it, we reckon you’ll like this one too. We’ll see you over there.