Market Pulse
Monday, July 24, 2023
Welcome to this week’s Market Pulse, your 5 minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.
This week, we once again have a single theme: Investing in Luxury Goods.
And our three stories on this topic are:
Read the full Market Pulse below, or if you want to access it on the go, download the Sidekick app.
Adrian (Portfolio Manager), and the rest of the Sidekick team.
It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.
Consumers buy luxury goods to feel special. Luxury brands can reflect not only their personalities but also their economic, political, and social aspirations. Playing towards the top of Maslow's pyramid of needs, the perceived importance of the benefits they offer is so significant that price becomes almost irrelevant. This pricing power has made the sector a favourite amongst investors [5], especially in the current inflationary environment.
But not all luxury companies are equal. Growing wealth in emerging economies like China, Russia, and the Middle East has boosted demand for luxury products, benefiting many brands. However, as consumers become more sophisticated and those markets mature, brands must work harder to stand out and remain relevant.
Amongst those growing economies, China is critical, accounting for 40% of the luxury market [1]. So, when Chinese GDP numbers disappointed last week [2], it was no surprise that luxury companies' share prices reacted negatively.
What grants luxury brands their mesmerising pricing power? It's easy to think of luxury as a transient, egotistical indulgence but the heritage of the most successful brands is deeply rooted in innovation.
Take Louis Vuitton, for example, the most valuable luxury brand in the world today. The son of a hat maker, Mr Vuitton's success began as an apprentice in Paris, specialising in packing and boxing trunks for the aristocracy's extensive travels. Innovating with water-resistant canvas and flat-shaped boxes, he revolutionised modern luggage just as steamboats and trains replaced wagons. Within a short time, his trunks became a symbol of the elite and gained widespread popularity.
Similarly, Cartier's most significant innovation was the wristwatch, which, though seemingly trivial now, was a considerable challenge at that time. People primarily used pocket watches, and women wore highly decorative watches as status symbols, not for timekeeping. Cartier's wristwatch required extensive innovation, as it needed to lie flat on the wrist, withstand varying temperatures, and be wound with one hand, unlike traditional pocket watches. This technical innovation made the wristwatch a practical and revolutionary timepiece, moving away from the conventional pocket watch era.
The list goes on: Gucci's innovative use of new materials like bamboo bypassed the leather scarcity during World War II. Prada's pioneering approach to blending luxury and functionality brought haute couture to everyday wear. And Thomas Burberry's gabardine fabric was more waterproof and practical for outdoor wear allowing adventurers and soldiers to stay dry and protected without added weight and bulk.
A successful luxury brand thrives on its heritage and innovation. But to stay appealing to today's fickle consumers, it needs to constantly reinterpret the past wisely. This powerful combination of old and new is what grants luxury brands their coveted pricing power. For investors, this means that the best opportunities may be found in heritage-rich luxury brands that might have faced temporary setbacks in staying relevant.
Hospitality is a minor part of the total luxury market - €79 Billion compared to €283 for personal goods [1], but the two segments are closely interconnected. Leading luxury conglomerate LVMH is diversifying its portfolio by venturing into very high-end hotels such as Cheval Blanc, Belmond, and Bulgari. It even considered opening a Louis Vuitton hotel [3] in Paris. The idea behind a Louis Vuitton hotel is that the essence of the luxury brand can be condensed into the space, engaging all the senses and leaving a lasting impression on consumers. In essence, guests immerse themselves in the brand, experiencing it through dining, accommodation, and overall ambience.
The move has raised some eyebrows with investors because hotels require significant capital investment and may not yield the same pricing power as personal luxury goods.
But it enables LVMH to enhance its database with valuable potential customers. Moreover, hotels offer a captive audience with significant amounts of time to spare. This audience can be enticed and engaged with various methods to promote luxury goods, ranging from simple approaches like product placements in the hotel's lobby and rooms to more elaborate strategies such as creating exclusive limited collections, providing access to luxury locations, and even offering bespoke yachts for sale.
Luxury mega-brands are constantly strengthening their marketing arsenal, and including high-end hotels represents their latest and most advanced tactic, leveraging their scale advantage over smaller competitors.
There is a constant debate among investors about whether luxury cars should classify as autos or luxury goods. Put them in the former, and the market is but a small fraction of global auto sales where profits are thin, and valuation multiples are low. Put them in the latter, and they make up about half of the total global luxury market [1].
The spin-off of luxury car brands such as Ferrari, Aston Martin, and Porsche AG from their mass-market conglomerates has increased investor interest in the value of these assets. This interest is due in part to the immense success of Ferrari since its IPO in 2015 [4].
But no matter how differentiated luxury cars are from their mass-market equivalents, they must overcome electrification's rapid and irrevocable challenge. The lingering question is whether this challenge will be a threat or an opportunity.
Luxury sports cars have built their allure on cutting-edge, internal combustion engine technology. Electrification has thrown that into disarray. Consumers often associate higher power with higher price tags, but with the rise of electric motors, achieving incredible acceleration has become more accessible, making it easier and cheaper to build fast and desirable cars. Interestingly, some of the best-performing EVs are not manufactured in Europe, where most luxury brands are based.
Weirdly enough, the paradigm shift could prove to be an opportunity more than a threat for luxury automakers. Consumer stubbornness and nostalgia are big drivers of demand for legacy luxury car models. Therefore, technological changes are sometimes met with resistance, creating a distinct customer base. Luxury brands like Ferrari can leverage this loyalty by producing hybrids and costly traditional models at the same time. The strong brand loyalty of clients who prefer traditional features gives existing luxury car manufacturers immense pricing power and a key advantage over new entrants.
[1] https://altagamma.it/media/source/Altagamma%20-%20Bain%20Luxury%20Market%20Monitor%202021.pdf
[3] https://www.architecturaldigest.com/story/first-louis-vuitton-hotel-paris
[4] https://www.ft.com/content/dfbfea32-976f-475e-bc5a-29325fa65ce6
[5] https://www.ft.com/content/72208629-1213-4ece-b405-1e2c21c08868
It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.
Sidekick is not yet regulated but has applied to the FCA for authorisation to operate. Prior to Sidekick becoming fully authorised, none of the information provided is intended as an invitation or inducement to apply for any Sidekick product or service.
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